Domestic Support To Agriculture In The European Union And The United States: Policy Developments Since 1996

Prior to the 1994 Uruguay Round Agreement on Agriculture, many developed countries supported production largely through support prices and government procurement. Since mid-1990s these countries have increasingly favored income support or direct payments over price support policies. In this study, we outline the farm policy changes in the European Union, EU, and the United States, US, since 1996 and compare their levels of support under various policies. The producer support estimates for the EU are more than twice that of the US, although the value of EU agricultural production is only 30% more than the US production value. In the EU, reductions in the intervention (support) prices for cereals, oilseeds and beef sector have been compensated by increased direct payments, i.e., payments based on historical acreage and yield or animal head counts. In 1996, the US eliminated target prices and deficiency payments for major crops, and acreage set-sides for supply control. They have been replaced with fixed and emergency payments. However price floors (loan rate with deficiency payments) have been retained for major crops. The sugar and dairy sector policies of the EU and the US have undergone few changes since 1996. In the case of major crops, support is generally higher in the EU (ranging from $67 per ton for cereals to over $1,100 per ton for olive oil) than in the US except in the case of cotton ($456 per ton) and rice ($111 per ton). The intervention support and direct payments for major crops as a percent of border price have remained relatively constant in the EU. The US price support and direct payment for major crops as a percent of either farm or fob price has shown an increasing trend from 1996-2000, with marginal declines in 2001. The US support levels have at least doubled for most major crops between 1996 and 2001. The direct payments are categorized as minimally trade distorting support by the EU and the US, which led to their placement in the blue box and green box/de minimis exemptions, respectively. The EU and US have increasingly used direct payments, which are fully or partially decoupled from current market conditions. Whether or not payments with varying degrees of decoupling affect production decisions has been a subject of debate. Although decoupled payments do not depend on current acreage or yield, they could impact production under uncertainty or in a dynamic context. These payments help farmers cover fixed costs, and reduce constraints in capital and labor markets. They also change farmers' attitudes towards risk and create expectations about future payments being contingent on current planting. Under uncertainty "partially coupled policies," like the US emergency payments, can induce a production response through the insurance effect (reduction in the degree of risk) in addition to the wealth effect. A review of modeling attempts shows a consensus that the wealth effects induce a relatively weaker production response than the insurance effect, but some find it of similar or even greater magnitude than the traditional subsidy effects. However, there is a wide range of estimates and substantial disagreement on the absolute magnitude of the insurance effect and its relative impact on production vis-à-vis the traditional subsidy effect. In addition, while many studies have acknowledged the importance of the expectations effects of decoupled payments, few have attempted to quantify it. The initial EU and US agricultural proposals for the Doha round focused on reducing market access barriers and export subsidies, but refrained from limiting domestic support measures. Developing countries' effective opposition to these proposals led to the collapse of the 2003 WTO Ministerial Meeting at Cancun, Mexico. The recently announced Doha Work Program proposes complete elimination of export subsidies and significant reductions in market access barriers. In the case of domestic support, developing countries' views such as the reductions in product and non-product specific de minimis provisions, and the criteria for blue box payments are reflected in the proposal. At the same time, developed countries' views on the continued placement of direct payments in either blue or green box have been included in the proposal. However, agreement on the extent of reductions and the specific modalities is expected in the next 16 months. The final agreement, scheduled for presentation to members at the Hong Kong WTO Ministerial Conference in December 2005, likely depends on whether or not the new proposals and their modalities would result in meaningful limits on domestic support.