Future Directions for Trade Policy: Developments in U.S. Agricultural Policies

1. Future Directions for Trade Policy: Developments in U.S.Agricultural Policies Robert L. Thompson Gardner Endowed Chair in Agricultural Policy University of Illinois at Urbana-Champaign 3 March 2010

2. Historical Perspective • 1985-95: U.S. farm policy & Uruguay Round Ag Agreement moved in similar directions • Late 1990s: U.S. farmers lost enthusiasm for exports and became infatuated by biofuels, esp. corn-based ethanol. • 2002-2008: US. reversed course on ag policy reforms

3. U.S. WTO Proposal in 2004 • In 2004 the U.S. proposed a full phase-of of all trade-distorting forms of ag support over 15 years, with a 60% reduction in the Uruguay Round cap on trade-distorting support in the first 5 years, to be followed by a 5-year pause for adjustment, with the rest phased out before year 16. • Poor communication led to backlash from farmers, who understood that the U.S. had offered a 60% reduction in all ag support.

4. U.S. Farm Organization Attitude • Have never been enthusiastic about Doha Round; ethanol excites them much more! • Say they will support a Doha Round Agreement that significantly reduces trade-distorting domestic subsidies only if the Agreement includes significant increases in real market access. • They put too much emphasis • on increasing access into shrinking markets of the past and not enough on potential growth in the total size of the world market (LDCs). • Protecting current farm program structure with commodity-specific benefits

5. Farm Bill Landscape in 2007 • Unprecedented anti-farm program editorial comment in media across the country. • Farm programs seen by many as inequitable • 93% of all direct support goes to 5 commodities. • Over 60% of US agriculture receives no support, and this part is not perceptibly less profitable than that which does. • Southern crops (rice, cotton and sugar cane) receive much more support per acre and per farmer than Northern crops (corn, soybeans and wheat). • 16% of payments go to rural residence farms.

6. Many Alternatives Proposed • Numerous groups proposed alternatives to the existing farm programs, e.g. • Gross revenue insurance in place of disaster payments, crop insurance, marketing loans, loan deficiency payments, & counter-cyclical payments. • Public goods investments, e.g. rural infrastructure, research, etc. • Payments to farmers for providing environmental services • Proposed reforms almost all rejected by Congress. Bush vetoed the farm bill, but Congress overrode his veto.

7. The Food, Conservation & Energy Act of 2008 (“The 2008 Farm Bill”) • Winners • Nutrition Programs: +$10.361 billion • Specialty Crops (fruits & vegetables): $1.35 billion of new money • Conservation: + $4 billion in CSP & other programs • Bioenergy (other than corn-based): +$1 billion • Drought-prone states: $3.7 billion • Losers • Corn-based ethanol: no new budgetary support; blenders’ tax credit reduced • Crop insurance industry: subsidy reduced • Taxpayers

8. Positive Trade Policy Changes in the 2008 Farm Bill • Repealed authority for export subsidies (Export Enhancement Program) • Eliminated long-term export credit program & reformed export credit guarantee program. • Authorized small amount of local purchase of food aid near destination

9. WTO Problems with Farm Bill • Raised loan rates and target prices (shifted dollars from green to amber box) while reducing direct payments • ACRE creates additional large upside potential in amber box support if market prices drop • No repeal of fruit & vegetable exclusion • Extended authority for dairy export subsidies and monetization of food aid • Failed to change cotton program as required by WTO Brazil Cotton Case & reauthorized equivalent to “step 2” subsidy • Increased sugar support & protectionism • Mandated Country-of-Origin Labeling (“COOL”)

10. Congress • “All politics is local.” • 2002 and 2008 Farm Bills moved U.S. ag policy in opposite direction as WTO negotiations • No action on 3 unratified bilateral trade agreements (Panama, Colombia;S. Korea) • No Trade Promotion Authority (fast track) • Little interest in Doha Round or honoring U.S.’ international obligations, e.g. cotton

11. Rising Protectionist Sentiments in U.S. Before Sept. 2008 • Drumbeat of anti-globalization rhetoric from labor unions & environmental activists (unholy alliance) over “off-shoring” of jobs & “outsourcing” overseas. • The reality: Every 3 months an estimated 55,000 U.S. jobs “moved overseas,” but 400,000 new jobs were created in U.S. and 7 million Americans changed jobs.

12. 2007-08 Presidential Primary • The multiple aspirants to the Democratic Party’s nomination for President tried to outdo each other in bashing trade and trade agreements. • All promised tougher labor and environmental “standards” in trade agreements • Obama pledged to renegotiate NAFTA

13. 1st Year of Obama Presidency • Foci were wars in Iraq & Afghanistan, the financial crisis, rising unemployment, cap & trade; health insurance reform. • Hardly any mention of trade except pledges of tougher enforcement (anti-dumping & safeguards) • Occasionally referred at summit meetings to need to complete Doha Round, but no evidence that U.S. negotiators ever had authority to really negotiate.

14. Influence of Organized Labor • Less than 10% of the U.S. work force is unionized (and more than half of all labor union members in the U.S. are employed in the public sector). • Labor unions, generally opposed to free trade, are among the largest contributors to Democratic Party election campaigns. • This gives them a disproportionately large say in the Dem. Party’s policy stance.

15. Post-Sept. 2008 • Collapse in consumption and increase in unemployment to >10% has paralyzed possibility for trade liberalization. • No way to complete Doha Round before recovery is well underway and unemployment drops. • 2011 at the earliest, but questionable; • 2012 unlikely due to next Presidential election; • maybe 2013 if the economy is booming again.

16. Obama Administration Food & Agricultural Interests • Enhance health & nutrition of Americans; reduce childhood obesity; alleviate hunger here and abroad; increase food stamps. • Modernize food safety system; consolidate into one federal food safety agency? • Climate change & other environmental priorities; reward farmers for carbon sequestration & reduction in GHG emis-sions; increase U.S. Forest Service’s role.

17. Obama Administration Food & Agricultural Interests • Limit commodity support program payments per farmer • Increase “energy security” via renewable energy, esp. 2nd generation biofuels. • Enhance small scale, local and especially organic agriculture. • Put agricultural development back into U.S. foreign aid

18. Recent Obama Initiatives • State of the Union Speech • Proposed major export initiative to double U.S. exports in 5 years (“to create jobs”) • No reference to need to liberalize trade • FY2011 Budget Proposal • Reduce cap on commodity support program payments ($/farmer/year) • Cut crop insurance subsidy • Cut maximum indemnity in revenue insurance • Increase ag export promotion funds

19. 2012 Farm Bill (Authorization for 2013-18 USDA programs) • Debate starting already. • Tighter budget constraint likely to induce shifts of $ from decoupled direct payments to avoid cutting commodity-specific sup-ports (i.e. from green box to amber box). • Some discussion of revenue insurance alternative • Doha Round not likely to be a factor