On January 8, some six months after the World Trade Organization (WTO) multilateral trade talks ground to a halt, Canada filed notice that it was seeking consultations with the United States over its corn subsidies, thus setting in motion dispute settlement procedures that could lead to litigation should the two sides fail to reconcile their differences.

Over the following weeks, many more countries joined Canada in the fray, including Argentina, Australia, Brazil, the European Union, Guatemala, Thailand and Uruguay.

This is not the first time the United States has been forced to adopt a defensive posture over its agricultural subsidies, nor is likely to be the last. Should the WTO trade talks enter a period of prolonged hibernation, resources previously tied up in stop-and-go negotiations will be released, and countries looking for respite from low world-market prices for commodities may turn to litigation to seek redress.

"The prevailing wisdom, and I can't say I disagree with it, is that there are a number of potential cases waiting in the wings, and if Doha falls, then they'll come out of the wings," Timothy Josling, a professor at the Food Research Institute at Stanford University, told Subsidy Watch in a recent interview.

Ending the Peace

While an extended stop to negotiations raises the possibility of increased litigation over agricultural subsidies, another factor also plays a part. Until the end of 2003, WTO members had been partly shielded from attacks on their agricultural subsidies by the so-called Peace Clause. This provision in the Agreement on Agriculture (AoA), concluded during the last round of trade talks, the Uruguay Round, called for members to exercise "due restraint" in launching disputes regarding agriculture products under the WTO's subsidy agreement, the Agreement on Subsidies and Countervailing Measures (ASCM).

Geza Feketekuty, a senior US trade official during the Uruguay Round, described the Peace Clause as a means to force trade negotiators to get serious about progress in the AoA negotiations, which remains today an incomplete agreement. "It is actually fairly simple. We wanted to give other countries, particularly the EU, some incentive to negotiate, while putting them on notice that we would challenge many of their policies," said Professor Feketekuty in an interview with Subsidy Watch. "The US did not dream at that time that anyone would take our policies to dispute settlement."

Now, with its agricultural subsidies under attack, the United States has indicated that it would like to see the Peace Clause extended in a Doha Round agreement. But that would come at a cost.

"The US is going to have to buy a renewal of the Peace Clause," said Prof. Josling. "They have said that they want it, but whether they would be prepared to pay for it in the negotiations is another question. The US is not in a terribly strong position at the moment to demand things."

Indeed, renewing the Peace Clause would not come cheap- many developing countries are not eager to see it back again. As one delegate to the WTO from a major grain-exporting developing country put it, "the US is saying ‘you shall not sue me in the areas in which I am weak, but I shall sue you in the areas where I am strong.' It is discriminatory."

While the United States' agricultural subsidies have received the most focus due to the high profile nature of the cotton case, the European Union may also find itself exposed. Subsidies defined as trade-distorting under WTO rules - i.e. those included in its Aggregate Measure of Support (AMS) in WTO speak - are currently capped at roughly 19.1 Billion USD for the United States. The limit for the EU sits at around 67 Billion USD. Although the US comes much closer to meeting its ceiling than the EU (in fact, by some accounts, the US has already broken the ceiling), the sheer differential of trade-distorting subsidies employed on both sides of the Atlantic suggest that neither should be overly sanguine about the prospects in a post-Peace Clause world.

Stressing the system

With the possibility of an increased number of disputes challenging rich-country agricultural subsidies, the WTO may soon see its dispute-settlement mechanism put to the test. How it will hold up is a matter of concern.

Flaws in the system are already evident. When a WTO panel finds that a country's subsidies are in breach of its WTO commitments, it does not specify the steps that need to taken to bring the offending measures into conformity with its ruling. It is up to the country to decide how it will reform, which makes it easier for countries to stall.

Countermeasures can then be requested if the offending country does not conform, taking the form of tariffs on exports flowing from the offending country. Yet countervailing measures are not going to help exporters hurting from the illegal subsidies. Raising tariffs on some American imports to Brazil, for example, is not going to benefit the Brazilian cotton exporters affected by US subsidies that drag down world market prices.
Given that most subsidy disputes are funded at least in part by private interests, this could cut the number cases that are filed.

According to Jorge Miranda, a Washington-based economist involved in WTO litigation and former trade remedies expert with the WTO Secretariat, "If there is not effective implementation, then that is going to torpedo the frequency with which cases are filed. If you don't implement, or if you implement as defectively as possible, and you make known what your general approach to compliance is, then you are sending smoke signals to the affected private interests financing WTO cases that going down this route isn't worth the trouble."

Ending rich country SDT

Agricultural subsidies have sometimes been called a form of Special and Differential Treatment (SDT) for developed countries because of the much higher levels of support they are permitted to provide to farmers compared with the levels allowed of developing countries overall. Indeed, as part of their process of acceding to the WTO, developing and transition-economy countries without pre-existing agricultural subsidies are forced to give up the right to ever use them at all. It is therefore no wonder that developing countries continue to ask why such large subsidies persist in many of the richer and more advanced economies of the WTO.

The current round of negotiations will be difficult to conclude without some sort of deal to continue reductions of agricultural subsidies by most if not all WTO members. The size of those cuts will in many ways depend on whether the Peace Clause is renewed and what types of qualifications will be negotiated to condition its use. Ultimately, the most significant economic consequences of the various potential Doha Development Round outcomes will not result not from rules and liberalizations providing SDT to developing countries. Rather, it will hinge on whether SDT provided to trade distorting agricultural subsidies predominantly in developed countries will be renewed.