Farm bill may already violate international trade rules
The 2008 Farm Bill expired at the end of September, and a replacement is caught up in the stalemate on the so-call “fiscal cliff” talks in Washington, which will dictate the extent of the safety net for US farmers over the next five years. However, the lack of detailed legislation has not prevented warning flags from being raised by ag economists that some of the commodity programs may get the US crossways with international trade rules regarding how developing countries are put at a disadvantage.
In recent years, including the Brazilian victory over the US cotton program, other nations have been quick to file trade complaints alleging that US farm programs spur production and dampen prices. And the pending proposals in the House and Senate, even though there is no agreement on anything, are being touted as inflammatory to fair international trade.
A Swiss trade policy organization, the International Center for Trade and Sustainable Development, published the economic analysis of Bruce Babcock of Iowa State University and Nick Paulson of the University of Illinois. The chief executive of the organization says the recent development of Farm Bill proposals lacked a discussion on compliance with the World Trade Organization (WTO) rules, yet the US Farm Bill would have some of the largest spending on farm policy as any in the world.
STAX & Shallow Loss
The economists are quick to acknowledge that a new Farm Bill is still a work in progress, but the structure of the Senate bill’s Agricultural Risk Coverage program that allows a separate Stacked Income Protection program (STAX) for cotton producers, and the Supplemental Coverage Option (SCO) that is a “shallow loss program” in both the Senate and House proposals would potentially create detrimental economic impacts to foreign producers of cotton, and possibly wheat.
The “shallow loss program” essentially helps producers reduce their outlay for the deductible portion of crop insurance with a second insurance program, the SCO. Babcock and Paulson say the direct payment program, which was designed to move away from spurring production increases, succeeded in insulating US farm policy from WTO complaints. But eliminating a program that was not tied to production, and returning to programs that do have ties to production, will renew the international trade complaints. They say, “If US farmers begin to base their planting decisions on government support rather than on the basis of market signals, then it is possible that farmers in developing countries will receive lower prices than they otherwise would because of the supply-enhancing aspects of the new US farm bill.”