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

Potential Challenges to U.S. Farm Subsidies
in the WTO
Updated April 26, 2007
Randy Schnepf
Specialists in Agricultural Policy
Resources, Science, and Industry Division

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

Glossary of Acronyms
AAAgreement on Agriculture (WTO)
ABAREAustralian Bureau of Agricultural and Resource Economics
ADAnti-Dumping
AMSAggregate Measure of Support
CCCCommodity Credit Corporation
CCPCounter-Cyclical Payment
CEGCertificate of Exchange
CVDCountervailing Duty
DEIPDairy Export Incentive Program
DPDirect Payments (under the 2002 farm bill)
DSBDispute Settlement Body (WTO)
DSUUnderstanding on Rules and Procedures Governing the Settlement
of Disputes (WTO)
EEPExport Enhancement Program
EUEuropean Union
FAPRIFood and Agricultural Policy Research Institute
FSAFarm Service Agency (USDA)
GATTGeneral Agreement on Tariffs and Trade
LDPLoan Deficiency Payment
MILCMilk Income Loss Contract
MLAMarket Loss Assistance
MLGMarketing Loan Gain
OECDOrganization for Economic Cooperation and Development
PFCProduction Flexibility Contract payments (under the 1996 farm bill)
RMARisk Management Agency (USDA)
SCMAgreement on Subsidies and Countervailing Measures
TRQTariff-Rate Quota
USDAU.S. Department of Agriculture
WTOWorld Trade Organization

Contents
In troduction ..................................................1
Report Overview and Disclaimer..................................2
Recent Developments: WTO Challenges of U.S. Farm Programs............3
WTO Commitments, Rules, and Challenges.............................4
Overview ....................................................4
WTO Agreements.........................................5
Agricultural Policy Reform Commitments......................6
WTO Subsidy Challenges Under the Peace Clause....................8
Subsidies Under The SCM Agreement.........................8
The Peace Clause..........................................9
Brazil’s WTO Case Against the U.S. Cotton Program................10
First Ruling: Peace Clause Violation..........................10
Second Finding: Prohibited Subsidies.........................11
Third Finding: Serious Prejudice.............................12
Post-Peace-Clause DSU Challenges..............................13
U.S. Farm Program Subsidies.......................................15
Overview ...................................................15
U.S. Domestic Support Outlays and Notifications...................15
Farm Support Programs....................................16
Program Commodities.....................................21
Which U.S. Program Crops Might Be Vulnerable to WTO Challenge?...24
How Important Are Farm Subsidies Relative to the Commodity’s
Market Returns?......................................24
How Important Are Farm Subsidies Relative to the Commodity’s
Costs of Production?..................................26
Which Programs Provide Most of the Farm Subsidies for
the Commodity?......................................28
How Important Is U.S. Production and Trade for an Identified
Commodity Relative to World Markets?...................32
Marketing Loan Benefits as Export Subsidies.......................33
Reducing Vulnerability to WTO Challenge.............................34
WTO Remedies..............................................34
What Constitutes an Acceptable Subsidy?.........................35
Decoupled Program Support....................................35
Fully Decoupled Direct Payments............................35
Whole Farm Revenue Insurance Type Programs.................36
Green Payments..........................................36
New Farm Bill...............................................37
Program Buyout..............................................37
References ......................................................38
Appendix A. Review of Economic Studies of Causal Linkage:
U.S. Farm Policy vs. World Markets..............................40

Sumner (2003)...........................................41
Sumner (2005)...........................................42
FAPRI (2005)............................................45
Oxfam Briefing Paper No. 81 (2005)..........................47
ABARE (2006)..........................................48
Appendix B. Agreement on Agriculture, Article 13: Due Restraint
(the Peace Clause)............................................49
Appendix C. Agreement on Subsidies and Countervailing Measures;
Part I, Article 1: Definition of a Subsidy...........................50
Appendix D. Agreement on Subsidies and Countervailing Measures;
Part III: Actionable Subsidies; Articles 5 and 6......................51
Appendix E. Agreement on Agriculture, Key Provisions of Annex 2
(the Green Box)..............................................54
List of Figures
Figure 1. U.S. Revenue Components as Share of Total Costs,
Selected Program Commodities..................................26
Figure 2. U.S. Corn Subsidies, FY1996 to FY2005F*....................29
Figure 3. U.S. Upland Cotton Subsidies, FY1996 to FY2005F*............29
Figure 4. U.S. Wheat Subsidies, FY1996 to FY2005F*...................30
Figure 5. U.S. Soybean Subsidies, FY1996 to FY2005F*.................30
Figure 6. U.S. Rice Subsidies, FY1996 to FY2005F*....................31
Figure 7. U.S. Grain Sorghum Subsidies, FY1996 to FY2005F*...........31
Figure 8. U.S. Peanut Subsidies, FY1996 to FY2005F*..................32
Figure 9. U.S. Share of World Production and Trade,
Selected Program Commodities..................................33
List of Tables
Table 1. Categorized List of U.S. Support Programs, 1995-2001...........18
Table 2. WTO Notifications of U.S. Domestic Support:
Amber Box Categories and De Minimis Exemptions, 1995-2001.......20
Table 3. USDA Net Outlays by Major Programs, 1996 to 2006............23
Table 4. Commodity-Specific Program Support and Insurance Subsidy
Payments, Yearly Average, FY1996-2005..........................25
Table 5. Commodity Revenue and Cost Per Unit of Production,
National Averages for Major Program Crops for Selected Periods.......27
Table 6. Commodity Subsidy Outlays, by Program,
FY2002-FY2007 (forecast).....................................28
Table 7. U.S. Share of World Production and Trade for
Selected Commodities, Yearly Average, 2002-2005..................32
Table 8. Third-Country Markets Impacted by U.S. Subsidies..............41
Table 9. Evaluating the Importance of U.S. Crop Subsidies...............43
Table 10. Potential WTO Cases Against Subsidized U.S. Crops............48

Potential Challenges to U.S. Farm Subsidies
in the WTO
Introduction
The combination of three relatively recent events — the expiration of the World
Trade Organization’s (WTO’s) Peace Clause¹ on January 1, 2004; Brazil’s successful
challenge of certain provisions of the U.S. cotton program in a WTO dispute
settlement proceeding (upheld on appeal in March 2005); and the indefinite
suspension of the Doha Round of WTO trade negotiations in July 2006 — have
raised concerns among U.S. policymakers that U.S. farm programs could be subject
to a new wave of WTO dispute settlement challenges.
Prior to its expiry, the Peace Clause had provided a degree of protection from
WTO challenges — under both domestic countervailing duty proceedings and the
WTO dispute settlement process — to most domestic agricultural support measures
provided they met certain compliance conditions. The success of Brazil in
challenging U.S. cotton program provisions within the WTO’s dispute settlement
process demonstrated the vulnerability of U.S. commodity programs to WTO²
challenges in the absence of the Peace Clause. Furthermore, those countries most
likely to bring new WTO challenges against U.S. commodity programs may feel
more inclined to do so in light of the diminished likelihood of further negotiated
reductions in U.S. domestic support following the indefinite suspension of the Doha
Round of trade talks.
Nevertheless, some trade specialists argue that, despite the indefinite suspension
of Doha Round talks and the substantial market distortions linked to several of the
major U.S. domestic support programs, a large number of additional WTO challenges
of U.S. farm support is unlikely. They contend that the fact-intensive nature of WTO
challenges, their extensive costs, and the potential negative consequences in broader
geopolitical terms may far outweigh any potential trade gains achieved through WTO³
litigation or dispute settlement proceedings. In addition, others have argued that
there is a large inherent risk involved in bringing a challenge against another
country’s subsidy program — if the challenge fails, it could legitimize those very
programs that it had sought to discipline. Furthermore, some argue that Brazil’s

¹ Agreement on Agriculture, Article 13.
² For more information, see CRS Report RS22187, Brazil's WTO Case Against the U.S.
Cotton Program: A Brief Overview, by Randy Schnepf.
³ For a recent discussion of the legal context for WTO challenges before and after the
expiration of the Peace Clause, see Terence P. Stewart and Amy S. Dwyer, “Doha’s Plan
B: the Current Pause and Prospects for the WTO,” paper presented to the Global Business
Dialogue, Inc., September 13, 2006; hereafter referred to as Stewart and Dwyer (2006).

successful cotton case is indicative of the substantial investment Brazil has made
over the past decade in human and institutional capacity to monitor trade issues and
to use the WTO’s dispute settlement process in protecting its interests. Few, if any,
other developing countries have developed a similar capacity.
The potential success of WTO challenges against U.S. farm programs is of
concern to the U.S. Congress. The current 2002 farm bill is set to expire in 2007, at
which time Congress is expected to either extend, amend, or rewrite the current farm
bill. USDA Secretary Johanns has stated that one of his primary objectives for the
next farm bill is to make U.S. farm programs “beyond challenge.”⁴ 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.
Report Overview and Disclaimer
This report provides background concerning the potential vulnerability of U.S.
domestic agricultural programs to new challenges under current WTO agreements.
In addition, it provides a brief summary of the current status of the major ongoing
WTO challenges against U.S. agricultural products. However, it is not an official
CRS legal analysis of U.S. program vulnerability to WTO challenge, and it does not
attempt to predict which WTO members might challenge U.S. commodity subsidies,
the likelihood that such challenges will be brought, or the potential outcome of such
challenges. Instead, this report reviews the general criteria for successfully
challenging a farm subsidy program, then uses available data and published economic
analyses to weigh U.S. farm programs against these criteria. As such, it acts as a
primer on the issue of the vulnerability of domestic farm programs to WTO
challenges, and provides numerous references for those seeking greater detail and
more background information.
The report is divided into four sections. The first section briefly summarizes the
recent developments concerning ongoing WTO dispute settlement (DS) challenges
against U.S. farm programs. The second section reviews some provisions of WTO
agreements that would be implicated in potential WTO challenges. A review of both
the policy commitments and compliance rules established during the Uruguay Round
is important in understanding which particular commodities would be most
vulnerable to potential challenges and how a challenge might be framed. This
section also includes a discussion of Brazil’s successful WTO challenge of certain
provisions of the U.S. cotton program, since it is also suggestive of how future cases
against U.S. farm programs may be fashioned, as well as being indicative of the
policy consequence of such challenges.

⁴ Remarks by Agriculture Secretary Mike Johanns at the Cato Institute’s Center for Trade
Policy Studies, Washington, DC, USDA News Release No. 0333.06, August 31, 2006.

The third section of the report provides a review of U.S. domestic support, by
program and by commodity, with a discussion of how each program fits into the
scheme of WTO liberalization commitments. This section includes a review of
various crop-specific measures that might suggest farm program vulnerability to a
WTO challenge and discusses how U.S. programs could be altered to minimize the
threat of challenge.
The final section briefly reviews several broader issues related to WTO
challenges of commodity subsidy programs, including likely remedies under
successful challenges, defining subsidy criteria under the serious prejudice claim, and
potential redesign of farm programs to reduce their vulnerability to WTO DS
challenges.
Recent Developments:
WTO Challenges of U.S. Farm Programs
Two significant WTO DS cases against U.S. farm programs remain active —
the Brazil case (DS267) against certain features of the U.S. cotton program and the
Canada case (DS357) against certain features of U.S. farm programs, in general, and
more specifically against the U.S. corn program.
Concerning the cotton case, a WTO Appellate Body (AB) issued a final ruling
in March 2005 recommending that the United States remove both the prohibited
subsidies and the adverse effects defined by the case.⁵ In response, the United States
eliminated the Step 2 program (August 1, 2006) and indicated that the market loss
payments cited in the case have also ended. However, Brazil claims that additional
permanent modifications to U.S. farm programs are still needed to fully comply with
the WTO ruling. On August 21, 2006, Brazil submitted a request for a WTO
compliance panel to review whether the United States has fully complied with panel
and AB rulings. A compliance panel was established on October 25, 2006. On
January 9, 2007, the compliance panel’s chairman announced that work would be
finished in July 2007. If the compliance panel finds that the United States has not
fully complied with the AB rulings, Brazil could ask a WTO arbitration panel to
resume its work that was temporarily suspended in mid-2005. Brazil has claimed the
right to retaliate against $3 billion in U.S. exports to Brazil based on the prohibited
subsidies, and proposed $1 billion in retaliation based on the actionable subsidies.
On January 8, 2007, Canada requested consultations with the United States
under the auspices of the WTO DS process to discuss three explicit charges against
U.S. farm programs (all three charges derive directly from the legal precedent of the
Brazil cotton case).⁶ First, Canada contends that U.S. corn subsidies have caused
serious prejudice to Canadian corn producers in the form of market price suppression

⁵ For more information and the U.S. response, see CRS Report RS22187, U.S. Agricultural
Policy Response to WTO Cotton Decision, by Randy Schnepf.
⁶ For more information and the U.S. response, see CRS Report RL33853, Canada's WTO
Case Against U.S. Agricultural Support, by Randy Schnepf.

in Canadian corn markets during the 1996 to 2006 period. Second, Canada argues
that the U.S. export credit guarantee program operates as a WTO-illegal export
subsidy. Third, Canada claims that U.S. fixed direct payments are not green box
compliant and should therefore be included with U.S. amber box payments, in which
case the United States would be in violation of its $19.1 billion amber box spending
limit for 1999, 2000, 2001, 2004, and 2005. If successfully litigated, this case could
affect broader U.S. agricultural policy, since the charges against the U.S. export
credit guarantee and direct payment programs extend beyond corn to all major
program crops.
Consultations are still ongoing and Canada has not yet requested the formation
of a WTO panel. If a WTO panel is requested and ultimately agreed to by the WTO
Dispute Settlement Body, it would set in motion the full rules and timetables of the
WTO DS process in examining Canada’s case. Should any eventual changes in U.S.
farm policy be needed to comply with a WTO ruling in Canada’s favor, such changes
would likely involve action by Congress to produce new legislation. Congress will
be revisiting U.S. farm legislation this year and could potentially address some of the
issues raised by Canada’s WTO challenge.
WTO Commitments, Rules, and Challenges
Overview
The linkage between agricultural subsidies and market distortions has long
provided a basis for trade remedy claims.⁷ Article VI of the General Agreement on
Tariffs and Trade (GATT) of 1947 helped to standardize international trade remedies
where claims of dumping and subsidization were alleged. Article XVI of the GATT
also addressed subsidies. However, agricultural support policies and their linkage
to commodity markets and trade were first addressed in the Uruguay Round (UR) of
multilateral trade negotiations in 1994 under the Agreement on Agriculture (AA).
This agreement attempted to specify and discipline agricultural support policies, and
to develop a process for settling disputes between member countries concerning the
use of agricultural subsidies.⁸ Both anti-dumping (AD) and countervailing duty
(CVD) trade remedies have remained available to member countries of the WTO
since its establishment in 1994. However, Article 13 of the AA (the so-called Peace
Clause) called for due restraint among WTO members in seeking CVD or WTO
dispute settlement claims, particularly if the subsidies in question remained within
certain limits as spelled out in the AA and in each member country’s schedule of
concessions. Article 13 was limited by a sunset provision that fixed its duration to
the nine-year implementation period running from January 1, 1995, through
December 31, 2003.

⁷ For more information and a general discussion of trade remedies, see CRS Report
RL32371, Trade Remedies: A Primer, by Vivian C. Jones.
⁸ For more information, see CRS Report RL32916, Agriculture in the WTO: Policy
Commitments Made Under the Agreement on Agriculture, by Randy Schnepf.

As part of WTO membership, countries agreed to disciplines in agricultural
support including rules and definitions governing the nature of agricultural support
(e.g., market distorting or non-distorting), as well as formal, clearly defined
commitments to reduce or limit agricultural support.⁹ In addition, WTO members
have agreed to formal procedures for resolving disputes concerning compliance with
WTO disciplines. This report assumes a general knowledge of WTO rules and
procedures; however, those aspects deemed most relevant for understanding potential
challenges to U.S. agricultural programs are briefly described below.
WTO Agreements. Within the WTO’s multitude of legal texts and
supporting documents, the following are most relevant to issues related to
agricultural subsidies and challenges to the WTO legality of those subsidies:¹⁰
^!General Agreement on Tariffs and Trade of 1994 (GATT 1994).
GATT 1994 subsumes the original GATT 1947 under the WTO and
includes a series of “understandings” that provide additional
precision to the interpretation of earlier GATT 1947 legal texts and
rules.
^!Agreement on Agriculture (AA). The AA provides the legal
framework for administering the agricultural policy reforms agreed
to in 1994 by members.
^!Country Schedules to the AA.¹¹ Each individual member has a
unique schedule of concessions and commitments that includes such
details as the implementation period for subsidy and tariff reductions
or quota expansions, subsidy caps, and other country-specific terms.
^!Agreement on Subsidies and Countervailing Measures (SCM).
The SCM establishes formal definitions and rules for subsidies,
including whether they are “prohibited”or “actionable,” as well as
providing special and additional rules for consultations and dispute
settlement.
^!Understanding on Rules and Procedures Governing the
Settlement of Disputes (DSU). The DSU establishes a binding
dispute settlement system to enforce WTO rules.¹² It is only within
the framework of the DSU that a member country may bring a

⁹ For more information on WTO AA liberalization commitments as well as notification
requirements, special treatment of developing countries, and related issues, see CRS Report
RL32916, Agriculture in the WTO: Policy Commitments Made Under the Agreement on
Agriculture, and CRS Report RL30612, Agriculture in the WTO: Member Spending on
Domestic Support, both by Randy Schnepf.
¹⁰ For all official WTO legal texts (including those mentioned here), see The Legal Texts:
The Results of the Uruguay Round of Multilateral Trade Negotiations (Cambridge
University Press, ©World Trade Organization, 1999); available at [http://www.wto.org/
english/docs_e/legal_e/legal_e.htm] .
¹¹ Each member’s schedule of concessions is publicly available at the WTO website at
[ ht t p: / / www.wt o.or g/ engl i s h/ t r at op_e/ s chedul es_e/ goods_schedul es_e.ht m] .
¹² For more information, see CRS Report RS20088, Dispute Settlement in the World Trade
Organization: An Overview, by Jeanne Grimmett.

formal challenge against another member country for alleged
violation of rules or provisions of the AA or SCM.
Article 13 and Annex 2 from the AA, along with Articles 1, 5, and 6 from the
SCM, are included as attachments at the end of this report.
Agricultural Policy Reform Commitments. To limit and reduce the
amount of distortive subsidies directed to their agricultural sectors, WTO members
have agreed to disciplines in agricultural support in three broad areas — domestic
support programs, export subsidies, and market access. Since much of the potential
for new challenges of U.S. farm programs involves compliance with these policy
reform commitments, each of these broad policy reform areas is briefly discussed
below.
Domestic Support. In Article 6 of the AA, domestic support programs were
categorized based on their potential to distort commodity markets.¹³ Domestic
support that is deemed to have a “direct effect” on agricultural markets is measured
by an index referred to as the Aggregate Measure of Support (AMS).¹⁴ The AMS
combines the monetary value of all non-exempt agricultural support into one overall
measure. The AMS includes budgetary outlays in the form of actual or calculated
amounts of direct payments to producers under various commodity programs such
as marketing loan provisions, input subsidies, and interest subsidies on commodity
loan programs, as well as revenue transfers from consumers to producers as a result
of policies that distort market prices. Once measured, the AMS is then subject to
reductions and a cap. However, to accommodate legitimate domestic policy goals,
the AA defined four major categories of domestic support, three of which are eligible
for exemption from reduction commitments:¹⁵
^!Green Box. This category covers domestic programs deemed to be
minimally or non-market distorting, such as agricultural research and
extension programs.¹⁶
^!Blue Box. This category includes support that is production-limited
for either crop or livestock production.¹⁷
^!Product- and Non-Product-Specific De Minimis Exemptions.
U.S. commodity-specific support that is below 5% of a commodity’s
value of production is deemed sufficiently benign that it does not

¹³ Specific WTO domestic support commitments in dollar values, as well as country-
specific notifications of support by program, are presented in CRS Report RL30612,
Agriculture in the WTO: Member Spending on Domestic Support, by Randy Schnepf.
¹⁴ AMS is defined in the AA, Article 1 (a) and (h). Calculation of the AMS is described in
Annex 3 of the AA.
¹⁵ AA Articles 6 and 7.
¹⁶ See Attachment 4, “Agreement on Agriculture, Key Provisions of Annex 2 (the green
box)” for criteria for inclusion in the green box.
¹⁷ AA Article 6.5.

have to be included in the AMS calculation.¹⁸ Such commodity-
specific support can be evaluated for each individual commodity.
Similarly, non-product specific support that is below 5% of the total
value of production for all commodities may be exempted from
AMS limits. Since the value of U.S. agricultural production
averages in excess of $200 billion annually, this latter exemption can
cover as much as $10 billion in non-product specific support.
^!Amber Box. After excluding all of the exempted categories, the
remaining AMS support is placed in the Amber Box. U.S. Amber
Box AMS has been capped at $19.1 billion since 2000.
Each WTO Member has certain obligations to notify the WTO of spending
under each of these domestic support categories (amber box, blue box, de minimis,
and green box).¹⁹ The AA is fairly specific on the criteria for designating domestic
support programs into the various AMS categories. However, each country makes
its own designations and there is not always a clean fit between a domestic program
and a WTO AMS category. As a result, disagreement may arise between WTO
members over a particular program designation (e.g., exemption status with respect
to the AMS) or whether the support under a particular program has been fully
counted. Such disagreements may manifest themselves as formal DSU challenges.
For example, as part of its WTO cotton case, Brazil successfully challenged the U.S.
designation of Production Flexibility Contract (PFC) payments as fully “decoupled”²⁰
and, therefore, green box compliant. However, increasing tardiness in notifying
domestic crop subsidies to the WTO, particularly on the part of those countries with
the largest domestic subsidies — the United States, the EU, and Japan — has
diminished the ability of third countries to use notifications as a basis for challenge.
Export Subsidies. The AA imposes limits on direct agricultural export
subsidies, but not on indirect export subsidies. Indirect methods of export
subsidization include government subsidized financing for exports (e.g., export credit
guarantees), export promotion and information activities, tax benefits, or other forms
of assistance that may lead to lower than normal costs for exported products.²¹ WTO
members agreed to both volume and value reductions in the use of direct export
subsidies from a 1986-90 base period. Each country’s schedule specifies both how
much can be exported with subsidy as well as the permitted subsidy expenditure for
each listed commodity. A WTO member may not initiate new export subsidies for
commodities that are not in its country schedule.²² Because indirect export subsidies
are less transparent, but may still provide substantial market support, their use
represents a potential source for dispute between nations and may lead to new

¹⁸ AA Article 6.4.
¹⁹ See CRS Report RL32916 for more information on WTO notification requirements.
²⁰ Discussed in more detail in section “Brazil’s WTO Case Against the U.S. Cotton
Program.”
²¹ Export subsidies are specifically dealt with in Articles 8-12 of the AA. For more
information on U.S. agricultural export programs see USDA, Foreign Agricultural Service,
“Programs and Opportunities,” at [http://www.fas.usda.gov/programs.asp].
²² AA Article 8.

challenges. For example, as part of the WTO cotton case, the panel found that U.S.
export credit guarantees operated as prohibited export subsidies and were permissible
only to the extent that they complied with the export subsidy commitments listed in
the U.S. country schedule.
Market Access. Market access refers to the extent to which a country permits
imports. Within the WTO, market access refers more specifically to the conditions
governing tariff and non-tariff measures agreed to by members for the entry of²³
specific goods into their markets. WTO members agreed to bind the maximum
tariff rates that may be applied to imported products at base period (1986-88) levels.
Member countries are free to apply tariff rates that are below the bound rate, but may
never apply a tariff rate in excess of the bound rate without first consulting the other
members most likely to be affected by such a change and agreeing on some level of
compensation.²⁴ In addition to the binding of maximum tariff rates, member
countries have agreed to reductions in the bound rates as specified in their country
schedules. In some countries, a tariff-rate quota (TRQ) was established for
“sensitive” products that included a minimum low-tariff, access quota component
and a more protected above-quota component. The specific quota and tariff rates for
all TRQs are listed in the country schedules. Violations of tariffs and TRQ
provisions are challengeable, as are indirect import restrictions in the form of variable
import levies, discretionary import licensing, non-tariff measures maintained through
state trading enterprises, voluntary export restraints, and most border measures other
than ordinary customs duties. However, the Peace Clause did not apply to market
access commitments. As a result, the status of WTO legal challenges of market
access commitments has not changed with the expiration of the Peace Clause.
WTO Subsidy Challenges Under the Peace Clause
Subsidies Under The SCM Agreement. As mentioned earlier, the
Agreement on Subsidies and Countervailing Measures (SCM) establishes formal
definitions and rules for subsidies, including whether they are “prohibited” or
“actionable,” as well as providing for consultations and dispute settlement.
Prohibited Subsidies. The SCM is explicit in its prohibition of subsidies
that directly affect trade.²⁵ Two types of subsidies are prohibited: subsidies
contingent upon export performance and subsidies contingent upon the use of
domestic over imported goods. These prohibitions apply except as provided in the²⁶
AA. For example, in the WTO cotton case, U.S. Step 2 cotton payments to
exporters were identified as unscheduled export subsidies, while Step 2 cotton²⁷
payments to domestic users were identified as illegal import substitution subsidies.
Thus, both Step 2 payments were subject to the SCM agreement prohibition. In the

²³ AA Article 4 treats market access, and AA Article 5 treats Special Safeguard Provisions.
²⁴ GATT 1994 Article 28.
²⁵ SCM Article 3.
²⁶ AA Article 3.1.
²⁷ See later section “Brazil’s WTO Case the Against U.S. Cotton Program” for details.

WTO’s dispute settlement process, prohibited subsidies are treated with greater
urgency than are actionable subsidies. If a policy measure is found to constitute a
prohibited subsidy under DSU challenge, then the DSU panel “shall recommend that
the subsidizing Member withdraw the subsidy without delay.”²⁸
Actionable Subsidies. Actionable subsidies (i.e., those subsidies that are
not expressly prohibited but against which legal action may be taken) are broadly
defined in SCM Article 5 as those subsidies (defined in SCM Article 1) which cause:
... adverse effects to the interests of other Members, i.e.:
(a) injury to the domestic industry of another Member ;
(b) nullification or impairment of benefits accruing directly or indirectly
to other Members under GATT 1994 in particular the benefits of
concessions bound under Article II of GATT 1994;²⁹
(c) serious prejudice to the interests of another Member.
Trade analysts have argued that the adverse effects criteria represent a lower
threshold for achieving successful challenges to agricultural support programs than
the injury requirement under a countervailing duty claim. This is because under
SCM Article 5, “serious prejudice,” but not injury, must be established (discussed
below).³⁰ Prior to its expiration, the Peace Clause had provided protection from trade
remedy consideration for actionable subsidies provided that they met certain
compliance conditions (discussed in the following section).
The Peace Clause. During the nine-year period from January 1, 1995,
through December 31, 2003, Article 13 of the AA, known as the “Due Restraint” or
so-called Peace Clause, exempted most domestic commodity support measures from
domestic countervailing duty (CVD) and DSU challenge, so long as the support
provided for any specific commodity (a) was in compliance with the provisions of
Annex 2 of the AA, or (b) was in compliance with the criteria for AMS, green box,
blue box, and de minimis from Article 6 of the AA and did not exceed the level of
support received during the benchmark 1992 marketing year.³¹ In other words, for
those agricultural support programs in full compliance with the terms of the AA, the
Peace Clause provided relief from domestic CVD and DSU challenge provided the
value of the support did not exceed the 1992 spending benchmark.
The intention of the Peace Clause was to allow WTO members sufficient time
to comply fully with their policy reform commitments, recognizing that some policies
would likely take several years to bring into full compliance due to the dynamics of

²⁸ SCM Article 4.7.
²⁹ SCM Article 5.
³⁰ The evaluation of WTO legal provisions and their potential relevance to future DSU
challenges of agricultural support programs relies heavily on the analysis done in Richard
H. Steinberg and Timothy E. Josling, “When the Peace Ends: The Vulnerability of EC and
US Agricultural Subsidies to WTO Legal Challenge,” Journal of International Economic
Law, Vol. 6, No. 2, pp. 369-417, July 2003; hereafter referred to as Steinberg and Josling
(2003).
³¹ See annotated version of AA Article 13 appended to this memo as Appendix B.

each country’s internal political process. With the expiry of the Peace Clause, the
full substantive and procedural legal apparatus of the WTO may be used to challenge
any type of agricultural subsidy — including export subsidies, Amber Box, Blue
Box, Green Box, and De Minimis measures — even if a subsidy remains within
spending limits defined under the country schedule.
The Peace Clause did not provide protection from DSU challenges to all
agricultural policy support measures. Prior to the Peace Clause’s expiration, DSU
challenges with respect to agricultural commodities could encompass issues arising
from noncompliance with WTO commitments, particularly from prohibited
subsidies. In addition, DSU challenges could encompass issues arising from
violation of other WTO rules, such as those covering dumping or sanitary and
phytosanitary measures including emerging issues such as biotech trade disputes.
CVD actions also were available for injury resulting from subsidized trade, although,
as noted earlier, members were requested to use “due restraint” in seeking
countervailing duties. At the time of the Peace Clause expiration, over 128 DSU
cases involving agricultural products (including fisheries and forestry) were in some
stage of determination.³²
U.S. trade negotiators have sought to include a new Peace Clause in the
negotiating text of the Doha Round in order to protect domestic support programs
while a new round of domestic support disciplines is being adopted. However, the
proposal for a new Peace Clause has met stiff resistance from nearly all negotiating
partners.
Brazil’s WTO Case Against the U.S. Cotton Program
On March 21, 2005, the WTO Dispute Settlement Body (DSB) adopted the
reports from both the WTO Appellate Body and the original WTO panel hearing
Brazil’s claims against the U.S. cotton program.³³ Several of the rulings from the
cotton case have important implications for future DSU challenges against U.S. farm
programs and are briefly summarized below.³⁴
First Ruling: Peace Clause Violation. The existence of the Peace Clause
did not prevent Brazil from bringing its case against the U.S. cotton program, in part
because Brazil thought it could prove that the United States was in violation of the
Peace Clause’s 1992 spending limit. After reviewing the evidence presented, the
panel found that U.S. cotton support levels for each of the marketing years 1999
through 2002 exceeded the Peace Clause’s 1992 benchmark spending threshold. As
a result, according to the panel the Peace Clause exclusion could not be used to
protect the U.S. policy measures. Had Brazil failed to show a violation of the Peace

³² Based on CRS review of WTO dispute settlement cases listed chronologically at
[ h t t p : / / www.wt o.or g/ engl i s h/ t r at op_e/ d i s pu_e/ d i s pu_st a t u s_e.ht m] .
³³ Refer to WTO case number DS267 for official documentation, available at
[http://docsonline.wto.org/ ge n_home.asp?language =1&_=1].
³⁴ For more information, see CRS Report RS22187, U.S. Agricultural Policy Response to
WTO Cotton Decision, by Randy Schnepf.

Clause’s 1992 support threshold, it is unlikely the panel would have pursued the case
further, thus demonstrating the important protection provided to domestic support
measures by the now-expired Peace Clause.
A key element of the panel’s determination regarding the Peace Clause was that
U.S. Production Flexibility Contract (PFC) payments made under the 1996 farm bill
and Direct Payments (DP) made under the 2002 farm bill failed to fully meet the
Green Box conditions for decoupled income support. Disqualification arises because
of planting restrictions on fruits, vegetables, and wild rice. As a result, the panel ruled
that they should count against the U.S. 1992 spending benchmark. In its notifications
for 1996 through 2001, the United States notified PFC payments as fully decoupled
green box support, thereby not counting against the U.S. AMS limit of $19.1 billion.
Although the panel did not declare that PFC and DP payments should be
notified as amber box payments, the panel implied as much. This particular finding
was not a part of the “serious prejudice” finding that required remedy; however, it
establishes a precedent for interpreting the notification status of U.S. direct payments.
As such, the ruling represents an obvious vulnerability should another country choose
to specifically challenge the notification status of PFC and DP payments. Such a
DSU challenge, if successful, would have important implications for the United
States’ ability to meet its domestic support commitments. What would happen if
PFC and DP payments are included as amber box rather than green box? Two
economic analyses conclude that the United States would have violated its AMS limit
of $19.1 billion during the years 1998, 1999, 2000, 2001, and 2006.³⁵ New
legislation would be necessary to make these direct payments green box compliant.
Second Finding: Prohibited Subsidies. On Sept 8, 2004, the panel found
that both the Step 2 cotton program and the export credit guarantee program acted as
prohibited subsidies and should be withdrawn (i.e., terminated) within six months of
adoption of the panel report by the WTO (or by July 1, 2005, whichever was³⁶
earlier). Furthermore, the panel found that this applied, not just to cotton, but to all
commodities that benefit from U.S. commodity support programs and receive export
credit guarantees. As a result, U.S. export credit guarantees for any recipient
commodity are subject to previously scheduled export subsidy commitments for that
commodity (as listed in the Country Schedule). For the United States, this refers to
export subsidies listed under the Export Enhancement Program (EEP) and the Dairy³⁷
Export Incentive Program (DEIP). Among those commodities eligible for EEP or

³⁵ Chad E. Hart, “The WTO Picture After the Cotton Ruling,” Iowa Ag Review, Vol. 11, No.

2, Spring 2005, pp. 10-11, available at [http://www.card.iastate.edu/iowa_ag_review/

spring_05/]; and Daniel A. Sumner, Boxed In: Conflicts between U.S. Farm Policies and
WTO Obligations, CATO Institute Trade Policy Studies, No. 32, December 5, 2005,
available at [http://www.freetrade.org/pubs/ pas/pas.html].
³⁶ WTO, Panel Report, United States — Subsidies on Upland Cotton, paras. 8.3 (b), (c),
WT/DS267/R, (September 8, 2004); hereafter referred to as WTO Upland Cotton Panel
Report.
³⁷ The United States has scheduled export subsidy reduction commitments for the following
thirteen commodities: wheat, coarse grains, rice, vegetable oils, butter and butter oil, skim
(continued...)

DEIP, the panel found that U.S. rice exports received export credit guarantee benefits
in excess of its EEP volume commitments. The panel found that all “unscheduled”
program commodities, such as cotton, receiving export credit guarantee benefits were
also in violation of WTO commitments.
The panel ruling on export credits hinged on a determination that the financial
benefits returned to the government failed to cover long-run program expenses, thus
implying that they functioned effectively as export subsidies.³⁸ An amendment to the
statute is needed to eliminate the alleged subsidy component of export credit
guarantees — i.e., below market user fees due to a 1% cap on user fees for GSM-102
(the primary export credit program). This statutory cap prevents charging higher
risk-based fees as recommended by the panel. Other U.S. trade assistance programs,
such as the various market development programs, appear to operate within WTO
rules; however, if brought under more intensive scrutiny, they could be vulnerable
to interpretation charging that they effectively function as export subsidies, which
would potentially subject them to scheduled export subsidy commitments.³⁹
Third Finding: Serious Prejudice. The panel ruled that the United States
should remove the prejudicial effects of price-contingent support measures including
marketing loan provisions, Step 2 payments, market loss payments, and counter-
cyclical payments. The extent of program change needed for compliance is not clear,
particularly since the Step 2 program ended on August 1, 2006, and no market loss
payments have been made since 2002. However, Brazil claims the right to impose
retaliatory tariffs valued at $1 billion. On August 21, 2006, Brazil requested the
establishment of a compliance panel to determine whether current U.S. actions are
sufficient to comply with the original WTO rulings and recommendations.⁴⁰
Although the United States successfully blocked Brazil’s first attempt to form a
compliance panel, Brazil’s second request on September 28, 2006, resulted in the⁴¹

establishment of a compliance panel.
³⁷ (...continued)
milk powder, cheese, other milk products, bovine meat, pigmeat, poultry meat, live dairy
cattle, and eggs. For more information on the EEP program and U.S. export subsidy
commitments, see Export Enhancement Program, Foreign Agricultural Service, USDA at
[ h t t p : / / www.f a s.usda.gov/ e xcr e di t s / eep.ht ml ] .
³⁸ WTO Upland Cotton Panel Report, paras 7.857-7.869.
³⁹ For more information on USDA market development programs, see [http://www.fas.
usda.gov/programs.asp], and CRS Report RL33553, Agricultural Export and Food Aid
Programs, by Charles Hanrahan.
⁴⁰ WTO, Recourse to Article 21.5 of the DSU by Brazil, United States — Subsidies on
Upland Cotton, WT/DS267/30 (August 21, 2006). For more information, see CRS Report
RS22187, U.S. Agricultural Policy Response to WTO Cotton Decision, by Randy Schnepf.
⁴¹ WTO, Dispute Settlement Body, “DSB Sets Up Compliance Panel to Review U.S.
Implementation of ‘Cotton’ Rulings,” 2006 News Item, September 28, 2006.

Post-Peace-Clause DSU Challenges
Following the expiry of the Peace Clause, both export and domestic subsidies
on agricultural products that are otherwise in compliance with WTO commitments
may be subject to DSU challenge under various legal provisions of the GATT 1994
and the SCM Agreement.⁴² One legal analysis of the potential for post-Peace-Clause
DSU challenges, undertaken by Steinberg and Josling, suggests that the most likely
avenue for future DSU challenges against the alleged “adverse effects” of U.S. farm
programs under SCM Article 5 would be claims of “serious prejudice” as defined in
SCM Article 5(c), primarily because this provision contains the lowest threshold that
a challenge must meet.⁴³ SCM Article 6 defines the nature of “serious prejudice” and
the cases in which it may be said to exist. In particular, Article 6.3 provides that:
Serious prejudice in the sense of paragraph (c) of Article 5 may arise in any case
where one or several of the following apply:
(a) the effect of the subsidy is to displace or impede the imports of a like
product of another Member into the market of the subsidizing
Member;
(b) the effect of the subsidy is to displace or impede the exports of a like
product of another Member from a third country market;
(c) the effect of the subsidy is a significant price undercutting by the
subsidized product as compared with the price of a like product of
another Member in the same market or significant price suppression,
price depression or lost sales in the same market;
(d) the effect of the subsidy is an increase in the world market share of
the subsidizing Member in a particular subsidized primary product or
commodity as compared to the average share it had during the
previous period of three years and this increase follows a consistent⁴⁴
trend over a period when subsidies have been granted.
SCM Article 6.4 adds further precision to the nature of market displacement
identified in Article 6.3(b) by indicating that displacement may be demonstrated by
showing that a change in relative market shares has occurred to the disadvantage of
a non-subsidized “like” product.
Steinberg and Josling conclude that the biggest challenge to making a trade
remedy claim under SCM Article 6.3 would be to credibly and reliably establish that
agricultural subsidies are causing serious prejudice as defined by the above⁴⁵
provisions. Steinberg and Josling provide a roadmap for developing a case under
these legal provisions including the incorporation of economic and statistical
modeling for showing causal linkages between agricultural support policies (i.e.,
subsidization) and prejudicial market effects as measured by market share, quantity
displacement, and/or price suppression. Steinberg and Josling argue that a strong

⁴² For a recent discussion, see Stewart and Dwyer (2006) p. 6; supra note 2.
⁴³ Steinberg and Josling (2003), p. 371.
⁴⁴ SCM Article 6.3 (italics added by CRS).
⁴⁵ Steinberg and Josling (2003), p. 389.

prima facie case under the legal standards of SCM Article 6.3 and 6.4 could be made
if:
^!regression analysis, partial equilibrium modeling, or general
equilibrium modeling confirmed each of the relationships being
tested, and
^!those analyses were complemented by a confirmatory narrative about
the relationships in particular markets.
Brazil’s successful challenge of the U.S. cotton program followed this general
course, but used a serious prejudice argument based on “significant price
suppression” in world markets. Econometric model results were included to support
the argument of strong adverse policy-to-price linkages.⁴⁶ Specifically, the WTO
panel cited four main grounds that supported a causal link between the implicated
U.S. cotton subsidies and significant price suppression:⁴⁷
^! the United States exerts a substantial influence in the world cotton
market due to the relative magnitude of U.S. cotton production and
exports;
^!the relevant U.S. subsidies are price contingent, i.e., linked directly
to world prices for upland cotton, thereby insulating U.S. producers
from low prices;
^!there is a discernible temporal coincidence of suppressed world
market prices and the price-contingent U.S. subsidies; and
^!there is a divergence between U.S. cotton producers’ total costs of
production and their revenue from cotton sales, suggesting that it is
the U.S. subsidies that permit cotton sales at prices that fail to cover
costs.
These same criteria are relevant for evaluating the potential vulnerability to
future WTO legal challenges for U.S. commodities. Appendix A provides a brief
review of several published economic analyses of the market effects of U.S.
agricultural policies. As a general rule, these studies support the idea that U.S. (and
other developed country) agricultural support programs negatively influence
international market prices and tend to disadvantage third-country trade of non-
subsidized “like” products.
The following section reviews actual U.S. program outlays by commodity, as
well as various market statistics (e.g., share of world production and trade) for major
U.S. program crops that correspond with the causal linkage criteria listed above.

⁴⁶ Sumner, Daniel A. A Quantitative Simulation Analysis of the Impacts of U.S. Cotton
Subsidies on Cotton Prices and Quantities, Paper presented to the WTO Cotton Panel
(DS267). October 26, 2003; available at [http://www.fao.org/es/esc/common/ecg/47647_en_
sumner.pdf].
⁴⁷ WTO Upland Cotton Panel Report, paras 7.1348-7.1353.

U.S. Farm Program Subsidies
Overview
As mentioned earlier, each WTO member country is expected to routinely
submit notification reports on the implementation of its specific policy reform
commitments, including domestic farm support outlays, to the WTO.⁴⁸ The country
notifications, along with any other publicly available information on domestic
support outlays, provide the basis for evaluating and challenging compliance with
WTO commitments. As of this writing, the United States has notified domestic
support outlays for only calendar years 1995 through 2001. However, USDA
routinely publishes estimates of U.S. farm program support for historical, current,
and projected crop years.⁴⁹ In building its case against the U.S. cotton program,
Brazil made ample use of USDA public data sources. Furthermore, a critical issue
for U.S. commodity subsidies with respect to their inclusion in a WTO legal
challenge is, not how they were notified to the WTO, but the extent to which they can
be linked to a specific commodity.
This section reviews both U.S. domestic support notifications and publicly
available USDA data since 1996 to evaluate the potential vulnerability of U.S. farm
commodities to new WTO legal challenges. This section begins with a review of
U.S. farm support programs, including a discussion of differences between actual
USDA outlays and the AMS support levels notified to the WTO. This is followed
by an evaluation of domestic support for each of the major U.S. program crops
against the criteria for measuring potential linkages between policy and market
effects as developed in the first section of this report.
U.S. Domestic Support Outlays and Notifications
The United States operates a wide range and large number of federal programs
that both directly and indirectly support U.S. agricultural production. For example,
in FY2006, USDA and related agencies (the Food and Drug Administration and the
Commodity Futures Trading Commission) received budget authority of an estimated
$99.9 billion that included domestic food assistance programs, agricultural research
and extension, rural development, conservation, foreign aid, and commodity
programs.⁵⁰ However, most of these programs and activities are considered
minimally production and trade distorting under the terms of the WTO Agreement
on Agriculture (AA).
A WTO challenge under SCM Articles 5 or 6.3 appears likely to focus on those
programs that are categorized under the WTO criteria as production and trade

⁴⁸ For more information see CRS Report RL30612, Agriculture in the WTO: Member
Spending on Domestic Support, by Randy Schnepf.
⁴⁹ USDA, Farm Service Agency, Budget Division, “Table 35, CCC Net Outlays by
Commodity and Function,” available at [http://www.fsa.usda.gov/dam/bud/bud1.htm].
⁵⁰ For more information see CRS Report RL33412, Agriculture and Related Agencies:
FY2007 Appropriations, Jim Monke coordinator.

distorting (i.e., amber box) or that are have been exempted from the amber box under
the blue box, de minimis, or green box criteria but can be shown to cause adverse
effects in certain markets. Table 1 presents a list of U.S. agricultural support
programs by WTO category based on the domestic support notifications submitted
by the United States during 1995-2001.
During the 1995-2001 period, the United States notified an annual average of
$15.3 billion in domestic spending under the AMS amber box and de minimis
categories (Table 2). The United States has used the blue box only once (in 1995)
since qualifying target-price deficiency payments were eliminated by the 1996 farm
bill. During that same 1995-2001 period, the United States notified an annual
average of $50 billion in green box support outlays.
The 2002 farm bill (Farm Security and Rural Investment Act of 2002, P.L. 107-
171), made some changes to commodity support programs including the creation of
two new programs — the Counter-Cyclical Payments (CCP) program and the Milk
Income Loss Contract (MILC) program. Neither of these programs has yet been
notified as belonging to a particular WTO category. U.S. commodity programs are
briefly described below.
Farm Support Programs. Domestic commodity support provisions in the

2002 farm bill include three major payment programs: Direct Payments, Counter-

Cyclical Payments (CCP), and benefits under marketing loan provisions — i.e., loan
deficiency payments (LDPs), marketing loan gains (MLGs), and certificate exchange
gains (CEGs).⁵¹ Over 62% ($110 billion) of USDA CCC outlays were made under
these three programs during 1996-2006 (Table 3).
CCP payments and marketing loan benefits (LDP, MLG, and CEG) vary with
market prices and make outlays when market prices fall below target prices (CCP)
or loan rates (marketing loan benefits). Marketing loan benefits have been notified
as product-specific AMS support (see Table 2, heading 2, “Non-Exempt Direct
Payments”). Like marketing loan benefits, CCP payment are specific to a
commodity. Unlike marketing loan benefits which depend on actual production,
CCP outlays are based on historical base acres and national average prices. As a
result, CCP payments are decoupled from producer planting decisions, but do retain
a link to market prices. Because CCP payments were not made until calendar 2003,
they have yet to be notified to the WTO. However, the commodity-decoupled, but
price-linked nature of CCP payments suggests that they would likely be notified as
non-product specific AMS support under current WTO criteria. As a result, CCP
would likely qualify for exemption from the AMS limit under the non-product-
specific de minimis exemption.
Direct payments (DP) are paid annually and are based on historical base acres
and yields. As a result, they do not vary annually based on current production or
market conditions. DP under the 2002 farm bill are an extension of the Planting

⁵¹ For more information on U.S. farm programs, see CRS Report RS21999, Farm
Commodity Policy: Programs and Issues for Congress, and CRS Report RL33271, Farm
Commodity Programs: Direct Payments, Counter-Cyclical Payments, and Marketing Loans,
both by James Monke.

Flexibility Contract (PFC) payments of the 1996 farm bill (P.L. 104-127). The
principal difference between DP and PFC payments is that farmers were allowed to
adjust their declared base acres and crops at sign-up time for the 2002 farm bill. As
a result, the share of DP payments across program crops shifted slightly between the
1996 and 2002 farm bills. The United States has always notified both DP and PFC
to the WTO as decoupled green-box support. However, the WTO panel and
Appellate Body hearing the cotton case (DS267) found that DP payments are not
fully decoupled because of a prohibition on planting fruits, vegetables, and wild rice
on payment acres. As a result, the panel ruled that DP payments did not qualify for
inclusion in the green box and therefore were counted against the 1992 “Peace
Clause” spending limit discussed earlier. This raises the question of whether or not
the U.S. will continue to classify direct payments as green box or report them in the
future as amber box.

Table 1. Categorized List of U.S. Support Programs, 1995-2001
Green Box Programs — non or minimally production and trade distorting programs
exempt from disciplines.
USDA research, cooperative extension, and economics programs;
Animal and Plant Health Inspection Service (APHIS) pest and disease programs;
Food Safety and Inspection Service (FSIS) meat and poultry inspection;
Agricultural Marketing Service (AMS), Grain Inspection, Packers and Stockyards
Administration (GIPSA), and other marketing services, including grading, quality
inspection, and market news;
Domestic food assistance programs, including food stamps, school food, the
special supplemental food program for women, infants, and children (WIC), and
Section 32 food purchases for domestic assistance;
Food security commodity reserve;
Disaster payments for livestock and crop losses due to natural disasters;
Conservation programs like conservation operations and the Environmental
Quality Incentives Program (EQIP);
Farm credit including Farm Service Agency (FSA) farm ownership and operating
loans; and state mediation programs;
The Conservation Reserve Program (CRP); and
CCC production flexibility contract payments made under the Agricultural Market
Transition Act (AMTA) of 1996.
Blue Box Programs — production limiting programs exempt from disciplines.
Target price deficiency payments (which ended with 1996 farm law).
Amber Box Programs — potentially production and trade distorting programs that are
subject to disciplines. They are defined as either product- or non-product specific.
Product-specific support:
Dairy price support;
Sugar price support;
Peanut price support;
Benefits under marketing loan provisions; and
Storage payments.
Non-product specific support:
Irrigation subsidies on Bureau of Reclamation Projects in 17 Western States;
Subsidies for grazing livestock on federal land;
Federal crop and revenue insurance subsidies; and
Farm storage facility loan subsidies.
^Source:^U^.^S^.ⁿ^o^tⁱ^fⁱ^catⁱ^oⁿ^s^t^o^t^h^{e WT}^O^;^G^/^A^G^/^N^/^U^S^A^/^#^f^o^{r #’}^s^{10, 17, 27, 36, 43, an}^{d 51}.
Nearly all of the payments made under these three programs — DP, CCP, and
marketing loan provisions — are directed to a relatively small number of
commodities (see following section). However, several other federal programs
provide substantial annual direct support to a broader list of crops. Such programs
include livestock grazing subsidies, crop and revenue insurance subsidies, irrigation
subsidies, storage payments, and commodity loan interest subsidies. In addition, over
$37 billion in emergency assistance payments were made to agricultural producers
during FY1996-FY2006. Although most disaster assistance qualifies for the WTO
green box exclusion, U.S. emergency payments included $16 billion in ad hoc market
loss assistance (MLA) payments that were made to grain, oilseed, cotton, tobacco,

and dairy producers in response to low farm commodity prices during the 1998-2002
period.⁵²
Based on specific AMS criteria, the United States notified support under many
of these smaller programs (including MLA payments) as non-commodity-specific
domestic support such that they qualified for the de minimis exemption (see Table 2,
heading 5, “Non-product specific support”). However, in many instances payments
from these programs can be linked directly to specific crops using publicly available
information sources. For example, MLA payments were based on specific crop yield
conditions. Similarly, the United States has notified its crop insurance subsidies as
non-commodity-specific support since all crop production is universally eligible for
such insurance. However, most crop insurance subsidies (with the exception of⁵³
adjusted gross revenue insurance) can be linked directly to a specific insured crop.
Government support of crop insurance has expanded greatly in the past decade
and is currently available to all crops grown in the United States. As a result, federal
crop insurance subsidies have greatly expanded the pool of subsidized commodities
in the United States. Crop insurance support is administered by USDA’s Risk
Management Agency (RMA) and funded through the Federal Crop Insurance Fund
rather than from the CCC, therefore crop insurance subsidies are not included in CCC
budget tables. Since FY2002, government net outlays (including premium subsidies
and government loss-sharing) have averaged over $3 billion annually. However, the
recent growth in federal crop insurance subsidies, coupled with projections for
continued growth (FAPRI projects federal crop insurance net outlays to exceed $4⁵⁴
billion by 2008 and to reach $4.6 billion by 2015) could potentially bring the crop
insurance program under greater scrutiny from WTO competitors.

⁵² For more information on market loss payments, see CRS Report RL31095, Emergency
Funding for Agriculture: A Brief History of Supplemental Appropriations, FY1989-FY2006,
by Ralph Chite.
⁵³ See USDA, Risk Management Agency’s Summary of Business searchable database for
crop-specific data; available at [http://www3.rma.usda.gov/apps/sob/].
⁵⁴ FAPRI, 2006 U.S. and World Agricultural Outlook, FAPRI Staff Report 06, January 2006.

Table 2. WTO Notifications of U.S. Domestic Support:
Amber Box Categories and De Minimis Exemptions, 1995-2001
BaseAverage
AMS Policy category^a1986-8819951996199719981999200020011995-01
($ million)
1. Market Price Support^b6,9566,2135,9195,8165,7765,9215,8405,8265,902
Dairy 5,4094,6934,6744,4554,3324,4374,3774,4834,493
Sugar 1,0411,1089371,0451,0931,1801,1331,0321,076
Peanuts 347412308315350303330311333
Beef^c 158 0000000 0
2. Non-Exempt Direct Pmts^d12,3938875784,43710,40310,5678,4354,931
Loan Def. Payment560032,7806,2106,2735,5932,980
Marketing-Loan Gain387001611,0391,685733610604
Certificate-Exch. Gains000061756191,975396
Cotton Step 2 payments0356416280446237182229
Other non-exempt pymnts2,2448874146132,3322,943256951
3. Total Other Support^e1,995101280338567457367262
Storage payments 573402478144436251
Interest subsidies 1,59911578141344443466367279
NE dairy compact benefits0000285520015
Fees paid by producers (177)(109)(67)(84)(112)(74)(72)(62)(83)
4. Product-Specific Totals21,3436,3115,9376,47510,55016,89116,86514,62811,094
(= 1 + 2 + 3)
5. Non-prod-specific support9011,5431,1135684,5847,4067,2786,8284,189
Crop market loss payments00002,8115,4685,4634,6402626
Crop insurance costs2899066331207471,5141,3961,7701,012
Irrg. subsidies-W. States543543381348348316316300365
Other 69 94 99 100 677 108 103 118 186
For Non-Specific “De Minimis” (DM) Calculations
5% of value of prod.^f7,1469,50510,28510,1949,5449,2379,4769,9259,738
6. Total Before Exemptions22,2457,8557,0517,04215,13424,29724,14321,45615,283
(= 4 + 5)

7. Exemptions1,634(1,642)(1,174)(812)(4,750)(7,435)(7,341)(7,045)(4,314)

Non-prod-specific DM^f(901)(1,543)(1,113)(568)(4,584)(7,406)(7,278)(6,828)(4,189)
Prod-specific DM.^f(692)(99)(61)(244)(166)(29)(63)(217)(126)
Credit in base period^g3,22800000000
8. Total Non-Exempt AMS23,8796,2125,8766,23110,38416,86216,80214,41110,968
Outlays (= 6 + 7)
9. AMS Ceiling^h23,87923,08322,28721,49120,69519,89919,10319,10320,809
10. Unused AMS Ceiling —16,86916,39015,25310,3033,0372,3014,6909,835
^Source:^U^S^D^A^/^E^R^S^,^W^T^O^d^a^t^a^b^a^s^e^a^t^[^h^t^t^p^:^/^/^www.^e^r^s^.^u^s^d^a^.^g^o^v^/^b^rⁱ^e^fⁱⁿ^g^/^f^a^r^m^p^o^lⁱ^c^y^/^u^sⁿ^o^tⁱ^f^y^.^h^t^m]^aⁿ^d^r^ecen^{t U.S. n}^o^tif^ication^s
^t^o^t^h^{e WT}^O^.^R^e^produ^{ced f}^r^om^C^R^S^R^e^port^R^L^30612,^Agrⁱ^cul^t^u^r^eⁱⁿ^t^h^{e W}^T^O^:^M^e^m^b^er^Spendi^{ng on D}^o^m^e^s^tⁱ^c^Suppor^t^.

^Notes^{for T}^a^b^l^{e 2:}
^a.^C^a^t^e^g^o^ri^es^corres^pon^{d t}^o^t^h^os^eⁱⁿ^of^fⁱ^ci^al^dom^es^tⁱ^c^s^u^pportⁿ^o^tⁱ^fⁱ^catⁱ^oⁿ^s^t^o^t^h^{e WT}^O^,^as^s^h^owⁿ
ⁱⁿ^S^u^pportⁱⁿ^g^T^a^bl^es^D^S^:^{4, 5, 6, 7, an}^{d 9.}^D^o^m^e^s^tⁱ^c^s^u^pportⁱ^s^m^eas^u^r^{ed by}^WT^Oⁱⁿ^dex^cal^l^e^d
^t^h^{e ag}^g^r^eg^at^{e m}^eas^u^r^em^en^t^of^s^u^pport^(A^MS^).
^b.^M^a^rk^et^pri^{ce s}^u^pportⁱ^s^t^o^t^a^l^elⁱ^gⁱ^b^l^e^produ^ctⁱ^oⁿ^tⁱ^m^es^t^h^{e di}^f^f^e^ren^ce^b^e^t^w^e^eⁿ^t^h^e^c^u^r^r^e^nt
^admⁱⁿⁱ^s^t^{ered pri}^{ce an}^{d t}^h^{e f}ⁱ^x^e^{d, 1986-}^{88 w}^o^rl^{d ref}^e^ren^{ce pri}^ce.
^c.^T^h^{e Un}^{ited States}^als^oⁿ^o^tif^{ied th}^{e v}^a^lu^{e of}^beef^pu^rch^a^s^e^s^m^a^{de to of}^f^s^{et th}^e^ef^f^ect^of^th^e^dairy
^h^e^{rd bu}^y^-^ou^t^prog^ram^.^N^o^fⁱ^x^e^{d w}^o^rl^{d ref}^e^ren^{ce pri}^{ce w}^a^s^u^s^ed.
^d.^S^{ee A}^ppen^dⁱ^x^T^a^bl^{e 11 of}^C^R^S^R^e^port^R^L^30612,^Agrⁱ^cul^t^u^r^eⁱⁿ^t^h^{e W}^T^O^:^M^e^m^b^er^Spendi^ng
^{on D}^o^m^e^s^tⁱ^c^Suppor^t^{, f}^o^{r det}^aⁱ^l^s^onⁿ^oⁿ^-^ex^em^pt^di^rect^pay^m^en^t^s^.^S^u^pportⁱⁿ^t^h^e^1986-^{88 bas}^e
^peri^{od w}^a^s^defⁱⁿ^e^{d t}^oⁱⁿ^cl^u^d^{e pay}^m^en^t^s^rel^a^t^e^{d t}^o^produ^ctⁱ^oⁿ^redu^ctⁱ^oⁿ^prog^ram^s^{. S}^u^ch
^p^a^y^m^en^ts^w^e^r^e^ex^em^p^t⁽^e^x^c^lu^d^e^d⁾^f^r^o^m^th^{e A}^M^{S r}^e^d^u^ctioⁿ^co^m^m^itm^en^{ts af}^ter^th^e^b^a^se^p^e^rⁱ^o^d
^an^{d w}^e^{re n}^o^tⁱ^fⁱ^e^{d i}ⁿ^S^u^pportⁱⁿ^g^T^a^bl^{e D}^S^:³^(bl^u^{e box}^{). U}^.^S^.^defⁱ^ci^en^cy^pay^m^en^t^sⁱⁿ^cl^u^d^{ed i}ⁿ
^t^h^{e bl}^u^e^box^w^e^re^re-^cal^cu^l^a^t^e^d^u^sⁱⁿ^g^{a f}ⁱ^x^e^{d, 1986-}^{88 ref}^e^ren^{ce pri}^{ce. T}^h^{e 1995 v}^a^l^u^{e i}ⁿ^t^h^e
^blu^e^box^w^a^s^{$7,030 m}^illion^.^T^h^is^pay^m^en^{t w}^a^s^elimⁱⁿ^{ated af}^{ter 1995 by}^th^e¹⁹⁹⁶^Farm^A^c^t.
^e.^Produ^ct^-^s^peci^fⁱ^{c s}^u^pport^on^l^y^.
^f^.^Uⁿ^d^e^r^t^h^e^d^e^mⁱⁿⁱ^mⁱ^s^p^r^o^vⁱ^sⁱ^oⁿ^,ⁱ^f^t^h^e^c^a^l^c^u^l^a^t^e^dⁱⁿ^dⁱ^vⁱ^d^u^a^l^produ^ct^s^u^pport^l^e^v^e^l^o^r^t^h^e
ⁿ^oⁿ^-^p^r^o^d^u^ct-^s^p^ecifⁱ^c^to^tal^isⁿ^o^t^lar^g^er^th^an⁵^%^o^f^{its r}^e^sp^ectiv^{e to}^{tal v}^a^lu^{e o}^f^p^r^o^d^u^ctioⁿ^,^th^e
^s^u^pport^doesⁿ^o^t^h^a^v^e^t^o^{be i}ⁿ^cl^u^d^{ed i}ⁿ^t^h^{e cu}^rren^t^t^o^t^a^l^A^M^S^.
^g^.^F^o^{r t}^h^{e 1986-}^{88 bas}^e^peri^{od on}^l^y^{, cou}ⁿ^t^ri^es^cou^l^{d i}ⁿ^creas^{e t}^h^ei^{r A}^M^S^by^u^sⁱⁿ^g^t^h^{e h}ⁱ^g^h^e^{r of}^t^h^e
¹⁹⁸⁶^v^a^l^u^e^o^r^t^h^e^1986-^{88 v}^a^l^u^e^.^Th^e^U^.^S^.ⁱⁿ^c^r^e^a^s^e^dⁱ^t^s^A^M^S^b^y^$³^,^{227 m}^illion^.^T^h^is^w^a^s
^don^{e to g}ⁱ^v^e^{credit f}^o^{r redu}^ction^sⁱⁿ^s^u^pport^already^accom^p^lis^h^e^{d du}^rin^g^th^{e f}ⁱ^rs^{t th}^{ree y}^ears
^o^f^t^h^e^U^r^ugua^y^Ro^und^.
^h.^Uⁿ^d^e^r^t^h^e^U^r^ugua^y^Ro^und^A^g^r^e^e^m^eⁿ^t^,^t^h^e^A^M^S^c^o^mmi^t^m^eⁿ^t^c^eⁱ^lⁱ^ng^w^a^s^deri^v^e^{d as}^t^h^e
^1986-^{88 bas}^e^v^a^l^u^{e m}ⁱⁿ^u^s^3.3%^per^y^ear^du^riⁿ^g¹⁹⁹⁵^t^h^ro^ugh²⁰⁰⁰^(20%^di^vⁱ^{ded by}^sⁱ^x^y^ears
^{= 3.33333%}^).
Program Commodities. Most direct program subsidies are available only
for about 25 agricultural commodities. The 2002 farm bill defines two classes of
commodities: “covered commodities” and “loan commodities.” The classes
determine which types of payments are available. For example, DP and CCP
payments are available only to the covered commodities, while marketing loan
benefits are available to the larger group of loan commodities. Covered commodities
include wheat, feed grains (corn, grain sorghum, barley, and oats), upland cotton,
rice, soybeans, and other oilseeds (sunflower seed, rapeseed, canola, safflower,
flaxseed, mustard seed, crambe, and sesame seed). Loan commodities include the
covered commodities, plus extra long staple cotton, wool, mohair, honey, dry peas,
lentils, and small chickpeas. Peanuts are classified separately, but receive payments
like the covered commodities.
U.S. dairy and sugar sectors also receive substantial support, but their support
is of a less direct nature than cash payments or certificate exchanges. Dairy prices
are supported (at a producer liquid milk-equivalent price of $9.90 per hundredweight)
through federal purchases of surplus nonfat dry milk, butter, and cheese. In addition,
dairy producers also receive a counter-cyclical “milk-income loss contract” (MILC)
payment when prices fall below a target price. Although they have yet to be notified,
MILC payments are linked to production and market prices (much like loan
deficiency payments for crops) and can be expected to qualify as amber box

payments. Demand for dairy products is supported by the Dairy Export Incentive
Program (DEIP), which subsidizes export of U.S. dairy products. Finally, domestic
prices are provided border protection by a system of TRQs for most dairy products.
No direct payments are made to U.S. sugar growers and processors; however,
U.S. sugar production is supported indirectly through import quotas, domestic
marketing allotments, and non-recourse loans to processors of domestically grown
sugar. The non-recourse loan rate varies for refined sugar from sugar cane (18¢ per
lb.) and from sugar beets (22.9¢ per lb.). As a result of these indirect support
programs, U.S. farm prices for sugar cane and sugar beets are maintained at levels
that are substantially above international market prices.
Because of the absence of direct payments, price support under the sugar and
dairy programs is defined by the WTO as the difference between the higher protected
domestic price and the unprotected international market price times annual
production. The relevant parameters for calculating price support were measured at
the farm gate and fixed by agreement during the Uruguay Round. As a result, these
reference prices do not change, even as world market conditions fluctuate. For dairy,
the U.S. administered domestic price of $9.90 per cwt. is compared with the
international reference price of $7.25 per cwt. to obtain the difference of $2.65 of
subsidy per cwt of domestic milk production. For sugar, the U.S. administered price
of 17¢ per lb. is compared with the international reference price of 10.5¢ per lb. to
obtain the difference of 6.5¢ of subsidy per lb. of domestic sugar production. WTO-
measured support for dairy and sugar varies annually with the volume of domestic
production. Because of the indirect nature of government support, USDA direct
outlays for dairy and sugar are significantly less than the level of annual AMS
support notified to the WTO. Prior to the 2002 farm bill, U.S. peanut support was
calculated in a similar manner based on a U.S. administered price of 30.5¢ per lb. and
an international price of 18.75¢ per lb. However, the U.S. peanut program was
revised as part of the 2002 farm bill such that peanuts are now essentially a “covered
commodity” and qualify for both market loan benefits and CCP payments.
The list of commodities that normally do not receive direct support includes
meats, poultry, fruits, vegetables, nuts, hay, and nursery products. Producers of these
commodities, however, may be affected by the support programs because
intervention in one farm sector can influence production and prices in another. For
example, program commodities such as corn are feed inputs for livestock. Congress
and the Administration often provide periodic assistance to some non-program
commodities. For example, the 2002 farm bill provided $94 million to apple growers
for 2000 market losses, and $200 million annually to purchase fruits, vegetables, and
specialty crops for food assistance under USDA’s Section 32 program.⁵⁵ Also, many
of these programs benefit from other USDA programs including subsidized crop
insurance, ad hoc disaster payments, and low-interest loans.

⁵⁵ For more information on USDA’s Section 32 program, see CRS Report RS20235, Farm
and Food Support Under USDA’s Section 32 Program, by Geoffrey Becker.

CRS-23
Table 3. USDA Net Outlays by Major Programs, 1996 to 2006
¹⁹⁹⁶¹⁹⁹⁷¹⁹⁹⁸¹⁹⁹⁹²⁰⁰⁰²⁰⁰¹²⁰⁰²²⁰⁰³²⁰⁰⁴²⁰⁰⁵^a²⁰⁰⁶^a^Av^e.
^$^b^illioⁿ^s
^a^y^m^en^ts^b^6.0⁶^.1^6.0⁵^.0^5.0⁴^.0^3.9⁶^.4^5.2⁵^.2^5.3⁵^.3
^{et L}^o^an^B^eⁿ^e^f^its^c^0.0⁰^.0^2.0⁶^.8^7.6⁶^.2^2.8¹^.3^3.5⁷^.0^2.9³^.6
^d^0.0⁰^.0^0.0⁰^.0^0.0⁰^.0^0.2²^.3^1.1⁴^.1^4.2¹^.1
^{Hoc Em}^erg^eⁿ^c^y^e^0.0⁰^.0^2.8⁷^.9^8.6⁸^.5^1.7³^.1^0.6³^.2^1.3³^.4
^nse^r^va^tⁱ^oⁿ^2.1²^.0^1.6¹^.6^1.7¹^.9^2.0²^.2^2.3²^.8^2.9²^.1
ⁱ^{ki/CRS-RL33697}^e^r^f^0.0⁰^.0^0.0⁰^.1^0.0⁰^.1^1.9¹^.2^0.2²^.1^1.7⁰^.7
^g/w^{tal CCC Ou}^tlay^s^g^8.1⁸^.1^12.4^21.5^22.9^20.7^12.⁴^16.5^13.0^24.3^18.2^16.2
^s^.or
^le^ak^o^p^In^su^ran^{ce Net Go}^v^t^Ou^tlay^s^h^1.8¹^.0^1.3¹^.7^2.3²^.5^3.0³^.3^3.3²^.9^2.9²^.4
^://wiki^:^C^C^C^ou^tlay^s^are^on^{a calen}^{dar y}^{ear bas}ⁱ^s^f^r^om^USDA^{, ER}^{S, Farm}^In^com^e^an^{d C}^o^s^t^s^B^r^iefⁱⁿ^g^R^oom^{, Farm}^{Sector In}^com^e^Forecas^ts^{; a}^v^aⁱ^l^a^b^l^e^a^t^[^h^t^t^p^:^/^/^www.^e^r^s^.^u^s^d^a^.^g^o^v^/
^h^ttpⁱⁿ^g^/^Farm^In^com^e^/Data/GP^_T^6.h^t^m^]^{; crop in}^s^u^ran^{ce n}^e^{t g}^o^v^e^rn^m^eⁿ^t^ou^tlay^s^{are on}^{a f}ⁱ^s^{cal y}^{ear bas}ⁱ^s^f^r^om^USDA^{, R}^M^A^,^Su^m^m^a^ry^o^f^B^u^sⁱⁿ^e^s^s^On^li^ne^d^a^t^a^b^a^s^e^{, av}^{ailable at}
^:^/^/^www3^.^r^ma^.^u^s^d^a^.^g^o^v^/^a^p^p^s^/^s^o^b^/^]^.
^{2005 an}^{d 2006 are f}^o^recas^ts^.
^clu^d^es^{Direct P}^a^y^m^en^ts^f^r^om^th^{e 2002 f}^a^rm^{bill an}^{d P}^r^odu^ction^Flex^ibility^C^oⁿ^t^{ract P}^a^y^m^en^ts^f^r^om^th^{e 1996 f}^a^rm^bill.
^etin^g^loan^ben^e^f^itsⁱⁿ^clu^d^{e loan}^defⁱ^cien^cy^pay^m^en^ts^{, m}^a^rk^etin^g^loan^g^aⁱⁿ^s^,^an^{d certif}^{icate ex}^ch^an^g^e^g^aⁱⁿ^s
^o^uⁿ^t^er-^c^y^c^{lical pay}^m^en^ts^w^e^{re n}^o^{t av}^{ailable u}ⁿ^d^{er th}^{e 1996 f}^a^rm^{bill, bu}^{t w}^e^{re s}^t^{arted by}^{a prov}^is^ionⁱⁿ^th^{e 2002 f}^a^rm^bil^l.
^clu^d^es^m^a^rk^{et los}^s^pay^m^en^ts^an^{d dis}^a^s^t^{er as}^sⁱ^s^t^an^ce.
^clu^d^{es Milk}^In^co^m^e^L^o^{ss Co}ⁿ^t^{ract (MIL}^{C) p}^a^y^m^en^{ts, p}^ean^u^t^q^u^o^t^{a b}^u^y^o^u^t^p^a^y^m^en^{ts, to}^b^acco^tran^sitioⁿ^p^a^y^m^en^{ts, an}^d^o^t^h^e^{r m}ⁱ^scellan^e^o^u^{s o}^u^tlay^s^.
^C^C^ou^tlay^s^{are on}^{a calen}^{dar y}^{ear bas}ⁱ^s^.
^r^{op in}^s^u^ran^{ce s}^u^bs^idies^{are on}^{a f}ⁱ^s^{cal y}^{ear bas}ⁱ^s^an^{d in}^clu^d^{e both}^prem^iu^m^s^u^bs^idies^an^{d los}^s^cos^t^-^s^h^a^rin^g^by^th^{e f}^e^deral^go^ve^rⁿ^m^e^nt^.

Which U.S. Program Crops Might Be Vulnerable
to WTO Challenge?
If subsidies are challenged as being in violation of U.S. WTO commitments
under SCM Articles 5 and 6.3, the challenges must be specific to commodities. This
section uses the criteria discussed in this report’s first section — i.e., magnitude of
commodity support and linkage to adverse effects in the marketplace — to identify
those subsidized U.S. commodities that are potentially vulnerable to WTO legal
challenges under current WTO rules.
First, USDA data are used to identify both those crops that depend heavily on
government subsidies, and the specific subsidies on which they depend (to the extent
that this varies across commodities). Three questions are addressed:
^!How important are farm subsidies relative to the commodity’s
market returns?
^!How important are farm subsidies relative to the commodity’s costs
of production?
^!Which programs provide most of the farm subsidies for the
commodity?
Second, those commodities identified as depending heavily on government
subsidies are evaluated in terms of the potential for their farm subsidies to be linked
to adverse effects in international commodity markets.
^!How important is U.S. production and trade for an identified
commodity relative to world markets?
How Important Are Farm Subsidies Relative to the Commodity’s
Market Returns? The commodities receiving mandatory federal support are listed
in Table 4 and ranked by the level of subsidy as a share of cash receipts (over the
past 10 years beginning with 1996). With the exception of some minor oilseeds, all
of the “covered commodities” receive subsidy payments amounting to more than
10% of cash receipts. At the top of the list is rice at 72%, followed by upland cotton
at 58%. The other top-ranking crops are sorghum (45%), wheat (34%), barley (30%),
corn (25%), sunflower seed (21%), and canola (20%). While these shares are high,
they actually understate the situation because they are 10-year averages. Challenges
in the WTO likely would identify the years when the subsidies were at their highest
levels relative to market revenues. In FY2000, for example, rice and cotton subsidy
payments amounted to 174% of cash receipts, and sorghum, wheat and corn
payments were respectively 110%, 101%, and 66% of cash receipts.⁵⁶ Figures 2-8
display agricultural subsidies by program for the major covered commodities during
fiscal years 1996 through 2005.

⁵⁶ FY2000 subsidy payments are compared with calendar year 2001 cash receipts.

Table 4. Commodity-Specific Program Support and Insurance
Subsidy Payments, Yearly Average, FY1996-2005
^Av^{. Subsidy}^Pa^y^m^ents^Subsidy^Pa^y^m^ent^C^a^s^{h Receipts}
^Subsidy
^Cro^p^b^Period^Period^To^t^a^l^Sha^{re o}^f
^Co^m^m^o^dity^CCC^a^Ins.^To^t^a^l^Miⁿ^Ma^x^Va^lue^To^t^a^{l Va}^lue
⁽^$^m^illioⁿ^s⁾^P^er^cen^t
^Rⁱ^ce⁹⁸¹⁹⁹⁹⁰⁴⁵⁰^1,786^{1,379 72%}
^U^p^l^aⁿ^d^C^o^t^t^oⁿ²^,221²⁴⁷^2,468⁷³⁶^6,522^4,229^58%
^So^r^ghum³⁷⁶⁶³⁴³⁹¹⁸⁸⁹⁹¹^{984 45%}
^Wh^eat^2,024²⁸⁸^2,312^1,374^5,418^{6,798 34%}
^Barl^ey¹⁷¹¹⁸¹⁹⁰⁸⁶⁴¹⁴^{636 30%}
^C^o^rn^4,390⁸⁸^4,478^1,120^10,149^{18,024 25%}
^O^a^t^s¹⁹⁴²³⁹⁶⁴^{93 25%}
^S^uⁿ^f^l^o^w^e^{r S}^eed⁴⁷²⁹⁷⁶⁰¹⁷⁸³⁶⁸^21%
^C^aⁿ^o^l^a¹⁸¹⁰²⁷⁰⁶⁰^{137 20%}
^F^l^ax^s^eed⁵¹⁶⁰²¹^{49 13%}
^D^r^y^Peas⁵¹⁶⁰³⁶⁴⁹^12%
^Pean^u^t^s⁷³³¹¹⁰⁴⁰³³²^{909 11%}
^S^o^y^b^ean^s¹^,362¹²⁰^1,481⁰³^,520^{14,772 10%}
^R^a^pes^eed⁰ⁿ^a⁰⁰⁰¹^5%
^Mu^s^t^{ard Seed}⁰⁰⁰⁰⁰⁸^5%
^S^a^f^f^l^ow^{er S}^eed¹¹¹⁰⁴⁴⁵^3%
^Wool¹ⁿ^a¹⁰⁵²⁶^3%
^H^oⁿ^e^y⁴ⁿ^a⁴⁰²⁸¹⁷⁰^2%
^D^aⁱ^r^y³⁰²⁰³⁰²⁰¹^,769^{23,132 1%}
^L^eⁿ^tils¹ⁿ^a⁰⁰³⁰¹^%
^Moh^a^ir⁰⁰⁰⁰⁰⁸^0%
^Cr^a^m^b^e⁰^na⁰⁰¹^na^na
^Chi^c^kp^e^a^s⁰^na⁰⁰⁰^na^na
^Se^sa^m^e⁰^na⁰⁰⁰^na^na
^O^t^h^e^{r 17}²⁶⁷²⁸⁴⁵⁷⁵⁵¹ⁿ^aⁿ^a
^A^{ll C}^o^m^m^odities^12,019^1,388^13,407^3,788^25,914^207,092^6%
^NA^{= n}^o^{t av}^ailab^l^e.
^So^urce^{: C}^C^C^ou^tlay^s^{are f}^r^om^USDA^{, Farm}^Serv^ice^A^g^en^cy^,^B^u^dg^et^Divⁱ^sⁱ^on^,^“^T^able^35,^C^C^C^Net
^Ou^tlay^s^b^y^Co^m^m^o^d^ity^an^d^Fuⁿ^c^tioⁿ^”^{; cr}^o^pⁱⁿ^su^r^aⁿ^{ce n}^e^{t g}^o^v^e^rⁿ^m^eⁿ^t^o^u^tlay^s^ar^e^f^r^o^m^USDA^{, RMA}^,
^S^u^mma^r^y^o^f^B^u^sⁱⁿ^e^s^s^Oⁿ^lⁱⁿ^e^d^a^t^a^b^a^s^e^,^a^v^aⁱ^l^a^b^l^e^a^t^[^h^t^t^p^:^/^/^www3^.^r^ma^.^u^s^d^a^.^g^o^v^/^a^p^p^s^/^s^o^b^/^]^.^C^a^s^h
^{receipt data are f}^r^om^USDA^{, Econ}^om^{ic R}^e^s^earch^Se^rv^{ice an}^{d are tabu}^{lated on}^a^calen^dar^y^ear^basⁱ^s^.
^F^o^{r l}^ack^of^corres^pon^den^{ce bet}^w^een^dat^a^s^e^t^s^{, F}^Y^{2000 s}^u^bsⁱ^d^y^pay^m^en^t^s^are^com^p^ared^wⁱ^t^h^cal^en^dar
^y^{ear 2001 cas}^h^receipts^.
^a.^G^o^v^e^rn^m^eⁿ^t^s^u^pport^f^o^{r t}^h^{e s}^u^g^a^{r an}^{d dai}^r^y^s^e^c^t^o^r^s^d^e^rⁱ^{ve pri}^m^ari^l^y^f^r^omⁱ^m^port^res^t^ri^ctⁱ^oⁿ^s
^rath^{er th}^an^{direct pay}^m^en^ts^.
^b.^C^r^{op in}^s^u^ran^{ce s}^u^bs^idies^{are th}^{e ex}^ces^s^ofⁱⁿ^demⁿ^ity^pay^m^en^ts^ov^er^f^a^rm^er-p^aⁱ^d^p^r^e^mⁱ^u^m^s^.
^Hen^{ce, it also}ⁱⁿ^clu^d^{es th}^{e p}^o^r^tioⁿ^o^f^th^{e to}^{tal p}^r^em^iu^m^th^{at is}^p^a^id^b^y^th^e^g^o^v^e^rⁿ^m^eⁿ^t^oⁿ^th^e
^fa^r^m^e^r^{’s b}^e^ha^l^f^.

How Important Are Farm Subsidies Relative to the Commodity’s
Costs of Production? Data in Table 5 show that, on average for the seven major
commodities examined, per unit market revenue has covered operating costs but not
total costs of production during recent three- to nine-year periods. In declining rank
order, per unit market revenue as a share of per unit total costs are: soybeans, 91%;
corn, 85%; rice, 70%; peanuts, 76%; cotton, 63%; wheat, 61%; and sorghum, 47%.
It is only with the subsidies that these commodities cover their total cost, and even
this was not accomplished for sorghum and wheat (see Figure 1). In the most
extreme case, market revenue for rice amounted to 70% of total costs, but with the
addition of subsidies the total revenue amounted to 146% of total cost.
These comparisons suggest that it is only with the aid of subsidies that a
substantial portion of U.S. production is made economically sustainable.
Unanswered is the question of whether production would decline without the
subsidies. Some, and possibly a substantial portion of the lost production from high
cost farms that would leave the sector in the absence of subsidies would be offset by
increased production from low cost farms that would likely expand their operations.
However, the substantial contribution of subsidies toward covering otherwise unmet
production costs implies a high chance for adverse rulings for any of the major
covered commodities.
Figure 1. U.S. Revenue Components as Share of Total Costs,
Selected Program Commodities

CRS-27
Table 5. Commodity Revenue and Cost Per Unit of Production, National Averages for Major Program Crops for
Selected Periods
SubsidyPer Unit of Share of
Commodity,Revenue Per Unitas ShareProductionTotal Cost
Data Time Frame,of TotalFederalOperatingTotalMarketTotal
(Unit of Measure)RevenueMarket^aSubsidy^bTotal^cCosts^dCosts^eRevenueRevenue
$/unit $/unit $/unit % $/unit $/unit % %
Corn 1996-04 (bu)$2.15$0.43$2.5817%$1.12$2.5485%102%
Soybeans 1997-04 (bu)$5.45$0.62$6.0710%$1.90$6.0091%101%
ⁱ^{ki/CRS-RL33697}Wheat 1998-04 (bu)$2.98$1.28$4.2630%$1.68$4.9061%87%
^g/wCotton 1997-04 (lb)$0.51$0.30$0.8137%$0.43$0.8063%101%
^s^.or
^le^akRice 2000-04 (cwt)$5.95$6.53$12.4852%$4.25$8.5670%146%
Sorghum 1996-04 (bu)$2.01$0.86$2.8730%$1.71$4.2447%68%
^://wikiPeanuts 2002-04 (lb)$0.19$0.06$0.2524%$0.12$0.2576%100%
^h^ttp
^Calcu^l^atioⁿ^s^ar^{e b}^y^th^{e au}^th^o^r^{s b}^a^sed^oⁿ^p^r^im^ar^y^d^a^{ta f}^r^o^m^th^{e USDA}^{. T}^h^{e tim}^{e p}^e^rⁱ^o^d^v^a^rⁱ^es^acr^o^ss^co^m^m^o^d^ities^b^a^sed^oⁿ^th^e^c^on^sⁱ^s^t^en^cy^of^prog^ram^operatⁱ^oⁿ^s^an^{d t}^h^e
^ility^o^f^d^a^ta.^Seasoⁿ^av^er^ag^{e cr}^o^p^p^r^{ice an}^d^co^{st o}^f^p^r^o^d^u^ctioⁿ^d^a^{ta ar}^{e f}^r^o^m^USDA^{, Eco}ⁿ^o^m^{ic Resear}^ch^Ser^v^{ice; CCC co}^m^m^o^d^ity^su^b^s^id^y^d^a^{ta ar}^{e f}^r^o^m^USDA^{, Far}^m^Ser^v^ice
^cy^{. C}^r^{op in}^s^u^ran^{ce data are f}^r^om^USDA^{, R}ⁱ^s^k^Man^a^g^e^m^eⁿ^t^A^g^en^cy^.
^on^av^erag^{e f}^a^rm^price.
^m^o^f^to^{tal f}ⁱ^{scal y}^ear^{CCC cr}^o^p^su^b^s^id^y^p^a^y^m^en^{ts, an}^d^cr^o^pⁱⁿ^su^r^aⁿ^{ce in}^d^e^mⁿ^{ities n}^o^{t o}^f^f^s^{et b}^y^f^a^r^m^er^-^p^aid^p^r^em^iu^m^s^{, p}^e^r^uⁿ^{it o}^f^to^{tal p}^r^o^d^u^ctioⁿ^.
^u^m^of^m^a^rk^et^rev^eⁿ^u^e^an^{d f}^e^deral^s^u^bsⁱ^d^y^pay^m^en^t^s^.
^t^s^di^vⁱ^{ded by}^yⁱ^el^d.
^g^cos^t^s^plu^s^fⁱ^x^e^{d an}^{d econ}^o^mⁱ^{c cos}^t^s^di^vⁱ^{ded by}^yⁱ^el^d.

Which Programs Provide Most of the Farm Subsidies for the
Commodity? Under the 2002 farm bill, the largest and most stable commodity
subsidy payments, on average, are direct payments. Counter-cyclical payments and
marketing loan program payments, as well as milk income loss contract payments are
the least stable and are large when prices are low. The cotton user marketing
program, commonly called the Step 2 program, has been terminated by a change in
U.S. law subsequent to the WTO ruling and expenditures drop to zero in FY2007.
There are purchase programs for milk and sugar to remove supplies when prices fall
below mandated support levels, but costs are comparatively low because price
support largely is achieved through import restrictions. Table 6 shows yearly
subsidy expenditures by program.
Table 6. Commodity Subsidy Outlays, by Program,
FY2002-FY2007 (forecast)
^Program^FY⁰²^FY⁰³^FY⁰⁴^FY⁰⁵^FY^06F^FY^07F
⁽^$^m^illioⁿ⁾^a
^{Direct P}^a^y^m^en^ts^P^r^og^ram^3,968^3,857^5,278^5,235^4,949^4,170
^C^o^uⁿ^t^er-^C^y^c^{lical P}^a^y^m^en^ts^P^r^og^ram^—^b^1,743⁸⁰⁹^2,772^3,975^3,147
^Mark^etⁱⁿ^g^L^o^an^Prog^ram⁵^,987^4,752^1,047^5,608^5,693⁴⁰²
^L^{oan D}^e^fⁱ^cⁱ^e^{ncy Paym}^ent^s^5,345⁶⁹³⁴⁶¹^3,856^4,576³⁵¹
^Co^mmo^d^{ity Certifica}^t^{e Ga}ⁱⁿ^s⁰³^,⁸⁶⁹²⁶⁸¹^,⁵²⁰¹^,¹⁰⁶³²
^M^a^r^ketⁱ^{ng L}^{oan G}^aⁱⁿ^s⁶⁴²¹⁹⁰³¹⁸²³²¹¹¹⁹
^Mi^l^k^In^com^e^L^o^s^s^C^oⁿ^t^ract⁰¹^,796²²¹⁹⁵¹⁵⁶⁰⁰
^C^o^t^t^oⁿ^U^s^{er Mark}^etⁱⁿ^g^Prog^ram¹⁸²⁴⁵⁵³⁶³⁵⁸²³¹²⁰
^T^o^ta^{l CCC Co}^m^m^o^d^ity^P^a^y^m^eⁿ^ts¹⁶^,¹²⁴¹⁷^,³⁵⁵⁸^,⁷⁶⁵¹⁹^,⁸¹⁴²¹^,¹³⁷⁸^,⁷²¹
^D^aⁱ^r^y^Pri^{ce S}^u^pport^Prog^ram⁶²²⁶⁹⁸⁷⁴⁽³⁰⁾⁸⁸¹⁴⁵
^S^u^g^a^{r Pri}^{ce S}^u^pport^Prog^ram⁽¹³⁰⁾⁽⁸⁴⁾⁶¹⁽⁸⁶⁾⁰⁰
^T^o^t^a^l^C^o^m^m^odi^t^y^Pu^rch^a^s^e^O^p^eratⁱ^oⁿ^s⁴⁹²⁶¹⁴¹³⁵⁽¹¹⁶⁾⁸⁸¹⁴⁵
^Cr^o^p^Iⁿ^su^r^aⁿ^{ce I}ⁿ^d^e^mⁿ^{ities in}^Ex^cess
^of^F^a^rm^er-^P^ai^{d Prem}ⁱ^u^m^s^1,772^2,892^1,871^1,500⁷⁵⁰ⁿ^a
^T^o^t^a^l^C^o^m^m^odi^t^y^-^S^peci^fⁱ^{c S}^u^pport^18,388^20,861^10,771^21,198^21,975^8,866
^So^urce^:^D^a^t^a^{are f}^r^om^U^S^D^A^,^F^S^A^,^C^C^C^N^e^t^O^u^t^l^a^y^s^by^C^o^m^m^odi^t^y^an^{d F}^uⁿ^c^tⁱ^oⁿ^,^Ju^l^y^{11, 2006.}
^Nu^m^b^ers^f^o^{r F}^Y^{2006 an}^{d F}^Y^{2007 are bu}^dg^{et f}^o^recas^ts^.
^a.^{Direct pay}^m^eⁿ^t^s^o^u^t^l^a^y^s^f^o^{r F}^Y^{2002 in}^clu^d^es^f^uⁿ^dⁱⁿ^g^f^o^{r th}^{e predeces}^s^o^{r con}^t^ract^pay^m^en^ts
^prog^ram^.
^b.^T^h^{e C}^C^P^prog^ram^w^a^s^{created by}^th^{e 2002 f}^a^rm^bill.
The variation in commodity subsidy payments by crop, by program, and by year
are large, as illustrated in Figures 2-8 and the minimum and maximum ranges of
Table 4. From FY1996 through FY2005, corn subsidies averaged $4.5 billion per
year, but ranged from $1.1 billion in FY1996 to $10.1 billion in FY2000. The
abnormally large corn payments in FY2000 were from market loss assistance.
Upland cotton subsidies averaged $2.5 billion, but ranged from $0.7 billion to
$6.5 billion. Especially large cotton commodity certificate payments were made in
FY2003 and FY2005 under the marketing loan program. Wheat, rice, soybeans, and
dairy payments also showed considerable variation over the 10-year period.
While crop insurance is available for nearly all crops in most production
locations, 68% of the subsidy over the FY2002-FY2006 period went to five crops —
corn (20%), wheat (18%), soybeans (16%), cotton (9%), and sorghum (6%) — and

75% of the total crop insurance coverage went to the price- and income-supported
crops, while the remaining 25% went to the non-supported crops. When total
premiums (including federal contributions) are compared to indemnity payments, the
loss ratio was 1.09, giving the overall appearance of approaching actuarial soundness.
However, if the federal premium subsidy is excluded, the loss ratio is 2.70
(indemnities were 2.7 times as high as farmer premium payments).
Figure 2. U.S. Corn Subsidies, FY1996 to FY2005F*
Figure 3. U.S. Upland Cotton Subsidies, FY1996 to FY2005F*

Figure 4. U.S. Wheat Subsidies, FY1996 to FY2005F*
Figure 5. U.S. Soybean Subsidies, FY1996 to FY2005F*

Figure 6. U.S. Rice Subsidies, FY1996 to FY2005F*
Figure 7. U.S. Grain Sorghum Subsidies, FY1996 to FY2005F*

Figure 8. U.S. Peanut Subsidies, FY1996 to FY2005F*

How Important Is U.S. Production and Trade for an Identified
Commodity Relative to World Markets? The most heavily subsidized
commodities (with the exception of milk) also are this nation’s largest agricultural
exports. Not only do exports provide a market for a large proportion of U.S.
production, these exports are a large proportion of the entire world’s exports.
During the 2002 to 2005 period, cotton exports accounted for 70% of U.S.
production and 40% of world trade (Table 7). Similarly, U.S. rice exports accounted
for 52% of U.S. production and 13% of world trade; wheat exports were 50% of U.S.
production and 25% of world trade; sorghum exports averaged 47% of U.S.
production and 83% of world trade; and soybeans exports averaged 35% of U.S.
production and 44% of world trade. Figure 9 illustrates the large share of world
exports held by the United States and begs the question of how this is accomplished
when market prices do not cover total costs.
Table 7. U.S. Share of World Production and Trade for Selected
Commodities, Yearly Average, 2002-2005
^Farm^Farm^{U.S. Expo}^rt^s:^{U.S. Sha}^{re o}^f^:
^Ca^sh^Va^lue^Sha^{re o}^f^U.S.^Wo^rld^Wo^rld
^C^o^mmo^dⁱ^t^y^Receipts^{of E}^x^p^o^rts^P^r^o^ductⁱ^oⁿ^P^r^o^ductⁱ^oⁿ^Expo^r^t^s
⁽^$^m^illioⁿ⁾⁽^p^er^cen^t)⁽^p^er^cen^t)
^C^o^rn^19,587^3,468^18%^40%^61%
^S^o^y^b^ean^s^16,631^5,791^35%^38%^44%
^Wh^eat^6,807^3,398^50%^9%^25%
^C^o^t^t^oⁿ⁵^,204^3,644^70%^20%^40%
^Rⁱ^ce^1,216⁶³⁸^52%^2%^13%
^So^r^ghum⁸⁶⁹⁴¹²⁴⁷^%¹⁸^%⁸³^%
^Pean^u^t^s⁷⁶¹⁹²^12%^6%^11%
^So^urce^{: Calcu}^l^atioⁿ^s^ar^{e b}^y^{CRS b}^a^sed^oⁿ^USDA^{, FSA}^m^a^r^k^etin^g^-^y^ear^d^a^ta.

Figure 9. U.S. Share of World Production and Trade,
Selected Program Commodities

Marketing Loan Benefits as Export Subsidies
Another important issue surrounds the nature of marketing loan provisions and
the contention by other WTO members that their benefits should be classified as
prohibited export subsidies. Under U.S. marketing loan provisions, a commodity’s
loan rate functions as a guaranteed price. If market prices fall below the loan rate,
producers of “loan” crops are eligible for additional subsidies as either loan
deficiency payments (LDPs), marketing loan gains (MLGs), or certificate exchange
gains (CEGs). All of a farmer’s production of a “loan crop” is eligible for marketing
loan benefits based on current market conditions making the subsidy payments
potentially market distorting. When market prices are low, the subsidies arguably
encourage greater production in spite of market signals to do just the opposite, in part
because the subsidies (on average) help to cover costs that low market returns are
unable to cover. Thus, marketing loan benefits, on average, offset what would
otherwise be revenue losses and encourage greater production than the market wants.
Other WTO members such as the EU have argued that, if the surplus U.S.
production generated by the marketing loan benefits is then exported at a market
price that is below the loan rate (and in many cases below the commodities’ cost of
production), the marketing loan subsidy is “effectively behaving like an export
subsidy.” Similarly, they contend that the subsidized production displaces imports
from other non-subsidizing countries. As a result, critics argue that, because the
subsidy provides a benefit to a U.S. commodity that is not available to a competitor’s
exports of “like-products” in either the U.S. or third-country market, it bears all of
the hallmarks of a prohibited export subsidy.

However, under SCM Article 3 an export subsidy must be based specifically on
export performance or upon use of domestic over imported goods. “The mere fact
that a subsidy is granted to enterprises that export shall not for that reason alone be
considered to be an export subsidy.”⁵⁷ In addition, the United States maintains that
all of its farm programs (including the marketing loan provisions) operate within the
framework of U.S. commitments to the WTO and are therefore in compliance.
Furthermore, since the WTO’s establishment in 1995 no WTO member has
challenged the benefits obtained by U.S. producers under the marketing loan
provisions as prohibited subsidies.
Reducing Vulnerability to WTO Challenge
WTO Remedies
In the event of a successful WTO dispute settlement challenge of a subsidy
program, the remedy depends on the nature of the subsidy — prohibited versus
actionable — and on the recommendation of the panel hearing the case. Prohibited
subsidies are to be withdrawn without delay (SCM Article 4.7). In other words,
prohibited subsidies are inconsistent with the WTO obligations of the United States
and would have to be eliminated within a time period specified by the panel in its
recommendation. If the recommendation is not followed within the specified time
frame, then the Dispute Settlement Body (DSB) “shall grant authorization to the
complaining Member” to take appropriate retaliatory countermeasures, unless the
DSB decides by consensus to reject the request (SCM Article 4.10). The
complaining member may also ask for a compliance panel under the DSU, as Brazil
has done in the WTO cotton case. On the other hand, the defending member can ask
for arbitration of the retaliation request if it thinks it to be excessive (DSU Article
22.6), then the arbitrator will decide whether the countermeasures are appropriate
(SCM Article 4.11).
With respect to actionable subsidies, the remedy under a successful challenge
of a subsidy causing adverse effects (SCM Article 7.8) is to remove the adverse
effects or withdraw the subsidy. Furthermore, SCM Article 7.9 states that if the
recommendation is not followed within six months of the adoption of Panel report
(or the Appellate Body report on appeal), then in the absence of a compensation
agreement, the DSB “shall grant authorization to the complaining Member” to take
appropriate retaliatory countermeasures commensurate with the degree and nature of
the adverse effects determined to exist. An arbitrator may be asked to determine
whether proposed countermeasures are commensurate with the adverse effects.
In lay terms, actionable subsidies causing adverse effects are to be altered so as
to remove the adverse effects. The subsidizing party is given some leeway in
deciding how to remove the adverse effect. Options would include eliminating the
subsidy program, reducing the subsidy amounts, reducing the linkage between the
subsidy and the adverse effects (e.g., decoupling), or suffering the consequences of

⁵⁷ SCM Article 3(a), footnote 4.

trade retaliation. Alternately, the subsidizing member could make some sort of
mutually acceptable compensatory payment to offset the adverse effects.
What Constitutes an Acceptable Subsidy?
Pedro Camargo Neto — former Secretary of Trade and Production of the
Ministry of Agriculture of Brazil during 2000-2002 — suggests that “a country
should not be permitted to export production that received trade-distorting support
covering production costs.”⁵⁸ Furthermore, Neto argues that the Doha Round
(assuming resumption of negotiations) should produce a negotiated understanding
of “serious prejudice” in relation to the effects of domestic trade-distorting support
for agriculture in order to avoid further litigation. Neto offers language for clarifying
serious prejudice as used in SCM Articles 5(c) and 6.3, “[s]erious prejudice occurs
when an agricultural product receives any kind of trade-distorting support of over

10% of the cost of production and reaches the international market with at least a 2%

market share.”⁵⁹
Mr. Neto’s suggested serious prejudice criteria might be viewed as extremely
narrow and, as such, would appear to encompass all major U.S. program crops.
Serious prejudice criteria, if established within the Doha Round, would be the
product of a negotiated understanding and could involve percentage levels
substantially larger than suggested by Neto. However, the evidence provided in
Tables 5 and 7 suggests that most major U.S. program crops would still remain
vulnerable to potential challenge under subsidy percentage levels of 15% to 20% of
the cost of production and an international trade share of 10%.
Decoupled Program Support
Several options for decoupling existing farm programs have been considered or⁶⁰
discussed as part of the on-going 2007 farm bill debate. These include fully
decoupled direct payments, whole-farm revenue-insurance-type programs, and
conservation or green payments. A major attraction for such programs is their
potential for exclusion from WTO AMS spending limits by qualifying under WTO⁶¹
green box criteria.
Fully Decoupled Direct Payments. Annual payments to a qualifying
producer based strictly on historical criteria with no linkage either to current market
conditions or to producer behavior would potentially be eligible for inclusion in the
green box.⁶² As previously noted, the WTO cotton ruling contradicted the U.S. claim
that the direct payments made under the 1996 and 2002 farm bills are minimally

⁵⁸ Neto, Pedro Camargo, “An End to Dumping through Domestic Agricultural Support,”
Bridges, No. 8, August 2005, pp. 3-4.
⁵⁹ Ibid., p. 4.
⁶⁰ For more information see CRS Report RL33037, Previewing a 2007 Farm Bill, Jasper
Womach coordinator.
⁶¹ See Attachment 4, “AA, Key Provisions of Annex 2” for the specific WTO criteria.
⁶² Ibid., see Annex 2, provisions 1, 5, and 6 for specific detail.

production and trade distorting. The ruling found that direct payments are not
decoupled from production because fruits, vegetables, and wild rice production are
prohibited on payment acres. Unless a legislative change for this problem is adopted,
other countries might challenge any categorization other than non-product specific
AMS or amber box for the direct payments. Counter-cyclical payments are tied to
the same payment acres as direct payments and likely would be categorized the same
as direct payments.
Whole Farm Revenue Insurance Type Programs. Current federally
subsidized revenue insurance products, offered to producers as part of the federal
crop insurance program, indemnify for diminished crop-specific revenue, whether
from reduced yield or from low market prices. A possible option for the next farm
bill is to expand current programs so that a producer can insure the revenue of the
entire farm (possibly including livestock), rather than individual crops. Analysis at
Iowa State University indicates that modifications can be made to current revenue
insurance products that make them ideally suited to hit congressionally determined
revenue targets. In addition, rationalizing commodity, disaster, and crop insurance
programs by replacing them with a single-payment program would increase program
transparency, eliminate program duplication, reduce administrative costs, and largely
eliminate over- and under-compensation of farmers, according to Iowa State⁶³
University researchers.
Current crop and revenue insurance products are classified as non-product
specific amber box under WTO rules because of their linkage to current prices and
current planted acres. As a result, they are exempted from AMS limits under the
de minimus exclusion. Whether modifications could make them comply with current⁶⁴
or new international subsidy rules is uncertain. For example, provision 7(b) of the
AA’s Annex 2 specifically limits compensation under an income safety-net program
to less than 70% of producer’s income loss. Presently, a U.S. producer can purchase
revenue insurance coverage for up to 90% of losses depending on the particular⁶⁵
policy selected.
Green Payments. The term “green payments” refers to providing financial
rewards to producers based on the scope or intensity of their conservation activities.⁶⁶
A shift from commodity subsidies to green payments is seen by some as attractive
because it could provide a new mechanism to support farm income, forge a stronger
link between conservation and farm income objectives, and still comply with WTO
obligations if the program is not considered to be production and trade distorting.

⁶³ Bruce A. Babcock and Chad Hart, Judging the Performance of the 2002 Farm Bill, Iowa
Ag Review, Spring 2005; available at [http://www.card.iastate.edu/iowa_ag_review ].
⁶⁴ See Attachment 4, Annex 2, provision 7 (a)-(d) for specific details.
⁶⁵ For a potential redesign of U.S. revenue insurance programs to fit within WTO limits, see
Bruce A. Babcock and Chad Hart, How Much “Safety” is Available under the U.S. Proposal
to the WTO?, Center for Agri. and Rural Dev., ISU, Briefing Paper 05-BP 48, November

2005; available at [http://www.card.iastate.edu/publications].

⁶⁶ For more information see CRS Report RL32624, Green Payments in U.S. and European
Union Agricultural Policy by Charles Hanrahan and Jeffrey Zinn.

The Conservation Security Program (CSP), enacted in the last farm bill, is one
model for translating the concept of green payments into a program. This program
was enacted as the first true entitlement program for conservation, meaning all
producers who meet eligibility qualifications would receive payments. However,
there is some concern over whether CSP fully qualifies for the green box in
accordance with AA, Annex 2, provision 12(b) which states that environmental
payments “shall be limited to the extra costs or loss of income” due to requirements
of a government program, “including conditions related to production methods or
inputs.”⁶⁷ Thus, any sort of incentive payment associated with green payments may
be sufficient to bring the qualification criteria into question.
New Farm Bill
During the past year, Agriculture Secretary Mike Johanns has been advocating
that a new farm act should be designed to place U.S. farm policy “beyond challenge.”
On January 31, 2007, the Administration released a proposal for U.S. farm policy
reform that, if incorporated into a new farm act, potentially could alleviate many of
Canada’s concerns while minimizing the likelihood of future WTO challenges.⁶⁸ The
proposal includes removal of the planting restriction on base acres receiving direct
payments. It also includes adjustments to the export credit guarantee program to
make them more compatible with WTO rules. Finally, the proposal includes
adjustments to price-contingent commodity programs (i.e., the marketing loan
program and the CCP) that would likely make them more WTO compliant and
potentially lower the vulnerability to challenges under the “serious prejudice”
charge.⁶⁹
Program Buyout
An alternative to program decoupling that has received some attention as part⁷⁰
of the 2007 farm bill debate is the idea of program buyout. Under a buyout
program, Title I commodity programs would be eliminated entirely, and replaced
with either a lump sum payment or a stream of annuity-like payments reflecting a
portion of the present discounted value of projected future commodity support under
existing law. The proposed buyout payments would be completely decoupled from
production and, therefore, notified as WTO green box compliant. Furthermore, by
eliminating all price-contingent amber box program payments, the buyout plan would
insulate the United States from any future challenges by other WTO members.

⁶⁷ See Attachment 4, Annex 2, provision 12 (a) and (b) for specific details.
⁶⁸ USDA News Release No. 0020.07, “Johanns Unveils 2007 Farm Bill Proposals,” January

31, 2007; available at [http://www.usda.gov].

⁶⁹ For more information, see USDA Farm Bill Fact Sheet, Release No. 0019.07, available
at [http://www.usda.gov/].
⁷⁰ For examples, see David Orden, “Feasibility of Farm Program Buyouts,” background
paper on U.S. farm program buyouts, January 23, 2007; available at
[http://farmpolicy.typepad.com/farmpolicy/files/orden_buyouts.pdf]; and Sallie James and
Daniel Griswold, Freeing the Farm: A Farm Bill for All Americans, Trade Policy Analysis
No. 34, Cato Institute, April 16, 2007; available at [http://www.freetrade.org/node/609].

Precedents cited for buyout programs include the 2004 buyout of the U.S. tobacco
program, and the 2002 buyout of U.S. peanut production quotas. In addition, the
recent EU sugar reform includes some buyout dimensions.⁷¹
References
CRS Report RL30612, Agriculture in the WTO: Member Spending on Domestic
Support, by Randy Schnepf.
CRS Report RL32916, Agriculture in the WTO: Policy Commitments Made Under
the Agreement on Agriculture, by Randy Schnepf.
ABARE, U.S. Agriculture Without Farm Support by McDonald, Daniel; Roneel
Nair, Troy Podbury, Belinda Sheldrick, Don Gunasekera, and Brian S. Fisher,
ABARE Research Report 06.10, September 2006.
Babcock, Bruce A., and Chad E. Hart. “Crop Insurance: A Good Deal for
Taxpayers?” Iowa Ag Review, Vol. 12, No. 3, Summer 2006.
FAPRI, Potential Impacts on U.S. Agriculture of the U.S. October 2005 WTO
Proposal, FAPRI-UMC Report #16-05, December 15, 2005.
Hart, Chad E. “The WTO Picture After the Cotton Ruling,” Iowa Ag Review, Vol.

11, No. 2, Spring 2005, pp. 10-11; available at [http://www.card.iastate.edu/

iowa_ag_ review/spring_05/] .
Neto, Pedro Camargo, “An End to Dumping through Domestic Agricultural
Support,” Bridges, No. 8, August 2005, pp. 3-4.
OECD, Agricultural Policies in OECD Countries: Monitoring and Evaluation 2005.
Oxfam International, Truth or Consequences: Why the EU and the USA must reform
their subsidies, or pay the price, Oxfam Briefing Paper No. 81, November 30,

2005; available at [http://www.oxfam.org/en/policy/briefingpapers/bp81_truth].

Steinberg, Richard H., and Timothy Josling. “When the Peace Ends: the
Vulnerability of EC and US Agricultural Subsidies to WTO Legal Challenge,”
Journal of International Economic Law, Vol. 6, No. 2, pp. 369-417, July 2003.
Stewart, Terence P., and Amy S. Dwyer. “Doha’s Plan B: the Current Pause and
Prospects for the WTO,” paper presented to the Global Business Dialogue, Inc.,
September 13, 2006; the authors are with Stewart and Stewart, Washington,
D.C.

⁷¹ For more information, see European Commission, Agriculture and Rural Development,
CAP Reform, “Sugar;” at [http://ec.europa.eu/agriculture/capreform/index_en.htm].

Sumner, Daniel A. A Quantitative Simulation Analysis of the Impacts of U.S. Cotton
Subsidies on Cotton Prices and Quantities, Paper presented to the WTO Cotton
Panel (DS267). October 26, 2003; available at [http://www.fao.org/es/esc/
common/ecg/ 47647_en_sumner.pdf].
Sumner, Daniel A. Boxed In: Conflicts between U.S. Farm Policies and WTO
Obligations, CATO Institute Trade Policy Studies, No. 32, December 5, 2005;
available at [http://www.freetrade.org/pubs/pas/pas.html].
WTO, The Legal Texts, Agreement on Subsidies and Countervailing Measures,
Cambridge University Press; © World Trade Organization 1999. WTO Legal
Texts are available at [http://www.wto.org/english/docs_e/legal_e/legal_e.htm].

Appendix A. Review of Economic Studies of Causal
Linkage: U.S. Farm Policy vs. World Markets
This appendix reviews several economic studies that have investigated the
causality linkage between U.S. agricultural policy support and the adverse world
market effects identified in SCM Article 6.3 — i.e., lost market share, quantity
displacement, and suppression of market prices. The studies reviewed here are cited
in the reference section at the end of this report and include:
^!Steinberg and Josling (2003);
^!Sumner (2003);
^!Sumner (2005);
^!FAPRI (2005);
^!Oxfam Briefing Paper No. 81 (2005); and
^!ABARE (2006).
As a general rule, these studies support the idea that U.S. (and other developed
country) agricultural support programs negatively influence international market
prices and tend to disadvantage third-country trade of non-subsidized “like” products.
While one may disagree with their results, the modeling techniques used in these
studies are not out of the mainstream of accepted modeling methodology found in the
professional economics literature and as taught in agricultural economics departments
at U.S. land-grant universities. They are included here because of both their
adequacy as economic analyses and their usefulness in indicating those commodities
and programs that are most vulnerable to potential WTO challenge from another
WTO member country.
Steinberg and Josling (2003). Steinberg and Josling developed a series of
regression models to evaluate the market effects of seven classes of U.S. subsidies
for six major commodities (barley, beef, corn, milk, rice, and wheat) based on data
for the 1986-2001 period. Their categories of commodity-specific subsidies were
based on definitions developed by the Organization for Economic Cooperation and
Development (OECD) and included (1) market price support which incorporated the
effects of import barriers and export subsidies; (2) payments based on output; (3)
payments based on area planted; (4) payments based on historical entitlements; (5)
payments based on input use, (6) payments based on input constraints; and (7)
payments based on overall farming income.
Steinberg and Josling performed regression analyses for each commodity market
using the market share and export volume criteria of Article 6.3(b) and the relative
market share criteria of Article 6.4 for the ten largest exporting non-subsidizing
WTO members (i.e., potential complainants) as the dependent variable. Each of the
subsidy categories was included as an independent variable along with other relevant
control variables. A second regression was included that incorporated the subsidies
as a single aggregate category. Steinberg and Josling evaluated these regressions for
impacts in both U.S. and third-country markets. With respect to the U.S. market,
their analyses found a significant negative relationship between U.S. subsidies and
imports of non-subsidized third-country product for barley and milk — i.e., higher
U.S. subsidies are associated with lower U.S. imports of non-subsidized “like”

products. In third-country markets, their regressions found widespread negative
effects of U.S. subsidies on both non-subsidized product market share and volume.
Table 8 provides a list of countries affected in third-country markets for each
commodity studied. Steinberg and Josling did not evaluate the causal linkage
between commodity support and market price changes.
Table 8. Third-Country Markets Impacted by U.S. Subsidies
SubsidizedThird-Country Markets With ^a
CommodityStatistically Significant Effects
BarleyCanada^d, Cyprus^b, Japan^b, Mexico^d
BeefColombia^b, Japan^d, Jordan^c, Nicaragua^b, Saudi Arabia^ba
CornAlgeria^d, Argentina^b, Canada^d, Costa Rica^d, Ecuador^b, Egypt^b, El^d^c^d^d^b^b
Salvador, Grenada, Guatemala, Honduras, Indonesia, Jamaica,^b^c^b^b^d^d
Korea, Mexico, Nicaragua, Panama, Philippines, Senegal,^b^b
Trinidad and Tobago, Venezuela
MilkAlgeria^b, Australia^b, Canada^c, Chile^b, China^b, Ecuador^b, Nicaragua^d,^c
Venezuela
RiceArgentina^b, Australia^b, Brazil^b, Chile^d, China^b, Colombia^d, Costa^d^d^c^c^d^d
Rica, El Salvador, Honduras, Indonesia, Mexico, Nicaragua
WheatAlgeria^d, Bolivia^c, China^d, Colombia^d, Cyprus^b, Ecuador^b, Egypt^b,^b^b^b^b^d^d^b
Honduras, Japan, Kenya, Korea, Morocco, Pakistan, Tunisia,^c
Venezuela
^Source:^S^t^eiⁿ^b^erg^an^{d Jos}^lⁱⁿ^g^(2003).
^{a. Statis}^{tical s}ⁱ^gⁿⁱ^fⁱ^can^{ce w}^a^s^tes^t^{ed u}^sⁱⁿ^g^{a 95% con}^f^iden^{ce in}^terv^al.
^b^.^B^a^sed^oⁿ^th^{e SCM A}^r^{ticle 6}^.³⁽^b⁾^stan^d^a^rd^{: m}^a^rk^{et sh}^{are o}^r^q^u^an^tity^dⁱ^sp^lacem^en^t.
^{c. B}^a^sed^oⁿ^th^{e SCM A}^r^{ticle 6}^.⁴^stan^d^a^r^d^{: r}^e^lativ^{e m}^a^r^k^{et sh}^ar^e.
^{d. Bas}^e^{d on}^cri^t^e^ri^{a ci}^t^e^{d i}ⁿ^bot^h^f^ootⁿ^o^t^e^s^{(b) an}^{d (c).}
Sumner (2003). Brazil’s successful WTO challenge of the U.S. cotton
program included the submission of an econometric simulation model (referred to
hereafter as the Sumner cotton model) in conjunction with its “serious prejudice”
arguments to evaluate the international market effects of U.S. cotton program
support. Unlike Steinberg’s and Josling’s regression analyses (which directly
evaluate the statistical relationship between a dependent and an independent variable
while controlling for the effects of other influential factors), a simulation model is a
statistical representation of a market complete with supply, demand, trade, and
equilibrium (market clearing) price. A simulation model may be used to test the
relationship between subsidies and trade flows or market price by comparing a
baseline scenario reflecting the status quo against a hypothetical scenario where the
subsidies in question are reduced or omitted.
The Sumner cotton model evaluated the market effect of six U.S. subsidy
programs — (1) marketing loan benefits, (2) PFC and DP payments, (3) market loss
assistance (MLA) payments and Counter-Cyclical Program (CCP) payments, (4) crop
insurance subsidies, (5) Step 2 payments, and (6) export credit guarantee subsidies.
A seventh aggregate subsidy category also was evaluated. On the supply side of the

simulation model, the subsidies influence U.S. producer behavior primarily through
net returns per acre for cotton relative to competing crops. On the demand side,
subsidies influence the net price paid by buyers of U.S. cotton. The Sumner cotton
model was simulated for the removal of all subsidy programs (as well as for each
individual component subsidy) for the five-year period 2003-2007. Because the LDP
and CCP program payments vary with market conditions, their influence also varied
from year to year as market conditions changed. Over the five-year period, the
removal of all U.S. cotton subsidies led to an annual average reduction in U.S. cotton
production of over 27%, a reduction in U.S. cotton exports of nearly 43%, and an
increase in the world cotton price of almost 12%.
Although the United States argued strongly against inclusion of the Sumner
cotton model as relevant evidence of serious prejudice (primarily on technical
modeling grounds rather than on the substantive value of econometric modeling per
se), the panel noted that:
we observe that the simulations were prepared by experts, and explained to the
Panel by experts. The outcomes of the simulations are consistent with the
general proposition that subsidies bestowed by member governments have the
potential to distort production and trade and the elimination of subsidies would
tend to reduce “artificial” incentives for production in the subsidized Member.
This is one of the underlying rationales for the establishment of the subsidy
disciplines in the SCM agreement.⁷²
As a result, it is not unreasonable to assume that the Sumner cotton model results
supported, if not directly contributed to, the Panel’s general finding in support of
Brazil’s challenge.
Sumner (2005). In follow-up analyses published by the Cato Institute,
Sumner used a similar analytical approach to review the vulnerability to WTO legal
challenge of U.S. program subsidies for corn, wheat, rice, and soybeans (cotton was
also included for comparative purposes).⁷³ First, looking at the 2004 to 2006 period
Sumner evaluated the magnitude of U.S. crop subsidies by comparing total subsidy
outlay to the value of production for each crop. The subsidy’s share of production
ranged in importance from 5% to 7% for soybeans and 15% to 45% for corn, up to
80% for cotton in 2005 and 78% for rice in 2004 (Table 9). In addition, the
subsidies were examined in relation to net returns (market revenue minus costs of
production). Net returns were evaluated with and without subsidies for 2003 through
2005. For every case, per acre average costs exceeded per acre market returns
without subsidies. It is only with the addition of the subsidy that net returns cover
costs in 7 out of 12 cases. This preliminary comparison based on a limited number
of years would suggest that subsidy payments have had substantial market impact,
particularly for rice and corn.

⁷² WTO Upland Cotton Panel Report, para. 7.1207.
⁷³ Sumner, Daniel A. Boxed In: Conflicts between U.S. Farm Policies and WTO
Obligations, CATO Institute Trade Policy Studies, No. 32, December 5, 2005; available at
[ ht t p: / / www.f r eet r a de.or g/ pubs/ pas/ pas.ht ml ] .

Table 9. Evaluating the Importance of U.S. Crop Subsidies
^Subsidy^Sha^re^{Net Returns}
^of
^P^r^o^ductⁱ^oⁿ⁽^%⁾^Wit^h^o^u^t^Subsidy⁽^$^/a^c)^Wit^h^Subsidy⁽^$^/a^c)
^Cro^p
²⁰⁰⁴²⁰⁰⁵²⁰⁰⁶²⁰⁰³²⁰⁰⁴²⁰⁰⁵²⁰⁰³²⁰⁰⁴²⁰⁰⁵
^Co^rⁿ^14.7^28.8^44.6^-^32.4^-^37.0^-^70.6^-^9.1⁰^.9^34.7
^W^h^eat^21.8^27.4^50.9^-^66.2^-^47.6^-^54.3^-^46.9^-^17.9^-^17.0
^Rⁱ^ce^78.1^32.1^39.6^-^164.7^-^110.3^-^108.9^298.7^171.6^85.4
^Soy^b^ean^5.4⁶^.9^6.9^-^4.9^-^20.8^-^16.9^16.3^-^8.1⁷^.8
^Co^ttoⁿ^22.7^80.3^65.2ⁿ^aⁿ^aⁿ^aⁿ^aⁿ^a^na
ⁿ^a^{= n}^o^{t av}^ailab^l^e.
^Source:^F^r^om^S^u^mⁿ^{er (2005) bas}^e^{d on}^U^S^D^A^dat^a^.
In addition, Sumner used a stylized version of his cotton model to evaluate the
causal linkage between U.S. crop subsidies and international market prices. The
model assumed that the extent to which subsidies caused market price suppression
depended on:
^!the subsidy rate relative to the value of production;
^!the degree to which the subsidy provided a production incentive (i.e.,
the extent of coupling);
^!the share of the subsidized production in the relevant world market;
^!the share of demand in each market; and
^!the supply and demand elasticities in the U.S. and world markets.
Sumner found that U.S. subsidies for corn, wheat, and rice were associated with a
substantial degree of market price suppression. Removing U.S. subsidies for these
crops resulted in world price increases of 9 to 10% for corn, 6 to 8% for wheat, and
4 to 6% for rice. These rates of change compare with a world price impact of over

12% associated with U.S. cotton subsidies in Sumner (2003).

In his Cato Institute paper, Sumner included several additional, highly relevant
observations in regards to potential WTO legal challenges of U.S. commodity
programs. In particular, he observed that challenges based on serious prejudice
need not be global in scope, but can be restricted to a specific geographic market or
product sub-market.⁷⁴ Sumner argues that such geographically restricted claims may
in many instance be stronger and more easily defended than claims that embrace one
commodity in the global marketplace. For example, Mexico, Japan, and Taiwan are
major markets for subsidized U.S. corn and displacement of corn exports from
Argentina is likely and could present the opportunity for a geographically-focused
challenge. Similarly, U.S. sales of subsidized wheat into major markets like Japan,
China, Mexico, and various Middle Eastern and Asian markets are also potentially

⁷⁴ Ibid., p. 23.

vulnerable on a geographic basis from competitor wheat-exporting nations such as
Australia, Argentina, and Canada.
With respect to product sub-markets, the United States is a large producer and
exporter of all major classes of wheat (hard red winter, soft red winter, white wheat,
hard red spring, and durum) and rice varieties (indica and japonica). Sumner
observed that, to the extent that many third-country markets are segmented by a
preference for a specific wheat class or rice variety, an analysis focused on a specific
class or variety might actually implicate the United States as playing a larger market
role in terms of production and export share than for the generic commodity.⁷⁵ Also,
evidence of displacement of quantities might be more direct in a localized geographic
market. As a specific example, Sumner points out that while the United States has
a relatively small share of world rice trade for indica (long-grain) rice, the U.S. share
of indica rice trade in Central and Latin America and the Caribbean is significantly
larger. Uruguay has recently claimed that U.S. exports to those and other markets
hinder its ability to market non-subsidized indica rice that competes directly with
heavily subsidized U.S. rice.⁷⁶
Sumner also suggests that the U.S. dairy subsidies “probably create more
vulnerability to WTO claims than any remaining farm subsidy.”⁷⁷ Not only are dairy
price supports a substantial portion of U.S. AMS notifications — averaging nearly
41% of total U.S. amber box subsidies notified to the WTO during 1995-2001
(Table 2) — but Sumner points out that the
price discrimination and pooling schemes under the milk marketing orders
stimulate overall milk production and divert milk from beverage products that are
generally not traded internationally to manufactured dairy products, e.g., cheese,
milk powder, and butter, which are the main traded dairy products. The net
result is a lower price of the tradable products and displacement of U.S. imports
or stimulation of U.S. exports to the detriment of other dairy export competitors⁷⁸
such as Australia or New Zealand.
With respect to the U.S. sugar program, Sumner points out that benefits for U.S.
sugar producers derive mainly from the import TRQ scheme and that, although the
price support scheme contributes more than $1 billion annually to the U.S. AMS
(Table 2), it provides little additional distortion above that caused by the “WTO-
scheduled” TRQ. As such, he concludes that the sugar program does not appear to
be a likely candidate for WTO legal challenge in its present form.⁷⁹
Sumner expresses concern that detailed analysis might reveal prohibited
subsidies for commodities supported under smaller programs such as market

⁷⁵ Ibid.
⁷⁶ Ibid.
⁷⁷ Ibid.
⁷⁸ Ibid., p. 24.
⁷⁹ Ibid.

research and development programs, crop insurance, irrigation subsidies, etc.⁸⁰
This might occur, for example, if the program provided a benefit to U.S.
commodities that is not available to an imported commodity, or to competitor exports
of “like-products” in third-country markets.
As a final observation, Sumner notes that two important domestic support
programs — irrigation subsidies and subsidized grazing on government-owned land
— have been classified as non-product-specific AMS subsidies. As such they have
been excluded from the amber box under the de minimis exclusion throughout the
1995-2001 notification period. Sumner suggests that subsidized grazing fees
represent low benefits relative to market revenue for the beef sector (the primary
beneficiary) and are therefore, unlikely to contribute to WTO violations. With
respect to irrigation subsidies, Sumner notes that, although larger in value than
grazing fees, they are also generally small in value relative to the revenue of
benefitting crops. Furthermore, irrigation subsidies are both difficult to measure and
difficult to attribute to a specific crop. For both of these reasons, Brazil chose not to
add irrigation subsidies to the list of U.S. programs supporting cotton in the WTO
cotton case.
FAPRI (2005). In December 2005, the Food and Agricultural Policy Research
Institute (FAPRI) released a report summarizing its analysis of the potential market
effects of the U.S. policy reform proposal made as part of the Doha Round of trade⁸¹
negotiations. FAPRI employed a large-scale multi-commodity, multi-country
economic simulation model to evaluate the various market effects of hypothetical
policy scenarios. In its analysis of the U.S. Doha proposal, FAPRI evaluated several
policy reform scenarios including a scenario based on unilateral U.S. policy reform
(i.e., no policy changes in other countries) with no offsetting green-box direct
payment compensation to producers for loss of program benefits. Specifically, the
U.S. proposal offered the following reduction in U.S. domestic support:
^!a 60% cut in the total amber box ceiling from $19.1 billion to $7.6
billion;
^!a cut in the de minimis threshold from 5% to 2.5% of total
production value;
^!product-specific AMS caps based on 1999-2001 levels; and
^!a redefined blue box with an expanded definition to permit inclusion
of CCP payments, but with a new ceiling on qualifying subsidies of
2.5% of total production value per commodity (blue box subsidies
are presently unlimited).
In addition to the domestic subsidy reduction, several market access concessions
were incorporated into the study including the elimination of export subsidies by
2010, substantial reductions of tariff upper bounds, and the expansion of TRQs from
current levels by 7.5% of average domestic consumption during 1999-2001. It
should be noted that an analysis of the U.S. proposed reduction of 60% in amber box

⁸⁰ Ibid.
⁸¹ FAPRI, Potential Impacts on U.S. Agriculture of the U.S. October 2005 WTO Proposal,
FAPRI-UMC Report #16-05, December 15, 2005.

support does not compare directly with an analysis of the complete elimination of
U.S. farm support as would be needed to investigate their full market effects.
However, by studying unilateral U.S. policy reform (i.e., independent of multilateral
reform), this partial reform scenario provides, at the least, some indication of the
extent to which policy reform can reduce the causal linkage between U.S. farm
supports and the adverse market effects of SCM Article 5.
Since there is no unique set of policy adjustments required for the U.S. to meet
its proposed support commitments (and the U.S. proposal contained no program-
specific recommendations), FAPRI made certain assumptions regarding how support
programs would be altered to obtain the proposed 60% reduction in U.S. amber box
support. The current regime of U.S. policy parameters offers only a few options with
the major policy levers being target prices and loan rates. (Simply reducing absolute
spending levels or fully decoupling spending are alternate options not considered by
FAPRI.) To remain somewhat neutral regarding the issue of equity across programs
and commodities, FAPRI applied uniform percentage cuts to commodity loan rates
and target prices so as to achieve the aggregate spending goals.⁸² The required cuts
included:
^!an 11% reduction in commodity loan rates and the milk support
price;
^!a 16% reduction in sugar loan rates (adopted to avoid public stock
accumulation targets under expected import increases);
^!a 7% reduction in commodity target prices;
^!sugar and butter TRQs were expanded by 7.5% of the 1999-2001
average consumption level; and
^!fixed direct payments are assumed to be green-box compliant (in
contrast to the non-green-box compliant determination under the
WTO cotton case).
Under this scenario of domestic support reductions, USDA Commodity Credit
Corporation (CCC) outlays declined by an annual average of $3.5 billion (from $16.5
billion to about $13 billion). Over 80% of the reduction in subsidies was accounted
for by three crops — corn (42%), soybeans (19%), and cotton (19%). The majority
of the annual average reduction in CCC outlays came from two programs —
marketing loan benefits ($1.9 billion) and CCP payments ($1.3 billion). With respect
to WTO subsidy categories, U.S. product-specific amber box subsidies declined from
an average of $9.4 billion per year in the baseline to $5.0 billion under the scenario,
while CCP outlays declined from $3.1 billion to $1.8 billion per year. However, the
individual commodity price and trade effects of this limited policy reform scenario
were generally very small. Only peanut, rice, and cotton scenario prices exceeded
baseline levels by more than 1%. The largest average price change was for peanuts

⁸² FAPRI applies a repetitive, stochastic estimation technique to its simulation model that
generates 500 outcomes for each scenario. It is these outcomes that are evaluated to
ascertain scenario effects. Based on this approach, FAPRI reduced target prices and loan
rates for major program crops until the incidence of the stochastic outcomes violating the
aggregate spending limit occurred in 5% or less of each scenario’s 500 outcomes.

at 2.4%. U.S. annual average export declines under the scenario were greatest for
cotton (4.1%) and rice (2.2%).
Part of the relatively small market effects resulting from a 60% cut in the U.S.
domestic support ceiling to $7.6 billion results from a significant portion of the
reduction being “water” — that is, unused but allowable support under the $19.1
billion ceiling. For example, from 1995 to 2001 U.S. amber box spending averaged
$11 billion (see Table 2, Total Non-Exempt AMS Outlays). This would suggest that
the effective cut in actual domestic spending under the U.S. proposal is a much
smaller 31% from $11 billion to $7.6 billion, than the 60% cut in the AMS ceiling.
At any rate, the limited market effects resulting under the U.S. Doha-Round proposal,
when compared with the more substantial effects found in Steinberg and Josling
(2003), Sumner (2003), and Sumner (2005) suggest that a partial policy reform of the
nature suggested by the U.S. Doha-Round Proposal would provide only modest
decoupling between U.S. commodity subsidies and their adverse effects. As a result,
U.S. subsidy programs would appear to remain vulnerable to WTO challenge under
SCM Article 5 and 6.3 following a policy reform like the U.S. Doha Proposal.
Oxfam Briefing Paper No. 81 (2005). In a paper from a report series
written to inform public debate on development and humanitarian issues, the
international development organization, Oxfam, published an assemblage of research
results that examined the international market effects of both European Union (EU)
and U.S. agricultural subsidies. In the wake of the WTO cotton ruling against the
U.S. cotton program, Oxfam claims in its report to reveal additional U.S. (and EU)
subsidies that are illegal under WTO rules. While several U.S. commodity groups
have questioned the objectivity of a report published by a development organization
that advocates on behalf of developing countries, the report and its results are
indicative of the type of scrutiny under which U.S. farm support programs are likely
to be placed in the post-Peace-Clause trade environment.
Based on a review of previously published work, Oxfam suggests that three
major U.S. field crops — corn, rice, and sorghum — are particularly vulnerable to
future WTO legal challenge (Table 10). According to Oxfam, major exporters of
these crops could challenge U.S. domestic subsidy payments under SCM Articles
5(c) and 6.3 (b) and (c) — i.e., serious prejudice due to export displacement and
market price suppression; while major importers of those crops from the United
States could challenge the U.S. domestic subsidies paid to those crops under SCM
Article 5(a) — i.e., injury to the domestic industry of another WTO member. In
supporting its arguments, Oxfam cites evidence that, for each crop:
^!the United States is a major producer and exporter;
^!market returns fail to cover production cost for an average U.S.
producer without government subsidies;
^!government subsidies provide a substantial portion of annual
average returns to each sector; and
^!relevant economic analysis exists confirming that U.S. crop
subsidies have substantial and significant international market
effects, particularly as measured by market price suppression.

Table 10. Potential WTO Cases Against Subsidized U.S. Crops
CropPotential plaintiff
CornMajor Exporters: Argentina, Paraguay, and South Africa.
Major Importers: Columbia, Ecuador, El Salvador, Honduras,
Guatemala, Mexico, Peru, and Venezuela
RiceMajor Exporters: Guyana, India, Pakistan, Suriname, Thailand, and
Uruguay.
Major Importers: Costa Rica, Ghana, Haiti, Mexico, Peru, Venezuela,
and Zambi.
SorghumMajor Importers: Kenya, Mexico, and South Africa.
^Source:^T^r^ut^{h or}^C^ons^equences^{, O}^x^f^a^m^Bri^e^fⁱⁿ^g^{Paper N}^o^{. 81, N}^o^v^e^m^b^{er 2005.}
ABARE (2006). In September 2006, the Australian Bureau of Agricultural and
Resource Economics (ABARE), released a report summarizing its analysis of the
potential market and welfare effects of abolishing both U.S. agricultural domestic
support as well as all import tariffs on agricultural products.⁸³ ABARE used a
dynamic simulation model of the world economy to evaluate several scenarios
involving the elimination of all U.S. farm support programs. By including the
removal of border restrictions, the ABARE analysis was able to capture the
hypothetical effects of government support on the sugar sector in addition to the
usual field crops. The hypothetical effects for the U.S. dairy sector are not reported
by ABARE in sufficient detail.
ABARE’s simulation results suggested large shifts in production away from
program crops and towards non-program crops. The largest declines in U.S.
production are projected to occur for sugar (31%), while cotton and rice production
experience projected declines of 13% and 11%, respectively. U.S. wheat and corn
production decline by 3% each and soybean production is projected to fall 1%.
Although the ABARE study does not report projected price changes, the production
effects are substantial and would likely have important international market price
consequences. ABARE suggests that reduced U.S. production of the scale projected
by its results could potentially have a noticeable upward effect on world prices,
particularly for those crops where the U.S. plays a major role in international
markets.⁸⁴ As a result, the ABARE study would appear to confirm the important
causal link between U.S. farm policy and international market prices and trade.

⁸³ ABARE, U.S. Agriculture Without Farm Support by Daniel McDonald, Roneel Nair,
Troy Podbury, Belinda Sheldrick, Don Gunasekera, and Brian S. Fisher, Research Report

06.10, September 2006.

⁸⁴ Ibid., p. 20.

Appendix B. Agreement on Agriculture, Article 13:
Due Restraint (the Peace Clause)⁸⁵
During the implementation period [i.e., the nine-year period January 1, 1995-
December 31, 2003], notwithstanding the provisions of GATT 1994 and the
Agreement on Subsidies and Countervailing Measures (SCM):
(a) domestic support measures that conform fully to the provisions of the Green
Box [AA, Annex 2] shall be:
(i) non-actionable subsidies for purposes of countervailing duties;
(ii) exempt from actions based on Article XVI of GATT 1994 [dealing with
the treatment of general subsidies] and Part III of the SCM [dealing with
the treatment of actionable subsidies]; and
(iii) exempt from actions based on non-violation nullification or impairment of
the benefits of tariff concessions accruing to another Member;
(b) domestic support measures that conform fully with AA domestic support
commitments as reflected in each Member’s Schedule, including direct
payments that conform to the requirements of Blue Box payments, as well as
domestic support within de minimis levels, shall be:
(i) exempt from the imposition of countervailing duties unless a determination
of injury or threat thereof is made in accordance with Article VI of GATT
1994 and Part V of the SCM [i.e., Countervailing Measures], and due
restraint shall be shown in initiating any countervailing duty investigations;
(ii) exempt from actions [as expressed in (a)(ii) above], provided that such
measures do not grant support to a specific commodity in excess of that
decided during the 1992 marketing year; and
(iii) exempt from actions based on non-violation nullification or impairment of
the benefits of tariff concessions accruing to another Member, provided
that such measures do not grant support to a specific commodity in excess
of that decided during the 1992 marketing year;
(c) export subsidies that conform fully to the provisions of AA Part V, as reflected
in each Member’s Schedule, shall be:
(i) subject to countervailing duties only upon a determination of injury or
threat thereof based on volume, effect on prices, or consequent impact in
accordance with Article VI of GATT 1994 and Part V of the SCM, and due
restraint shall be shown in initiating any countervailing duty investigations;
and
(ii) exempt from actions [as expressed in (a)(ii) above].

⁸⁵ Abridged and annotated by CRS. For the official WTO text, see WTO Legal Texts at
[http://www.wto.org/english/docs_e/legal_e/legal_e.htm]. For WTO terminology, refer to
CRS Report RL32916, Agriculture in the WTO: Policy Commitments Made Under the
Agreement on Agriculture, by Randy Schnepf.

Appendix C. Agreement on Subsidies and
Countervailing Measures;
Part I, Article 1: Definition of a Subsidy
PART I: GENERAL PROVISIONS
Article 1: Definition of a Subsidy

1.1 For the purpose of this Agreement, a subsidy shall be deemed to exist if:

(a)(1) there is a financial contribution by a government or any public body
within the territory of a Member (referred to in this Agreement as
“government”), i.e. where:
(i) a government practice involves a direct transfer of funds (e.g. grants,
loans, and equity infusion), potential direct transfers of funds or
liabilities (e.g. loan guarantees);
(ii) government revenue that is otherwise due is foregone or not collected
(e.g. fiscal incentives such as tax credits) ;
(iii) a government provides goods or services other than general
infrastructure, or purchases goods;
(iv) a government makes payments to a funding mechanism, or entrusts
or directs a private body to carry out one or more of the type of
functions illustrated in (i) to (iii) above which would normally be
vested in the government and the practice, in no real sense, differs
from practices normally followed by governments;
or
(a)(2) there is any form of income or price support in the sense of Article
XVI of GATT 1994;
and
(b) a benefit is thereby conferred.
1.2 A subsidy as defined in paragraph 1 shall be subject to the provisions
of Part II or shall be subject to the provisions of Part III or V only if
such a subsidy is specific in accordance with the provisions of
Article 2.

Appendix D. Agreement on Subsidies and
Countervailing Measures;
Part III: Actionable Subsidies; Articles 5 and 6
PART III: ACTIONABLE SUBSIDIES
Article 5: Adverse Effects
No Member should cause, through the use of any subsidy referred to in
paragraphs 1 and 2 of Article 1, adverse effects to the interests of other Members,
i.e.:
(a) injury to the domestic industry of another Member ;
(b) nullification or impairment of benefits accruing directly or indirectly to
other Members under GATT 1994 in particular the benefits of concessions
bound under Article II of GATT 1994 ;
(c) serious prejudice to the interests of another Member.
This Article does not apply to subsidies maintained on agricultural products as
provided in Article 13 [the ‘Peace Clause’] of the Agreement on Agriculture.
Article 6: Serious Prejudice
6.1 Serious prejudice in the sense of paragraph (c) of Article 5 shall be deemed to
exist in the case of:
(a) the total ad valorem subsidization of a product exceeding 5 per cent ;
(b) subsidies to cover operating losses sustained by an industry;
(c) subsidies to cover operating losses sustained by an enterprise, other than
one time measures which are non recurrent and cannot be repeated for that
enterprise and which are given merely to provide time for the development
of long term solutions and to avoid acute social problems;
(d) direct forgiveness of debt, i.e. forgiveness of government held debt, and
grants to cover debt repayment.
6.2 Notwithstanding the provisions of paragraph 1, serious prejudice shall not be
found if the subsidizing Member demonstrates that the subsidy in question has not
resulted in any of the effects enumerated in paragraph 3.
6.3 Serious prejudice in the sense of paragraph (c) of Article 5 may arise in any case
where one or several of the following apply:
(a) the effect of the subsidy is to displace or impede the imports of a like
product of another Member into the market of the subsidizing Member;
(b) the effect of the subsidy is to displace or impede the exports of a like
product of another Member from a third country market;
(c) the effect of the subsidy is a significant price undercutting by the
subsidized product as compared with the price of a like product of another
Member in the same market or significant price suppression, price
depression or lost sales in the same market;
(d) the effect of the subsidy is an increase in the world market share of the
subsidizing Member in a particular subsidized primary product or

commodity as compared to the average share it had during the previous
period of three years and this increase follows a consistent trend over a
period when subsidies have been granted.
6.4 For the purpose of paragraph 3(b), the displacement or impeding of exports shall
include any case in which, subject to the provisions of paragraph 7, it has been
demonstrated that there has been a change in relative shares of the market to the
disadvantage of the non subsidized like product (over an appropriately representative
period sufficient to demonstrate clear trends in the development of the market for the
product concerned, which, in normal circumstances, shall be at least one year).
“Change in relative shares of the market” shall include any of the following
situations: (a) there is an increase in the market share of the subsidized product; (b)
the market share of the subsidized product remains constant in circumstances in
which, in the absence of the subsidy, it would have declined; (c) the market share of
the subsidized product declines, but at a slower rate than would have been the case
in the absence of the subsidy.
6.5 For the purpose of paragraph 3(c), price undercutting shall include any case in
which such price undercutting has been demonstrated through a comparison of prices
of the subsidized product with prices of a non subsidized like product supplied to the
same market. The comparison shall be made at the same level of trade and at
comparable times, due account being taken of any other factor affecting price
comparability. However, if such a direct comparison is not possible, the existence
of price undercutting may be demonstrated on the basis of export unit values.
6.6 Each Member in the market of which serious prejudice is alleged to have arisen
shall, subject to the provisions of paragraph 3 of Annex V, make available to the
parties to a dispute arising under Article 7, and to the Panel established pursuant to
paragraph 4 of Article 7, all relevant information that can be obtained as to the
changes in market shares of the parties to the dispute as well as concerning prices of
the products involved.
6.7 Displacement or impediment resulting in serious prejudice shall not arise under
paragraph 3 where any of the following circumstances exist during the relevant
period:
(a) prohibition or restriction on exports of the like product from the
complaining Member or on imports from the complaining Member into the
third country market concerned;
(b) decision by an importing government operating a monopoly of trade or
state trading in the product concerned to shift, for non commercial reasons,
imports from the complaining Member to another country or countries;
(c) natural disasters, strikes, transport disruptions or other force majeure
substantially affecting production, qualities, quantities or prices of the
product available for export from the complaining Member;
(d) existence of arrangements limiting exports from the complaining Member;
(e) voluntary decrease in the availability for export of the product concerned
from the complaining Member (including, inter alia, a situation where
firms in the complaining Member have been autonomously reallocating
exports of this product to new markets);

(f) failure to conform to standards and other regulatory requirements in the
importing country.
6.8 In the absence of circumstances referred to in paragraph 7, the existence of
serious prejudice should be determined on the basis of the information submitted to
or obtained by the Panel, including information submitted in accordance with the
provisions of Annex V.
6.9 This Article does not apply to subsidies maintained on agricultural products as
provided in Article 13 [the ‘Peace Clause’] of the Agreement on Agriculture.

Appendix E. Agreement on Agriculture,
Key Provisions of Annex 2 (the Green Box)⁸⁶
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.
Accordingly, all measures for which exemption is claimed shall conform to the
following basic criteria:
(a)the support in question shall be provided through a publicly-funded government
program (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;
plus policy-specific criteria and conditions as set out below.
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. 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.
6. Decoupled income support
(a)Eligibility for such payments shall be determined by clearly-defined criteria
such as income, status as a producer or landowner, factor use or production
level in a defined and fixed base period.
(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.

⁸⁶ AA, Annex 2 is available in full at [http://www.wto.org/english/docs_e/legal_e/14-ag_02_
e.htm#annII].

(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)No production shall be required in order to receive such payments.
7.Government financial participation in income insurance and income
safety-net programs
(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. Any producer meeting this condition shall be
eligible to receive the payments.
(b)The amount of such payments shall compensate for less than 70 percent of the
producer’s income loss in the year the producer becomes eligible to receive this
assistance.
(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.
12. Payments under environmental programs
(a)Eligibility for such payments shall be determined as part of a clearly-defined
government environmental or conservation program and be dependent on the
fulfilment of specific conditions under the government program, 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 program.