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Seeds of a crisis

The Senate's ill-advised farm bill could create a trade catastrophe for the U.S.

December 19, 2007

The overwhelming passage of a disastrous farm bill in the Senate last week proves that common sense doesn't stand a chance against the awesome political might of Midwest agribusiness. A grass-roots campaign to highlight the damage wrought on taxpayers, consumers and Third World economies by farm subsidies had zero impact on senators, who passed legislation that would leave the current system largely unchanged for another five years. It didn't take long for the risks of this move to become apparent.

On Monday in Geneva, the World Trade Organization launched an investigation on behalf of Canada and Brazil into trade-distorting farm subsidies in the United States -- the kind the Senate decided by a 79-14 vote should continue. Though the case could take years to work out, a victory for Canada and Brazil could be extremely costly for the U.S. economy, because those countries and any others that could show they had been damaged by our irresponsible farm policies could be allowed to raise tariffs against U.S. exports to make up for the losses.

WTO rules contain arcane formulas and categories for subsidies and tariffs, which nations use to protect domestic industries. Certain kinds of subsidies damage trade relationships, while others have little or no effect; the WTO refers to the most damaging kind as "amber box" subsidies, and harmless ones as "green box." The United States is allowed to pay about $19 billion a year in amber farm subsidies under WTO rules, and in recent years has fallen well below that ceiling. But Canada and Brazil claim that's because of an accounting trick: The U.S. is counting many payments that should fall into the amber category as green.

The worst of these are so-called countercyclical payments, in which the government sets a target price for certain crops and makes up part of the difference if the actual market price falls below it. Countercyclical payments distort trade by encouraging farmers to overproduce and dump their crops overseas at below-market prices. Yet despite adverse rulings from the WTO, Washington continues to claim that these payments are harmless.

A victory for Canada and Brazil might or might not force an overhaul of farm legislation. The WTO could prohibit countercyclical payments, in which case Washington would have to do away with them, or it could simply rule that they have to be counted as amber box subsidies. The second scenario is the scariest. Because the prices of subsidized crops are very high and rising, the government is spending little on countercyclical payments, so the U.S. is unlikely to exceed its $19-billion annual limit even if it keeps the payments in place and counts them toward its amber total. But what happens if Canada and Brazil win and crop prices later drop sharply? That could put the U.S. well above its amber ceiling, which would spark retaliatory tariffs around the world.

Placating a relative handful of commodity farmers -- who don't need the money and who aren't collecting the countercyclical payments right now anyway -- isn't worth that kind of risk, as Congress would have recognized if it weren't in thrall to the farm lobby. The price for its shortsightedness could get even steeper in the future.

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