Academic journal article AEI Paper & Studies

Implications and Consequences for Us Global Trade Relationships in the Context of the World Trade Organization

Academic journal article AEI Paper & Studies

Implications and Consequences for Us Global Trade Relationships in the Context of the World Trade Organization

Article excerpt

US agricultural producers have been hard hit by the actions of Canada, China, Mexico, and other countries that have imposed tariffs against US agricultural products in retaliation for adverse trade actions from the Trump administration against the countries' exports to the United States. Consequently, US agricultural exports to China have fallen from almost $22 billion in fiscal year (FY) 2017 to $7.3 billion projected for FY2019, (1) and prices paid to US farmers for some commodities have been lower than would otherwise have been the case.

US soybean exports have been a major casualty of the trade war with China. In recent years, by value, US exports of soybeans have constituted over 60 percent of total US agricultural exports to China. Those exports have accounted for production from between a quarter to a third of the 85 million acres farmers annually plant to soybeans. While US soybean exports to other destinations such as the European Union increased in 2018 and 2019, compared to 2017, for 2019 total US soybean exports to all countries are projected to fall by about 22 percent in volume, compared to 2017. (2) Exports of numerous other agricultural commodities also have been hurt by increased tariffs, although in most cases the impacts have been much smaller. The affected commodities include row crops such as cotton, wheat, corn (maize), sorghum, pork, and dairy products and some fruits, vegetables, and tree nuts (e.g., almonds, pistachios, and walnuts).

To shore up political support from an important constituency, the Trump administration has authorized an estimated total of $28 billion in 2018 and 2019 to farmers and ranchers in compensation packages for their losses in those years. While those payments will help the sector in the short term, the subsidies have been criticized. First, commenters have questioned whether the level of compensation is commensurate with the losses the agricultural sector has absorbed due to the tariffs. While several producer groups argue that the aid has been insufficient, several empirical studies indicate that agricultural producers have been substantially overcompensated for their losses. Second, the level of trade aid payments provided to farmers, when combined with existing farm program and crop insurance payments authorized under the 2018 Farm Bill and other legislation, threatens to provoke some countries to initiate trade dispute cases against the United States. (3)

One cause for concern is that US domestic support levels for agricultural commodities are in danger of exceeding US "bound commitments" under the World Trade Organization (WTO) agreements that place a clearly defined limit on those support levels. Current WTO rules require that annual US domestic supports that distort trade flows not exceeed a maximum of $19.1 billion. Since the WTO disciplines went into effect in 1995, United States levels of support have remained in that annual limit.

In 2016, the most recent year for which the US reported information, US trade-distorting support was less than $5 billion. However, with the additional subsidies provided under the 2018 trade aid package, trade-distorting support for 2018 will likely be more than triple those levels. Further, at more than $15 billion the 2019 package could push the United States over its limits, potentially prompting WTO members to challenge US support programs and, if successful, seek damages or other trade concessions.

This report examines the effects of the 2018 and 2019 trade aid packages on the domestic support levels that the United States is likely to report to the WTO. It then assesses the potential consequences for US trade relations. Payments for 2018 losses were structured differently from the payments for 2019 losses, which affects, in turn, how they are likely to be notified to the WTO and whether the amounts reported will violate current US WTO commitments. In addition, the trade aid payments must be viewed with other domestic subsidies that are made to producers under the price and income support and crop insurance programs authorized by Congress through the 2018 Farm Bill and other preexisting legislation. …

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