Politics & Policy

Loopy Loopholes

The U.S. protects the protectionists.

The World Trade Organization talks that kicked off here today are largely seen as succeeding or failing depending on what kind of progress is made on agricultural trade. The European Union and its large farm-subsidy regime have taken most of the blame for blocking an agreement–blame that is richly deserved. But the United States is getting a break from the media and it shouldn’t. The U.S. has put concessions on the table, but nothing strong enough–leaving the EU an excuse to hide behind. In order to remove that fig leaf, the U.S. must drop its insistence on creating a loophole for one of its worst domestic-subsidy programs.

The counter-cyclical payment program is one of many the U.S. uses to subsidize its farmers. Congress created it as part of the horribly wasteful and protectionist 2002 farm bill. The counter-cyclical payment makes up the difference between the price farmers are getting for their farm goods and a certain “target price” that is equal to how much Congress thinks farmers should be getting–in the case of cotton, that target price is set at 72 cents per pound. To put that in context, the average price farmers received for their cotton during the 2004-2005 marketing year was 46 cents per pound.

Defenders of this program say it is “less trade distorting” because the payments are based on historical averages rather than current production. That argument is spurious. In a recent dispute with Brazil over this issue, the WTO found against the U.S. and ruled that the counter-cyclical payment is linked to current production because farmers have been allowed to update their historical averages. In other words, the payments are based on an average that represents how much a farmer has produced in the past. But the farmer is then allowed to update that average every five years when Congress passes a new farm bill. Thus they distort trade by giving farmers an incentive to produce a lot and raise their average for the next farm bill. As production increases, prices go down. Farmers in poor countries feel the squeeze, but U.S. farmers are insulated by the target price.

The WTO ruling against the U.S. put its policymakers in a bind. The finding that counter-cyclical payments counted as trade-distorting subsidies put the U.S. over the limit of allowable subsidies set by the 1995 WTO Agreement on Agriculture. So in order to avoid reforming the program–the largest component of the U.S. subsidy regime and one that costs taxpayers over a billion dollars per year–the U.S. has insisted on putting a loophole in the new agriculture agreement being negotiated here that would allow its farmers to continue receiving these payments.

This is not to say the U.S. hasn’t made some bold proposals in the area of agriculture recently. The U.S. has recommended deep cuts in other trade-distorting subsidies, as well as the elimination of all export subsidies on agriculture by the year 2010. The EU has rejected both ideas, and in so doing has drawn scorn for blocking the talks just to protect its pampered and inefficient farmers.

But the EU has countered that the U.S. is not sincere about reforming subsidies, and as evidence has pointed to our continued insistence that the agreement include a loophole for our counter-cyclical payments. In order to remove this last shred of an excuse, the U.S. should drop the loophole from its negotiating position and be even bolder, forcing the EU to reveal itself as cynically protectionist–an organization that talks a big talk about caring for third-world poverty, but won’t walk the walk.

Counter-cyclical payments are a particularly wasteful component of a wasteful system that costs taxpayers billions each year. In addition, our continued efforts to exempt them from a real free-trade agreement are impeding progress toward agreements on industrial goods and services that could provide a big boost to many U.S. companies. Finally, our insistence on this loophole is damaging our credibility in the talks and giving the EU an excuse to hide behind. We can seize the high ground by dropping special treatment for counter-cyclical payments from our negotiating position and sending a message: No loopholes–just free trade.

Stephen Spruiell reports on the media for National Review Online’s new media blog.

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