Construction of a "Green Box" Countercyclical Program

The United States Congress is currently devising the next farm bill. One of the many factors influencing the debate is the effect of trade agreements into which the United States has entered. Under the World Trade Organization's Agreement on Agriculture, government spending on trade-distorting agricultural policies (referred to as "amber box" policies) has been limited. However, if the policy is considered non-trade-distorting ("green box"), then spending on such a policy is not constrained under the agreement. We explore the possible construction of a green box policy that is countercyclical to factors related to agriculture. The policy is based on our interpretation of the green box requirements; other interpretations are possible. The policy we construct would provide payments that are countercyclical to weather events and exchange rate movements (that is, the timing and size of the payments depends on weather events and exchange rate movements). Our model is but one of many possible configurations of such an approach and was chosen as an example of how such a program might be implemented. Given our construction, we also estimate the cost of the new program.