The Dirty Green Box: Chair Pushes EU-US Positions on the Green Box in 2nd Installment

Aileen Kwa,
Geneva

The US and EU have
stubbornly opposed opening the Green Box. No real discussion has
taken place in terms of examining this nature and impact. They have
merely insisted that it is non-trade distorting, and therefore beyond
reach in this Round, and that the "review and clarification
process" is not about making changes to the nature of the box.

Agriculture Chair,
Crawford Falconer is clearly playing to their tune in his second
installment (25 May) text. Apart from tweaking a couple of provisions
to make clear that certain developing countries programmes are also
covered in the box (no real gift since it would have been inferred
that these programmes are covered anyway), he simply concludes that
"Beyond that, I have the impression that there is strong reluctance
to entertain much more by way of amendments to Annex 2. Of course a
number of Members would prefer things otherwise, but I doubt that
view will prevail." And with his silence, he attempts to wipe out
many issues the G20 has raised for years, on methods to discipline
the Green Box.

Agriculture Chair,
Crawford Falconer is clearly playing to their tune in his second
installment (25 May) text. Apart from tweaking a couple of provisions
to make clear that certain developing countries programmes are also
covered in the box (no real gift since it would have been inferred
that these programmes are covered anyway), he simply concludes that
“Beyond that, I have the impression that there is strong reluctance
to entertain much more by way of amendments to Annex 2. Of course a
number of Members would prefer things otherwise, but I doubt that
view will prevail.” And with his silence, he attempts to wipe out
many issues the G20 has raised for years, on methods to discipline
the Green Box.

He also avoids
confronting the fact that US and EU are shifting blue and amber
supports into green in order to cope with their reduction commitments
in those boxes. Green Box payments allow these countries to have
lower intervention prices. Yet farmers are compensated through direct
payments, and they continue production (cereal production is
increasing in the EU despite ‘decoupling’). The bulk of these
payments have been found to be as trade distorting, if not more so,
for being so nontransparent.

The one area where
Falconer makes a weak attempt at seeming to
take on board a major G20 concern is in the issue of fixed and
unchanging base periods. The issue here is that farmers continue to
stay in production since they know (in the US and EU) that a CAP
reform or new farm bill takes place every few years, and base periods
are revised with each new reform or bill. Keen to guarantee incomes
in the future, producers thus remain in production.

The Chair’s
comments on this issue in para 27 seem rather unclear. He says “The
concept is clearly to draft in a way that provides for occasional
changes in base periods provided these
are not done in a way that implied a link to prices or production.”
Is this not exactly the problematic situation now? Each Farm Bill or
CAP reform is an ‘occasional change’. US and EU say that their
current system is not linked the prices and production. What does
Falconer mean and upon what basis will governments use to calculate
payments to producers, if not by basing payments on production,
income/ revenue, or prices?

The major requests
by the G20 which have not been taken up
include: i) that direct payments should be directed only at low
levels of income, landholding and production – this is the one way
to ‘cap’ the Green Box; ii) that direct payments should not be
made in conjunction with AMS supports or Blue Box supports. This
interlinkage of policies often ensures that producers continue
production in order to obtain maximum income.

Litigation

The reasons why the
Green Box has to be strictly disciplined,
narrowed down and preferably even capped, are already clearly
provided in the WTO’s own litigation.

In the cotton case, the
Panel ruled that US green box payments did not belong there because
they were tied to production conditionalities (producers were not
allowed to plant fruit, vegetables and wild rice), leading to
production distortions.

Posing an even
greater challenge to the fundamental
character of the Green Box, the Appellate Body in the Dairy Products
of Canada case, in its 3 December 2001 report stated that

“We consider that
the distinction between the domestic support and export subsidies
disciplines in the Agreement on Agriculture would also be eroded if a
WTO Members were entitled to use domestic support, without limit, to
provide support for exports of agricultural products. Broadly stated,
domestic support provisions of that Agreement, coupled with high
levels of tariff protection, allow extensive support to producers, as
compared with the limitations imposed through the export subsidies
disciplines. Consequently, if domestic support could be used, without
limit, to provide support for exports, it would undermine the
benefits intended to accrue through a WTO Member’s export subsidy
commitments (para 91)… The potential for WTO Members to export
their agricultural production is preserved,
provided that any export-destined sales by a producer at below the
total cost of production are not financed by virtue of governmental
action (para 92)”. ¹

Studies Show the Green
Box is Distorting

Recent research by UNCTAD
– India shows that the current Green Box subsidy programmes used
by some developed WTO Members are not in keeping with the “no or at
most minimal, trade-distorting effects or effects on production”
criteria.

According to the
study, if the trade-distorting elements of the Green Box were
removed, the cost of production in key economies would increase by
15-30% and their exports would decline by 40-60%. Developing
countries would see an increase in exports by about 20%. Even LDCs
will find their exports going up by 20%. Global imports would also
decline. Agricultural employment will rise in almost all developing
countries. This rise in employment of skilled and unskilled labour
would lead to the alleviation of poverty. The rise in employment in
developing countries is estimated to range between 3-5%, far higher
than the rate of natural increase of the labour force. Wages would
also rise by 1% on average in developing countries, with LDCs
registering the highest increase. Hence there are significant and
positive poverty attenuating effects as a result of reducing Green
Box subsidies. ²

A World Bank study
also concluded that decoupling of farm payments is only effective if
properly managed. They should be a one-time buyout programme to
compensate farmers for the transition. If they are not one-time
payments, there should be a time-limit, harmonization with other
support programmes, as well as constraints on input use in order for
it to be effective as a transitional adjustment assistance. “Unless
these aspects are properly addressed, decoupled programs are likely
to have the same detrimental effects as other subsidy programs”.³

Case of the
EU – Decoupled And
Distorting

The EU is now
shifting most of its amber and blue subsidies into the Green Box -
in what is called the ‘Single Payment
Scheme” (SPS). Up to 30 billion Euros is now being provided by the
EU in this scheme, housed in the Green box. EU Trade Commissioner
Mandelson has said that up to 90% of EU agricultural supports will
soon be in this form. The SPS is supposedly decoupled and hence, the
argument is made that it is not or only minimally trade distorting.

Is this in fact the
case? EU decoupling in the past has been shown to be as trade
distorting as production related payments. Since
the 1990s, the EC has been decoupling part of its subsidies on
cereals. EC intervened at prices much closer to the world price, and
50 percent lower than the previous intervention price, whilst
channeling payments to farmers directly. If the theory of decoupling
were right, cereal production should have fallen, since farmers could
have produced less. On the contrary, the EU cereals production
increased by 25 percent in the 1990s, instead of contracting because
overall subsidy levels had in fact increased. The direct payments
given had been calculated to more than adequately make up for losses
experienced as a result of a lower intervention price.

How the Green box is
Trade Distorting

These following factors
have been found to contribute to trade distortions in the Green Box:

In
theory, decoupled payments are provided to farmers irrespective of
their production decisions and are therefore claimed to be non-trade
distorting. In practice, farmers make production decisions based on
the total income they anticipate – from direct payments as well as
income expected from production. When these amounts are significant,
they keep farmers in production even though domestic prices are often
lower than the costs of production. As such, they are indirectly a
form of price supports.

Large
payments can have risk reduction effects that lead to increased
output. They increase base income, and help cover fixed costs
allowing farmers to cross-subsidize production at market prices.
Direct payments can affect farmers’ investment and exit decisions
if they are facing constraints in capital and labour markets. They
improve farmers’ credit worthiness, allowing banks to make loans
when they otherwise may not. ⁴

Comments on the
Chair’s Recommendations: Guide to
Changes Required in Annex 2 (Green Box)

[Additions
to Annex 2 are in bold, deletions from the original text are struck
out, author’s comments explaining reasons for changes are in
brackets and are italicised.]

1.
Domestic support measures for which exemption from the reduction
commitments is claimed shall meet the
fundamental requirement that they have no, or at most minimal,
trade-distorting effects or effects on production for
developed countries. Accordingly, all
measures for which exemption is claimed by
developed countries shall conform to
the following basic criteria:

(a)
the support in question shall be provided through a publicly-funded
government programme (including government revenue foregone) not
involving transfers from consumers; and,

(b) the
support in question shall not have the effect of providing price
support to producers;

[It
seems patently unfair that developing countries, whose
agricultural sectors remain extremely underdeveloped should be
subject to these disciplines when the developed countries which have
had decades of unlimited domestic supports are not even abiding by
these disciplines]

plus
policy-specific criteria and conditions as set out below.

Government
Service Programmes

2.
General services

Policies
in this category involve expenditures (or revenue foregone) in
relation to programmes which provide services or benefits to
agriculture or the rural community. They shall not involve direct
payments to producers or processors. In
developed countries, these supports provided to the communities or
the agriculture sector shall be determined by clearly-defined
criteria of low levels of income, landholding or production levels.
Such programmes, which include but are
not restricted to the following list, shall meet the general criteria
in paragraph 1 above and policy-specific conditions where set out
below:

[This
recommendation is in keeping with UNCTAD’s analysis that general
services, due to their quantity, reduces
production costs by up to 11-16%]

(a)
research, including general research, research in connection with
environmental programmes, and research programmes relating to
particular products;

(b)
pest and disease control, including general and product-specific pest
and disease control measures, such as early-warning systems,
quarantine and eradication;

(c)
training services, including both general and specialist training
facilities;

(d)
extension and advisory services, including the provision of means to
facilitate the transfer of information and the results of research to
producers and consumers;

(e)
inspection services, including general inspection services and the
inspection of particular products for health, safety, grading or
standardization purposes;

(f)
marketing and promotion services, including market information,
advice and promotion relating to particular products but excluding
expenditure for unspecified purposes that could be used by sellers to
reduce their selling price or confer a direct economic benefit to
purchasers; and

(g)
infrastructural services, including: electricity reticulation, roads
and other means of transport, market and port facilities, water
supply facilities, dams and drainage schemes, and infrastructural
works associated with environmental programmes. In all cases the
expenditure shall be directed to the provision or construction of
capital works only, and shall exclude the subsidized provision of
on-farm facilities other than for the reticulation of generally
available public utilities. It shall not include subsidies to inputs
or operating costs, or preferential user charges.

(h)
policies and services related to agrarian, land and institutional
reform and the redress of historical land ownership structures, and
any other programmes related to food and livelihood security and
rural development in developing country Members, including services
related to such reform and other programmes. These include inter
alia, settlement programmes, issuance of property titles, employment
assurance, provision of infrastructure, nutritional security, poverty
alleviation, soil conservation and resource management, and drought
management and flood control.

[This
addition brings together all the
elements contained in both the African Group and G20 proposals]

3.
Public stockholding for food security purposes ⁵

Expenditures
(or revenue foregone) in relation to the accumulation and holding of
stocks of products which form an integral part of a food security
programme identified in national legislation. This may include
government aid to private storage of products as part of such a
programme.

The
volume and accumulation of such stocks shall correspond to
predetermined targets related solely to food security. The process of
stock accumulation and disposal shall be financially transparent.
Food purchases by the government shall be made at current market
prices and sales from food security stocks shall be made at no less
than the current domestic market price for the product and quality in
question.

⁵For
the purposes of paragraph 3 of this Annex, governmental stockholding
programmes for food security purposes in developing countries whose
operation is transparent and conducted in accordance with officially
published objective criteria or guidelines shall be considered to be
in conformity with the provisions of this paragraph, including
programmes under which stocks of foodstuffs for food security
purposes are acquired and released at administered prices,
provided that the difference between the acquisition price and the
external reference price is accounted for in the AMS.

[This
is the exact language of the African
Group proposal]

4.
Domestic food aid⁶

Expenditures
(or revenue foregone) in relation to the provision of domestic food
aid to sections of the population in need.

Eligibility to receive the food aid shall be
subject to clearly-defined criteria related to nutritional
objectives. Such aid shall be in the form of direct provision of food
to those concerned or the provision of means to allow eligible
recipients to buy food either at market or at subsidized prices. Food
purchases by the government shall be made at current market prices
and the financing and administration of the aid shall be transparent.

5
& 6For
the purposes of paragraphs 3 and 4 of this Annex, the provision of
foodstuffs at subsidized prices with

the
objective of meeting food requirements of urban and rural poor in
developing countries on a regular basis

at
reasonable prices shall be considered to be in conformity with the
provisions of this paragraph.

5.
Direct payments to producers

Support
provided through direct payments (or revenue foregone, including
payments in kind) to producers for which
exemption from reduction commitments is claimed shall meet the basic
criteria set out in paragraph 1 above, plus specific criteria
applying to individual types of direct payment as set out in
paragraphs 6 through 13 below. Direct
payments shall not be linked to production levels, including input
levels therein. When Members make such payments, they shall notify
the base period and all other relevant criteria, as well as the laws,
regulations and administrative decisions of such programmes made
under this provision. Further notifications under paragraph 5(a)
shall include regular and periodic information on how the programmes
under this provision achieve the stated objectives.

Where
exemption from reduction is claimed for any existing or new type of
direct payment other

than
those specified in paragraphs 6 through 13, it shall conform to
criteria (b) through (e)
in paragraph 6, in addition to the general criteria set out in
paragraph 1.

[This
is taken from the G20 proposal]

6.
Decoupled income support

(a)
For developed countries,
eligibility for such payments shall be determined by clearly-defined
criteria such as
of low levels of income, status
as a producer or landowner,
landholding and production
level
in a notified,
defined and
fixed and unchanging
base period. Developing country Members
who have not previously made use of decoupled payments, shall be
permitted to do so.

[This
is a critical discipline – there is a need, if not to cap such
payments, then in the least to limit them to low income producers.
This suggestion is ignored by the Chair. The first sentence comes
from the G20 language in order to prevent box shifting.

However,
the G20 proposal also advocates binding
developing countries’ to a base period. See below. This is
problematic. It is also problematic that the Chair has jumped on and
accepted this part of the proposal (see para 26 of the Chair’s
text). Many developing countries’ agricultural sectors are way
below potential. To bind ourselves to a base period when the sector
is dynamically developing is not likely to be helpful.

The
G20 language says:

Developing
country Members who have not previously made use of this type of
payment, and thus have not notified, shall not be precluded from
establishing an appropriate base period⁷,
which shall be fixed and unchanging and shall be notified.

⁷
Developing country Members may not have the capacity to fully assess
the impact of innovation in their agricultural policies. Accordingly,
the base period of a time-limited experimental or pilot programme may
not be taken as the fixed and unchanging base period for the purposes
of this paragraph.]

(b)
The amount of such payments in any given year shall not be related
to, or based on, the type or volume of
production (including livestock units) undertaken by the producer in
any year after the base period.

(c)
The amount of such payments in any given year shall not be related
to, or based on, the prices, domestic or international, applying to
any production undertaken in any year after the base period.

(d)
The amount of such payments in any given year shall not be related
to, or based on, the factors of production employed in any year after
the base period.

(e) Land, labour, or
any other factor of production shall not be required to be in
‘agricultural use’ and no
production shall be required in order to receive such payments.

[Language from G20 proposal to tighten decoupling]

(f) Such payments shall not be made in
conjunction with AMS support and support under Article 6.5, if the
sum of such support, as appropriate⁸,
exceeds X per cent of the annual value of production of a given
product.

⁸
This is without prejudice to the final outcome of the negotiations of
the amendment of Article 6.5.

 

[Also
from the G20 proposal, and again, ignored by the Chair.
This is an important addition. It is to prevent ‘false’
decoupling eg. The EU CAP allows for 75% decoupled payments and 25%
coupled payments. The mix of policies have the effect of providing an
incentive for producers to continue being in production.]

7. Government financial participation in income insurance and
income safety net programmes

(a)Eligibility for such
payments shall be determined by an income loss, taking into account
only income derived from agriculture, which exceeds 30 per cent of
average gross income or the equivalent in net income terms (excluding
any payments from the same or similar schemes) in the preceding
three-year period or a three-year average based on the preceding
five-year period, excluding the highest and the lowest entry, or
in the case of a developing country Member, income loss can be less
than 30 per cent. Any producer meeting
this condition shall be eligible to receive the payments.

[This has been
more or less accepted by the Chair (para 26). The G20 language is
slightly more constraining. It recommends:

or in the case of a developing country,
payments will be made ‘in accordance with specific criteria which
shall be defined in national legislation⁹

⁹Includes
administrative orders and regulations made by the designated
competent authorities. ]

(b) The amount of such payments shall compensate
only up to for
less than 70 per cent of the
producer's income loss in
the year the producer becomes eligible to receive this assistance.
In the case of a developing country
Member, compensation can be more than 70 per cent of the producer’s
income.

[G20 proposal:

In the case of a developing country Member,
compensation shall only be up to a certain proportion of the
producer’s income which shall be defined in national legislation¹⁰.

¹⁰Includes
administrative orders and regulations made by the designated
competent authorities. ]

(c)
The amount of any such payments shall relate solely to income; it
shall not relate to the type or volume of
production (including livestock units) undertaken by the producer; or
to the prices, domestic or international, applying to such
production; or to the factors of production employed.

(d)
Where a producer receives in the same year payments under this
paragraph and under paragraph 8 (relief from natural disasters), the
total of such payments shall be less than 100 per cent of the
producer's total loss.

8.
Payments (made either directly or by way of government financial
participation in crop insurance schemes) for relief from natural
disasters

(a)Eligibility
for such payments shall arise only following a formal recognition by
government authorities that a natural or like disaster (including
disease outbreaks, pest infestations, nuclear accidents, and war on
the territory of the Member concerned) has occurred or is occurring;
and shall be determined by a production loss which exceeds 30 per
cent of the average of production in the preceding three-year period
or a three-year average based on the preceding five-year period,
excluding the highest and the lowest entry, In
the case of developing country Members, payments for relief from
natural disasters may be provided to producers when the estimated
production loss is less than 30 percent of the average of production
in the preceding three-year period or a three-year average based on
the preceding five-year period.

[This
is from the African Group proposal. The G20 proposal states that
payments for developing country Members shall be in accordance to
defined national legislation (including administrative orders)]

(b)
Payments made following a disaster shall be applied only in respect
of losses of income, crop,
livestock (including payments in connection with the veterinary
treatment of animals), land or other production factors due to the
natural disaster or other disaster
in question.

[G20
suggestions]

(c)
Payments shall compensate for not more than the total cost of
replacing such losses and shall not require
or specify the type or quantity of future production.

(d)
Payments made during a disaster shall not exceed the level required
to prevent or alleviate further loss as defined in criterion (b)
above.

(e)
Where a producer receives in the same year payments under this
paragraph and under paragraph 7 (income insurance and income
safety-net programmes), the total of such payments shall be less than
100 per cent of the producer's total loss.

9.
Structural adjustment assistance provided through producer retirement
programmes

(a)
Eligibility for such payments shall be determined by reference to
clearly defined criteria in programmes
designed to facilitate the retirement of persons engaged in
marketable agricultural production, or their movement to
nonagricultural activities.

(b)
Payments shall be conditional upon the total and permanent retirement
of the recipients from marketable agricultural production.

10.
Structural adjustment assistance provided through resource retirement
programmes

(a)
Eligibility for such payments shall be determined by reference to
clearly defined criteria in programmes
designed to remove land or other resources, including livestock, from
marketable agricultural production.

(b)
Payments shall be conditional upon the retirement of land from
marketable agricultural production for a minimum of three years, and
in the case of livestock on its slaughter or definitive permanent
disposal.

(c)
Payments shall not require or specify any alternative use for such
land or other resources which involves the production of marketable
agricultural products.

(d)
Payments shall not be related to either the type or quantity of
production or to the prices, domestic or international, applying to
production undertaken using the land or other resources remaining in
production.

11.
Structural adjustment assistance provided through investment aids

(a)
Eligibility for such payments shall be determined by reference to
clearly defined criteria in government
programmes designed to assist the financial or physical restructuring
of a producer's operations in response to objectively demonstrated
structural disadvantages. Eligibility for such programmes may also be
based on a clearly-defined government programme for the
reprivatization of agricultural land.

(b)
The amount of such payments in any given year shall not be related
to, or based on, the type or volume of production (including
livestock units) undertaken by the producer in any year after a
fixed and unchanging the
base period other than as provided for under criterion (e) below.
Developing country Members shall be
precluded from establishing a fixed and unchanging base period.

(c)
The amount of such payments in any given year shall not be related
to, or based on, the prices, domestic or international, applying to
any production undertaken in any year after the base period.

d)
The payments shall be given only for the period of time necessary for
the realization of the investment in respect of which they are
provided.

(e)
The payments shall not mandate or in any way designate the
agricultural products to be produced by the recipients except to
require them not to produce a particular product.

(f)
The payments shall be limited to the amount required to compensate
for the structural disadvantage.

12.
Payments under environmental programmes

(a)
Eligibility for such payments shall be determined as part of a
clearly-defined government environmental or
conservation programme and be dependent on the fulfilment of specific
conditions under the government programme, including conditions
related to production methods or inputs.

(b)
The amount of payment shall be limited to the extra costs or loss of
income involved in complying with the government programme.

(c)
The conditions spelt out in paragraphs 12 (a) and (b) above shall not
apply to payments made by developing countries.

[This
is taken from the African Group proposal.]

13.
Payments under regional assistance programmes

(a)
Eligibility for such payments shall be limited to producers in
disadvantaged regions. Each such region
must be a clearly designated contiguous geographical area with a
definable economic and administrative identity, considered as
disadvantaged on the basis of neutral and objective criteria clearly
spelt out in law or regulation and indicating that the region's
difficulties arise out of more than temporary circumstances.
Developing country Members shall be
exempted from the condition that disadvantaged regions must
constitute a clearly designated contiguous geographical area with a
definable economic and administrative identify.

[The
above is both the G20 and African Group
language]

(b)
The amount of such payments in any given year shall not be related
to, or based on, the type or volume of production (including
livestock units) undertaken by the producer in any year after the
fixed and unchanging
base period, which shall be notified,
other than to reduce that production. Developing
countries should not be precluded from utilizing this kind of
payments in the future in the event that no base period was notified.

[The
above is from the African Group / G20 proposals. The following has
been removed from the African Group proposal:

“An
appropriate base period which shall be fixed and unchanging shall be
established and notified.“

The
G20 proposal, which was more flexible, stated in the footnote that
the base period for developing countries ‘of a time-limited
experimental or pilot programme may not be taken as the fixed and
unchanging base period for the purposes of this paragraph’]

(c)
The amount of such payments in any given year shall not be related
to, or based on, the prices, domestic or
international, applying to any production undertaken in any year
after the base period.

(d)
Payments shall be available only to producers in eligible regions,
but generally available to all producers within such regions.

(e)
Where related to production factors, payments shall be made at a
degressive rate above a threshold level of the factor concerned.

(f)
The payments shall be limited to the extra costs or loss of income
involved in undertaking agricultural production in the prescribed
area.

1
Cited in Berthelot J 2007 “Communication from the Chairman of the
Committee on Agriculture, Special Session, Comments by Jacques
Berthelot”, 30 April 2007, http://solidarite.asso.fr

2
UNCTAD India Team 2006 “Green Box Subsidies: A Theoretical and
Empirical Assessment”.

3
Baffes, J and Gorter, H 2005 “Experiences with Decoupling
Agricultural Support”, in Global Agricultural Trade and Developing
Countries, edited by Aksoy A and Beghin J, World Bank, Washington.

4
Baffes, J and Gorter H 2005 ibid.

5
UNCTAD 2006 ibid.

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