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Potential Challenges to U.S. Farm Subsidies in the WTO

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Abstract:

Prior to its expiration on January 1, 2004, the World Trade Organization's (WTO's) Peace Clause (Article 13 of the Agreement on Agriculture) provided protection from trade remedy consideration and WTO dispute settlement for domestic farm subsidies provided they met certain compliance conditions. Absent the Peace Clause, challenges to U.S. farm subsidies now appear to confront a lower threshold for success, that of establishing "serious prejudice" under Articles 5(c) and 6.3 of the Agreement on Subsidies and Countervailing Measures (SCM). In particular, the criteria for establishing serious prejudice claims include demonstrating (1) the magnitude of a commodity's subsidies either as a share of returns or as an important determinant in covering production costs; (2) the relevance of the subsidized commodity to world markets as a share of either world production or world trade; and (3) a causal relationship between the subsidy and the adverse effect in the relevant market. Evidence of these criteria favors a successful challenge ruling by a WTO panel, as demonstrated by Brazil's successful WTO challenge of the U.S. cotton program.

A review of current U.S. farm programs measured against these criteria suggests that all major U.S. program crops are potentially vulnerable to WTO challenges. In addition, a review of recent economic analyses suggests that a partial policy reform of the nature suggested by the U.S. Doha-Round Proposal would do little to diminish the causal relationship between U.S. crop subsidies and adverse effects in international markets. Instead, the most clear method for decreasing exposure to WTO legal challenges is through extensive decoupling of U.S. programs -- i.e., removing the linkage between payments and producer or consumer behavior. Such decoupling would sever the causality linkage necessary to consummate a successful WTO challenge.

The potential success of WTO challenges against U.S. farm programs is of concern to the U.S. Congress. If such challenges occur and are successful, the WTO remedy likely would imply either the elimination, alteration, or amendment by Congress of the programs in question to remove their adverse effects. Since most governing provisions over U.S. farm programs are statutory, new legislation could be required to implement even minor changes to achieve compliance. Alternately, in light of an adverse ruling the United States could choose to make compensatory payments (under agreement with the challenging country) to offset the alleged injury.

This report, which will not be updated, provides background regarding the vulnerability of U.S. agricultural support programs to potential WTO dispute settlement challenges. It does not predict which WTO members might challenge U.S. commodity subsidies, nor the likelihood that such challenges will be brought. Instead, this report reviews the general criteria for successfully challenging a farm subsidy program, and then uses available data and published economic analyses to weigh U.S. farm programs against these criteria. For a summary version of this report, see CRS Report RS22522, Potential Challenges to U.S. Farm Subsidies in the WTO: A Brief Overview.