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An analysis of EU, US and Japanese green box spending

Jesús Antón1

1 Jesús Antón is senior economist in the Organisation for Economic Co-operation and Development (OECD). The views expressed in this paper are those of the author and not necessarily those of the OECD Secretariat or its member countries. 1 Introduction

The URAA1 has provided a framework to discipline support for agricultural production. The domestic support pillar of the URAA has created a set of rules for individual members to classify and notify domestic support measures and an open mutual review process. The peace clause, which prevented members from using the Dispute Settlement Process to challenge agricultural measures that do not comply with WTO provisions, expired at the beginning of 2004.

The URAA framework is a legal structure derived from a complex negotiation process and oriented to discipline support through rules that need to be respected and applied. It is not meant to be an economic or analytical framework that takes into account all kinds of economic linkages, and it cannot be interpreted as a tool for the analysis of support. The notification process to the WTO has generated a database of support to agriculture in all member countries, which is classified according to specific criteria in various boxes and sub-boxes. This is particularly the case of the green box, which lists a series of payment types that are oriented to a briefly defined objective and have to conform to some general and specific provisions in Annex 2 of the URAA.

The purpose of this paper is to look with some detail at the agricultural domestic support notifications to the WTO by the three main providers of support to agriculture: the EU, the US and Japan, which are called “the Trio” in this paper. This overview is focused on identifying trends and patterns of support measures in each country, with particular attention being paid to movements of expenditure from one box to another and the underlying reform in the support programmes in order to identify potential “box shifting”, and to patterns of green box spending. Emphasis is placed on WTO provisions that may constrain potential impacts on production and trade. It is not the purpose of this paper to make any legal assessments of the conformity of notified measures with URAA provisions.

Why may some agricultural support measures have smaller impacts on production and trade? How do WTO provisions help to prevent this production effect to occur? Has green box support increased at the expense of the other boxes? What programmes have been affected by these changes in box colour patterns? What types of green box measure are being used by the EU, the US and Japan? Have there been changes in green box measures since the first notifications in 1995? Can we expect further changes with the ongoing policy changes and announcements?

The first two questions are tackled in Section 2 about the production effects of support programmes and WTO provisions for different boxes and sub-boxes. Section 3 reviews expenditure across boxes in order to identify potential “box shifting”. Section 4 analyses the green box expenditure of each of the Trio countries, identifying trends and patterns. Finally, Section 5 poses questions that remain open.

The main source of data for the analysis in this paper is the set of notifications to the WTO (http://docsonline.wto.org/gen_home.asp). Unfortunately, these notifications often suffer from large delays of several years. Last notifications at the date of writing this chapter correspond to 2006 for Japan, 2005 for the US and 2003 for the EU. This excludes information after the EU’s 2003 reform. The WTO World Trade Report 2006 has alerted us to the difficulty in obtaining updated information on agricultural domestic support notifications and in analysing the difference between the numbers in these notifications and in other sources with different methodologies (OECD Producer Support Estimate, and national budget). In this paper, data are expressed, as in the original notifications, in national currency and converted into US dollars only for comparisons, using current yearly average exchange rates from the OECD.2

2 The economics of agricultural policy reform Over the past two decades, the US and the EU have been involved in a long process of reforming agricultural support. This reform has been reinforced by the framework defined in the WTO URAA and the processes of General Agreement on Tariffs and Trade (GATT)/WTO negotiations, particularly the Uruguay and Doha rounds.

2.1 The WTO URAA framework

Article 6 of the URAA establishes that member countries commit to reduce their domestic support measures in favour of agricultural producers, as expressed in terms of the total aggregate measure of support (AMS). Paragraph 1 of Article 6 creates the main exception to this commitment: the green box measures that conform to the criteria of Annex 2 of the URAA are not subject to reduction commitments. The main underlying idea behind this exemption is that the criteria imposed on green box measures imply that these measures “have no, or at most minimal, trade-distorting effects or effects on production” and may allow the achievement of some domestic objectives. That is, the URAA creates a framework for reduction of agricultural support measures through commitments imposed on the AMS (amber box) but excludes from this reduction measures that are supposed to have minimal effects on production and trade. The agreement obliges members to reduce amber support but leaves the door open for them to shift support from the amber box to the green box – to the extent that new programmes comply with the corresponding green box criteria – while complying with reduction commitments. There are no monetary limits on expenditure under the green box.

Paragraphs 2, 4 and 5 of Article 6 create three additional exceptions of support measures that need not be included in AMS calculations and, therefore, are exempted from reduction commitments. Paragraph 2 refers to government measures that are an integral part of the development programmes of developing countries and therefore do not apply to the Trio. Paragraph 4 creates the de minimis provisions that exclude from AMS support product-specific measures up to 5 percent3 of the value of production of a basic agricultural product (product-specific de minimis) and non-product-specific measures up to 5 percent of the value of total agricultural production. Apart from the monetary limit on support, no other criteria or conditions are imposed on measures declared under de minimis. The main underlying idea behind this exception is that relatively small amounts of support can have only small impacts on production and trade. Even if it may be in the nature of these measures to have an impact, the impact will be small in quantitative terms. The possibility of shifting support from the amber box to the de minimis is limited by the 5 percent bounds.

Paragraph 5 of Article 6 creates the remaining exception to domestic support reduction commitments: the blue box. These are “direct payments under production limiting programmes” with three alternative criteria: based on fixed area and yields, made on 85 percent or less of the base level of production, or made on a fixed number of head (for livestock payments). This arrangement is the result of the negotiation procedure of the URAA in a context where the 1992 reform of the EU CAP needed to accommodate the compensatory payments. The underlying idea behind this exception was to create a box between amber and green in order to facilitate reform towards the green box. However, no mechanism was foreseen to reduce support under the blue box as an incentive towards reforming policies to conform to green box criteria.

The Peace Clause in Article 13 of the URAA has protected all support measures that conform to the URAA disciplines and provisions from complaints based on other WTO agreements and, particularly, the Subsidies and Countervailing Measures (SCM) agreement. This protection was exhaustive for green box measures, and only partial for amber and blue box measures, but it expired in 2004. Since then, in principle, all domestic support measures are actionable for litigation through all WTO mechanisms. Steinberg and Josling (2003) describe this situation as “legal vulnerability” of domestic support measures notified under the URAA, particularly with respect to the SCM agreement. This has become evident in the dispute US v. Upland Cotton, or “the Cotton Case”, which was initiated before the end of the Peace Clause. The WTO system of boxes is based on notifications by each country that decides, on its own, how to classify each domestic support measure. This notification can be challenged in the mutual review process or through the WTO dispute settlement procedures, but it can change only by another correcting notification by the country.

2.2 The economics of reducing the production and trade impacts of agricultural support measures

The amber box must include any support to agriculture that does not conform to the criteria in the other boxes (green, de minimis or blue). The amber box is the only box subject to reduction commitments. That is, the URAA created incentives to reduce amber box support while permitting its substitution by blue or green support, which are not subject to monetary limits. There are, then, two complementary directions in the domestic support disciplines: reduction of amber box support, which potentially can be production- and trade-distorting, and reforming support towards measures that, in principle, have smaller impacts on production and trade.

But how can governments reform towards measures that have smaller or even “minimal” impacts on production and trade? This process has often been labelled as “decoupling”, even if in WTO legal terms the word “decoupled” is applied only to a sub-box of the green box called “decoupled income support”. The answer to this question is complex due to the diverse and sophisticated economic mechanisms that may transmit the signals from support to production and trade. The OECD has worked in this area for several years; some of its publications can serve as reference4, and are used in this sub-section of the paper. Its Producer Support Estimate (PSE) is an alternative quantification and classification of support that has no simple correspondence with the legal WTO box classification and methodology, but it is useful to assess this agricultural policy reform process.

In the real world of policy changes, the main reforms that have occurred with the aim of moving towards more decoupled programmes have been characterized by two main stages (Antón, 2006; Antón and Sckokai, 2006): (i) payments or support are made on the basis of land rather than on the basis of output or other inputs and (ii) support is provided with more freedom on what to produce rather than specifically for individual commodities. There are good economic reasons to argue that, for the same amount of support, these movements reduce the production and trade response. If there is some substitution between land and other inputs, as is normally assumed, then support to a more inelastic input such as land generates a smaller production response. If the farmer has more freedom in what to produce (or not to produce) on land benefiting from payments, then the alternative uses of land are reduced and, with them, the land allocation response to payments. In the recent history of reforms in the US and the EU, the first stage corresponds to the first step in time (late 1980s for the US, early 1990s for the EU) and has supposed in WTO terms movements towards the blue box. The second stage corresponds to the US 1996 Fair Act and the EU 2003 CAP reform and generated (observed or likely) movements into green box notifications.

Even if there are solid arguments on the more decoupled nature of payments based on land with more production freedom, this type of programme can potentially have some impacts on production and trade, to be investigated empirically. This is why in economic terms it is preferably to talk about “degree of decoupling” and to link this quantification to a body of empirical results.

In more general terms, what are the potential mechanisms that can lead a support programme to have impacts on production and trade? This section does not aim to develop these mechanisms in detail, as they have already been developed and discussed elsewhere. However, it does intend to acknowledge them5 and to assess the extent to which trade-distorting effects or effects on production are reduced or eliminated by WTO provisions.

The best-known effects are the so-called “relative price effects” which consist of the direct incentive that support programmes may create on the production of agricultural commodities through their direct incidence on prices. This includes output prices plus output payment, or prices of inputs used for agricultural production minus the input payment. These relative price effects are affected directly by the conditions stating the activities required, allowed or forbidden when receiving the payment. These conditions may include retirement of some resources from agriculture, or maximum quantities of inputs or outputs that can benefit from support. In this context, empirical evidence shows significant differences in the production effects of different types of support measure, and generally price support and output payments are considered as the reference for large impacts, while payments based on land, particularly with freedom on what to produce, have smaller impacts (i.e. are found to be more decoupled).

Risk effects occur when support programmes reduce the perceived income risk from agricultural production activities. This may induce farmers to produce more, because the risk associated with agricultural activities is lower than that compared with non-agricultural activities. This can be due to support that is, by design, countercyclical with farm income, prices or yields, 6 or by ad hoc government decisions that respond to farm income circumstances. In both cases, farmers’ decisions on production would be affected by this insurance effect whenever these farmers “dislike risk” (are risk-averse), as it is commonly assumed and found in the empirical literature. However, risk effects could also occur, because support programmes make farmers wealthier with some “secure” support and, therefore, less sensitive to income variability from farming. These wealth effects may occur even if support is not countercyclical. Risk-related effects have been found to be empirically significant in several studies, and they can potentially occur with many types of support measure, including price support.

Dynamic effects refer to impacts that are somehow deferred over time; that is, the impacts on production and trade do not occur simultaneously with the implementation of the payment. There can be price and risk effects that are dynamic in nature because they are delayed due to lags in programme implementation, but there are also dynamic specific effects associated with investment and expectations. Investment in agriculture may be facilitated by support measures under certain circumstances. Available limited evidence shows relatively small investment effects on production. Expectations related to payments, programmes and policy may also affect production decisions in a dynamic way. For instance, ad hoc government decisions about base updating or the size of the payment may generate expectations about the future and potentially affect production. It is technically difficult to obtain empirical evidence regarding the magnitude of these effects.

These effects can occur simultaneously, and the magnitude of the production effects depends both on policy design and on the size of the support provided.

2.3 The economics behind the law

Rational objectives for agricultural policy include the redistribution of income, based on equity considerations, and the correction for market failure, based on efficiency criteria. The optimal economic responses to these objectives are, respectively, lump sum transfers, which cannot be affected by the recipient’s behaviour, and correcting the underlying cause of the market failure (Rude, 2000). In practice, however, government programmes often have hybrid objectives and use second-best policy instruments. The WTO Agreement on Agriculture tackled the challenge of creating some rules that try to minimize the production effects and, at the same time, allow implementing programmes that try to achieve domestic objectives that are not always well defined. The result is the set of boxes and the specific rules applied to the different sub-boxes inside the green box. These latter are written in Annex 2 of the URAA and summarized in Appendix 1 of this paper. Table 1 identifies three types of provision: (i) provisions that impose a monetary limit on total expenditure, (ii) provisions that discipline the implementation rules of the programmes and (iii) provisions that define the target, objective or purpose of a given measure.

The amber box and the de minimis are the only WTO boxes with a limit on expenditure defined, respectively, in each country’s schedules and as a percentage of the value of production. Neither the amber box nor the de minimis has any provision constraining the type of support measure in terms of the implementation rules or the objective that is pursued. Potentially they can have the largest impacts on production and trade, which is why the total expenditure is disciplined.

[[Table 1 here]]

Blue box measures do not have a limit on expenditure, but they include some constraints on implementation rules. These are, in general, weaker than the constraints specified for green box measures. Payments have to be a part of “production-limiting programmes”, but there is no definition of what these programmes have to be. The main constraint that may have implications on reducing the potential impact on production is that payments have to be based on a fixed area, yield or number of heads, or on a percentage of the base level of production. The idea is that if only past parameters determine the amount of the payment, then it will not create incentives to change production decisions. However, blue box provisions do not define whether the base area has to be determined at the individual or the aggregate level. In practice, current parameters have determined the amount of the payment received by individual farmers. The main notified programmes – the EU area compensatory payments – had an aggregate across countries or regions base area, and individual farmers’ decisions on the allocation of land among commodities and uses had direct implications on the total payments received. On the contrary, the yields were fixed for individual farmers. These EU payments were area payments, with a maximum total area receiving the payment. With this precedent, the blue box has excluded price support and/or variable input payments but has allowed area payments. Payments can be commodity-specific. There are no provisions forbidding payments being countercyclical with prices, and there is no limitation on the objectives of the programme, except for being a production-limiting programme.

Green box provisions attempt to impose better-defined constraints on the implementation rules of the programmes and on the objectives pursued, in order to reduce the impact on production and trade; this is why during the Doha Round negotiations, the reduction of overall trade distorting support is being discussed, including under this heading amber, de minimis and blue box expenditure, and excluding supposedly non-trade-distorting green box expenditure. However, there are effects that have been analysed in this section for which it is hard to imagine any set of provisions that completely excludes the occurrence of their production and trade impacts. In fact, none of the green sub-boxes includes any provision ruling out future updates or programme changes that may generate expectation effects. Neither is there any provision dealing with wealth effects associated with the fact that farmers receiving support would be wealthier than otherwise. The potential existence of these effects does not exclude the possibility that they are “minimal”.

The objectives or purposes covered by the green box are, in general, defined loosely, often in a single heading or a few words. There are 12 green sub-boxes: three on government services (expenditures or revenue foregone) and nine on direct payments to producers. Two of the government services are “domestic food aid” and “public stockholding for food security”, which define the type of purpose that may make a measure eligible for these sub-boxes. The “general services” sub-box includes a long list of services (research, pest and disease control, training, extension, inspection, marketing and promotion, infrastructural services) that is not exhaustive; that is, other services could also be included without any constraint on the purpose or target of the service. The eight types of direct payment to producers have a loose description of the purpose of the measures to be included in each sub-box. The loosest of these definitions is probably “decoupled income support”, which also has one of the most detailed set of constraints on implementation rules. There is also a residual type of direct payments with no definition of purpose; they have constraints only on the implementation rules, which are very close to those for direct income support.

There is a general provision in Annex 2 of the URAA that applies to all green box domestic support measures: “the fundamental requirement that they have no, or at most minimal, trade-distorting effect or effects on production”, they have to be part of a publicly funded government programme and they cannot have the effect of providing price support to producers. Therefore, price support is excluded in this general green box provision, but little is said about how to achieve “no, or almost minimal, trade-distorting effects” (this could be interpreted as deviations from efficient trade that account for potential externalities induced by the measures) “or effects on production” (this is independent of the externalities that may be derived from the corresponding green box measure). Therefore, a fundamental criterion for green box measures is the magnitude of their impact on production, which has to be at most minimal, even when other specific provisions are respected. Additional provisions may contribute to conform to this criterion, but there is no presumption that they guarantee this conformity.

Among the “general services” listed in Annex 2, only two have additional constraints. Marketing and promotion excludes expenditure for unspecified purposes that could be used by sellers to reduce their selling price. Infrastructural services exclude the subsidized provision of on-farm facilities. Public stockholding should correspond to predetermined targets related solely to food security, and the process should be transparent. Similarly, domestic food aid requires clearly defined criteria related to nutrition objectives and transparency. Some of these services have the potential to facilitate production, for instance off-farm infrastructural services that may reduce production costs at the farm level.

The “decoupled income support” sub-box has a detailed list of constraints on implementation rules. Eligibility has to be based on clear criteria applied in a defined and fixed base period. The amount of the payment will not be based on information about the type or volume of production, prices or factor use in any year after the base period. No production shall be required to receive the payment. These three conditions will constrain or reduce the potential impact on production of such payments. Farmers cannot allocate land or other inputs in a way that increases the payment, which mitigates relative price effects. Not requiring production implies that farmers can leave land idle and receive payment, mitigating its impact on keeping land or other resources in agricultural production. The fixed period provisions about production, prices and factors of production rule out the possibility of most kinds of countercyclical payment and the corresponding insurance effects on production. These conditions are designed to make these payments most similar to “lump sum” payments. However, some current conditions could still exist in a payment in this sub-box, and these conditions on what to do or not to do with land may affect relative costs of alternative uses and have an impact on production. Empirical studies on US PFC payments, the main significant payments under this sub-box for which there is already a history, show a relatively small impact on production compared with price support (Abler, 2004; OECD, 2005a). However, the Cotton Case has ruled out the possibility of excluding some commodities in payments under decoupled income support. Production of fruits and vegetables was forbidden in PFC payments and, therefore, they did not comply with this requirement. Except for the provision on eligibility based on clearly defined criteria in a fixed base period, the rest of the provisions apply to any other direct payment to producers that is not spelled out in Annex 2. In general, the provisions for the remaining direct payments that are spelled out are less constraining on the potential impacts on production.

There are two sub-boxes related to insurance, one on income insurance and income safety net programmes and another on crop insurance and relief from natural disasters. Eligibility is based on a minimum 30 percent loss of income or production; the amount of the payment will compensate, respectively, a maximum of 70 percent and 100 percent of this loss, and the sum of both types of payment cannot exceed the producer’s loss. In the income insurance sub-box, the amount of the payment has to be related solely to income, but the crop insurance sub-box permits the relation of the payment to factors of production such as land and heads. Because of the objective of this sub- box, the existence of potential insurance impacts on production is unavoidable, since the money received by the farmer will, by nature, be countercyclical with respect to income or production. The main constraint on impact may come from the specificity of the objective of these payments or programmes. Many developed countries have notified their crop insurance subsidies not in this sub- box but under the non-product-specific AMS (amber box or de minimis), due to non-compliance with requirements, particularly the need for a formal recognition by government authorities that a natural disaster has occurred and the minimum 30 percent loss.

There are three green sub-boxes dealing with structural adjustment: producer retirement programmes, resource retirement programmes and investment aids. The first two are conditional on the retirement of resources from agriculture: permanent for the farmer, at least three years for land, and slaughtering for livestock. This retirement of resources may have a negative direct impact on production. Both in the blue box and in these sub-boxes, the URAA accepts a negative impact on production compared with positive impacts. However, potential positive impacts through expectations or wealth cannot be ruled out in these resource-retirement programmes. For the investment aids, eligibility has to be based on objectively demonstrated structural disadvantage of the operation, and they can only compensate for this disadvantage with no relation to future production. These conditions constrain the target and the implementation rules of investment aids in the green box, but they cannot rule out the potential existence of investment effects on production, which are very likely to be positive and direct.

The eligibility for payments under environmental programmes has to be based on the fulfilment of specific conditions, including production methods and inputs, while the amount of the payment is limited to the extra costs of compliance. Payments could be based on area or head, potentially increasing the use of these factors, but compliance with environmental conditions may likely reduce rather than increase yields. Payments under regional assistance programmes require being in a well- defined structurally disadvantaged region and permit payments based on current use of factors of production such as land as far as they are made at a degressive rate.

Provisions in these green sub-boxes do not rule out all potential impact on production; but this does not mean that impacts occur for a given programme, or that if they do occur they cannot be considered as “minimal”. Measuring the impacts on production of a given measure would require an empirical investigation of each specific programme, and deciding whether they are minimal would additionally require a benchmark for comparison. None of these standards is defined in the URAA.

3 Extent of green box spending: comparison with other boxes

The structure of the URAA permits changes of support levels from one box to another. Furthermore, there are particular incentives for moving support out of the amber box due to the reduction commitments that discipline this box compared with others. Has support been shifted from the amber box? Has support shifted from other boxes into the green box? During these shifts, did the implementation rules of the programmes change to constrain or reduce potential impact on production and trade?

3.1 Domestic support in the European Union

The EU is the first provider of domestic support among all WTO members, representing 39 percent of all WTO-notified support across the period 1995–2003. Total notified support amounted to an annual € 90–95 billion (bn7) in 1995–96 and was reduced by about € 15bn to € 75–80bn in 2002– 03, the last two notifications available (Figure 1). Overall trade-distorting support8 (amber plus de minimis plus blue) was € 71bn in 1995 and has progressively reduced since 1998 to € 58bn in 2003. The EU has clearly reduced its total WTO-notified support since the beginning of the URAA process in 1995; this reduction affects mainly the so-called trade-distorting boxes.

Most EU domestic support has historically been notified in the amber box. However, there is a clear trend of reduction in amber box expenditure in the EU. It accounted for 88 percent of total support in the reference period 1986–88, while it was only 39 percent of support in 2003 (Table 2). This very significant reduction in amber support has brought its expenditure to around € 30bn in 2003, compared with € 74bn in 1986–88 and € 50bn in 1995 (see Table A.1 in Appendix 2). This is well below the amber box ceiling for the EU15 (the EU with 15 members up to 1994) of € 67bn after URAA reductions. This change involves both a reduction in total support plus a shift of support towards other boxes. In fact, expenditure in all other boxes (de minimis, blue and green) has not been reduced during the same period. The de minimis expenditure has grown, but represents only € 2bn in 2003. Blue box expenditure has increased from € 0.4bn in 1986–88 to € 25bn in 2003. Green box expenditure has fluctuated more and in 1996 had the same expenditure as in 2003 of € 22bn.

[[Figure 1 here]]

[[Table 2 here]]

What are the main shifts observed in the notifications of the EU, and what are the underlying policy changes that have occurred? Three main shifts can be identified in the data. First, 1995 notifications supposed a clear shift from amber to blue, as compared with the reference period. Second, from 2000 onwards, a new progressive shift from amber to blue is observed. Third (not seen in the data, which end in 2003), there will very likely be a change from blue to green in the years to come because of 2003 reform of the CAP.

Notifications from 1995 include € 21bn under the blue box, 75 percent of which is compensatory payments for arable crops notified as payments based on fixed area and yields, and 25 percent of which is compensatory payments per head notified as livestock payments made on a fixed number of head. These payments were created to compensate farmers for the reduction in institutional prices decided under the 1992 MacSharry reform, which included a 30 percent cut in cereals intervention prices. The new payments were based on area or head, with a maximum guaranteed area or number of animals and with fixed yields. They included a compulsory set-aside obligation that created a “production-limiting programme”. In practice, for the individual farmer with enough eligible land, they were area and per-head payments whose impact on production is potentially smaller than that derived from a similar amount of price support. At the same time, 1995 notifications included a reduction of € 23bn in the amber box. This reduction is explained by lower levels of market price support for the products affected by the reform, mainly € 14bn reduction for cereals and € 4.5bn for beef. In 1995, compared with the reference 1986–88, there is a clear shift in support from the amber box to the blue box, a shift that involves a change in the nature of support that is now made suitable for the blue box. The second significant change in the composition of support in EU notification occurs from 2000 onwards and is the same type of shift observed after 1992 reform: a reduction in amber box support accompanied by an increase in the blue box. This change is triggered by the Agenda 2000 reform of the CAP that was a continuation of the 1992 reform: further cuts in institutional prices (15 percent for cereals, 20 percent for beef), partially compensated with an increase in the area and per-head compensatory payments. In 2003, blue box payments were € 5bn higher than in 1999 (€ 3bn for payments based on area and € 2bn for livestock). Amber box support was reduced from € 48bn to € 31bn in 2003. This reduction is driven by a drop in the cereals prices and, particularly, a drop in the beef market price support, which fell €13bn down to zero in 2003. This fall is explained by the replacement of the beef intervention price that was € 3013/tonne in 2001 by a basic price for storage of € 2224/tonne in 2002, which is lower than the fixed reference price used in WTO calculations for price support. Due to various economic reasons, particularly the existence of border tariffs, reductions in institutional prices of this nature may not always be transmitted fully to producer prices. Calculations of the OECD for market price support follow a different, non-comparable methodology based on observed price gaps between producer prices and border reference prices. According to these calculations, beef market price support did not fall between 1999 and 2003.9

The third important change in domestic support composition in the EU is likely to be observed in the years to come, when the EU will submit notifications that reflect the impact of the new SFP scheme. The main underlying policy changes are in the 2003 CAP reform package, which has created this new type of payment, the main characteristic of which is that it is paid to the farmer as a payment per eligible hectare, independent of the type of production – or no production – that the farmer decides for that hectare. There are three main current conditions attached to the payment: land has to be maintained in good agricultural use, there is a set of cross-compliance requirements related mainly to the environment and animal welfare, and it is forbidden to cultivate fruit, vegetables and table potatoes. It is likely that the EU authorities envisage declaring these new payments in the “decoupled income support” green sub-box. The implementation rules of the payment scheme seem to fit with the conditions imposed in this sub-box, except for the prohibition of cultivating some commodities, which, according to the panel report of the Cotton Case, may not be compatible with this sub-box. The reform for the fruit and vegetables sector that has been approved in 2007 includes the elimination of this prohibition.

This new payment directly substitutes former domestic support, mainly blue box payments based on area and livestock heads. There are alternative choices for EU members on how to apply the reform, allowing the maintenance of some percentage of compensatory payments linked to specific products in the green box. It is estimated that, given the decision taken to date, at least 80 percent of the expenditure on compensatory payments in the blue box would be moved to the new SFP scheme. If finally notified in the green box, this would be the main shift in boxes derived from the 2003 reform. However, there are other expected changes of expenditure across boxes associated with 2003 and subsequent reforms (Mediterranean products, sugar, fruit, vegetables and wine). Current decisions would imply that market price support will fall mainly for sugar, milk, butter, olive oil and rice, which could add up to around € 9bn, which would reduce the EU’s AMS. Further reductions of amber box will be likely implied by the reforms on fruits and vegetables and wine. These cuts in support are mostly compensated by additional payments under the SFP scheme. Finally, the 2003 reform establishes a reduction of all direct payments of 5 percent (called modulation), which will be used for rural development expenditure, mostly notified in different green sub-boxes. The decision by the European Council on budgetary perspectives 2007–13 opened the door to a further 20 percent modulation to be decided by EU members, but this is still to be regulated. It is difficult to make an exact estimate of the impacts of the CAP reform on WTO notifications, but a rough estimate of these shifts (without additional modulation) would be of more than € 25 billion to be included in the green box, coming mostly from reductions in blue box expenditure but also from amber box. 3.2 Domestic support in the United States

The US is the second-largest provider of domestic support among all WTO members, with 28 percent of all WTO-notified support across the period 1995–2003.Total notified support by the US added up to $61–59bn in 1995–96 and increased by about $18bn to $86-91bn in 2001–03. The US has clearly increased its total WTO-notified support since the beginning of the URAA process in 1995. This increase in support was due mainly to increases in overall trade-distorting support in the period 1998-2001, and to increases in green box since 2002.

Most US domestic support has been notified as green box in all years since 1995. In the reference period 1986–88, green box expenditure already represented 41 percent of the total; it was 88 percent in 1996 and 1997, 67 percent in 2000 and 86 in 2003. In monetary nominal terms, green box expenditure in the US increased in 1995 to $46bn relative to the reference level of $24bn in 1986– 88; it has remained fairly constant around $50–51bn between 1996 and 2001, and increased to $72 bn in 2005. Blue box expenditure disappeared after 1996, and amber and de minimis expenditure was stable in the period 1995–97. Since 1998 both amber and de minimis expenditure behaved cyclically with a minimum in 2003 and two peaks in 1999 and 2005. Most support in the US is declared as green, but the amount of (presumably most distorting) amber box support has increased over the whole notification period and in 2000 it represented 88 percent of the amber box ceiling.

What are the main shifts observed in the notifications of the US, and what are the underlying policy changes that have occurred? Four main shifts or changes can be seen in Figure 2 and Table 3. First, in 1995, notifications show a reduction in amber box and an increase in green box, compared with the reference period 1986–88. Second, by 1996 there had been a shift from blue expenditure to green expenditure. Third, since 1998 there has been an increase in the total domestic support notified due to increases in both amber and de minimis expenditure with a cyclical pattern. Fourth, since 2002 thare has been a progressive increase in green box expenditure.

[[Figure 2here]]

[[Table 3 here]]

The 1995 notification shows a reduction in amber box expenditure of $18bn and an increase in green box expenditure of $22bn. There seems to be little relationship between these two changes: most of the new green expenditure is oriented towards domestic food aid (in the form of financial assistance for low-income families to purchase food), whereas the reduction in the amber box is support received directly by farmers (particularly cereals producers) in the form of market price support and deficiency payments. Expenditure shifts between boxes and the recipients and the nature of the support provided have also changed.

The 1996 shift concerns the blue box. In 1995, blue box support notified under “payments based on 85 percent or less of base level of production” added up to $7bn. These were deficiency payments declared to be made only on 85 percent of base area, with constant yields. This support is eliminated in the 1996 notification. Part of this expenditure (more than $5bn) was shifted to the decoupled income support green sub-box in the form of the PFC payments introduced in the 1996 US Farm Bill (the FAIR Act). These payments are based on fixed area and yields, and there is freedom on what to produce in the land benefiting from them – including idling – except for the production of fruit and vegetables. These payments were renewed by the 2002 Farm Bill as “direct payments”, while the option of updating the area to the average 1998–2001 was also provided. The panel of the Cotton Case has found that these payments do not conform to the criteria of the decoupled income support sub-box, because they are based on the current type of production due to the prohibition of producing some commodities. However, the panel did not solve the issue of the conformity of the base updating option with the green box criteria. Since 1996, the amount and structure of green box expenditure in the US has remained fairly stable.

The third important change in US domestic support pattern occurred in 1998. In that year, a combination of low market prices pushed the US government to complement the PFC payments with additional ad hoc “market loss assistance”, paid on the same basis as the PFC payments, plus crop disaster payments per hectare, adding up to a total of $3.4bn notified as new support expenditure under non-product-specific de minimis. An additional $1.3bn was declared as crop disaster payments in the green box, but with little impact on total green box due to reduction of other spending. Additionally, the amber box expenditure on loan deficiency payments and marketing loss gains was also expanded automatically following their countercyclical provisions that are triggered when prices are low, with an increase in amber box expenditure of $4.2bn compared with 1997. Expenditure on the same programmes was expanded further in 1999 in the context of lower prices, with additional amber expenditure of $6.5bn to a total of $17bn, and additional non-specific de minimis expenditure of $2.7bn to a total of $7.4bn. Since then expenditure was first reduced to a minimum in 2003, and then increased in 2004-05. These movements show high negative correlations with the level of world prices of main agricultural commodities. This reflects the countercyclical designed of main US programs, particularly the new countercyclical payments that were created by the 2002 Farm Bill as an institutionalization of the ad hoc Market Loss Assistance Payments. They have been notified under de minimis.

The fourth change implies a significant and progressive increase in green box notifications from $51 bn in 2001 to $72 bn in 2005. This adds to a total $21 bn additional green box expenditure.

According to the recently approved 2008 Farm Bill there will not be any big changes in domestic support in the US in the years to come. “Direct payments” will not prohibit the production of fruits and vegetables (to make them compatible with the green box. Farmers will have the possibility of opting between receiving the same Countercyclical payments that are contingent on prices and a new Average Crop Revenue Election (ACRE) payments that are countercyclical with respect to the calculated State revenue. One thing seems clear in the new Bill: US domestic support will remain, to a large extent, countercyclical in nature and expenditure could be significantly reduced or increased, depending on the future evolution of commodity prices and revenues.

3.3 Domestic support in Japan

Japan is the third-largest provider of agricultural domestic support according to WTO notifications, representing 18 percent of all notifications in the period 1995–2001. Total notified support has fallen from 7220bn yen in 1986–88 to 2481bn yen in 2006. Japan has clearly reduced the total level of notified domestic support since the reference period 1986–88 and since the beginning of the implementation period in 1995; this reduction was due to reductions in overall trade distorting support, mainly amber box.

Japan notified 69 percent of its support in the amber box in the reference period 1986–88, adding up to 5000bn yen compared with 31 percent, or 2200bn yen, in the green box. Notified amber box expenditure has been reduced in two main steps: in 1995 green box expenditure dropped to 52 percent of support, and in 1998 it dropped to only 20 percent. Green box expenditure has fluctuated in the notifications, first up to 2600–3200bn yen in 1995–98, and then down to 1800bn yen in 2006. There is a stable 1-2 percent of support under de minimis and a new 1 percent under the blue box in 1998, which has increased to 2-3 percent from 1999 onwards.

[[Figure 3 here]] [[Table 4 here]]

What are the main shifts observed in the Japanese notifications, and what are the underlying policy changes that have occurred? Three main changes are observed in the Japanese history of WTO notifications (Figure 3, Table 4). First, from 1986–88 to 1995, there is a reduction in amber support accompanied by an increase in the green box. Second, in 1998 amber box expenditure dropped to a quarter of what was notified in 1997; meanwhile, relatively low new blue box expenditure is created. Third, there is a progressive reduction in green box expenditure since 1998.

Comparing the 1986–88 reference period with the first notification in 1995, Japan shows a significant reduction in amber box support from nearly 5000bn yen to 3500bn yen. During this period, there are reductions in market price support across most commodities, particularly rice. These reductions are also captured to a great extent in the market price support calculations in the OECD’s PSEs, whose methodology is not comparable with WTO notifications. This change reduction in amber support was accompanied by a slightly smaller increase in green box support in the form of general services. Total support notified by Japan was reduced by about 500bn yen.

Japan notified in 1998 zero market price support for rice, compared with 2315bn yen in 1997. In 1998, Japan introduced a new Rice Farming Income Stabilisation (RFIS) programme, which was thought of as payments to compensate parts of the loss in case of market prices falling below a historical average. The government announced that its future rice purchases would be solely to maintain rice stocks for food security and, therefore, the government purchase price for domestic rice was no longer a tool for market price support. Despite the maintenance of this administered price, since 1998 notifications do not include market price support for rice. The OECD calculations of Japanese rice market price support use domestic prices to calculate its own market price support and show moderate reductions in support in the years 1998–2002 because of subsequent reductions in the government purchase price. Given the existence of border measures, in pure economic terms it is unlikely that price support received by rice producers has fallen by as much as the amount that is legally reflected in WTO notifications. The new RFIS programme accounted for only 50bn yen and 93bn yen in 1998 and 1999, respectively, only 4 percent of the market price support given to rice in the amber box 1997 notification. The new programme was notified in the blue box (direct payments to rice producers under production-limiting programmes, as payments based on 85 percent or less of the base level of production) and maintained with a similar level of expenditure in the following years.

Finally, from 1998 there seems to be a trend to progressively reduce green box support in Japan, from 3000bn yen down to less than 1800bn yen in 2006. This mainly affects general services, particularly infrastructural services, and does not seem to be the result of any shift of support between boxes.

3.4 Domestic support across all World Trade Organization countries

Analysis of expenditure for all WTO member countries can be misleading because it requires conversion into a common currency. Both the exchange rate of national currencies (in which notifications are made) and the number of countries notifying can vary from one year to the next, which can affect the result of adding up support, as in Figure 4. This caveat applies to the comparisons in this subsection.

Together, the EU, the US and Japan have notified 82 percent of all WTO domestic support in the period 1995–2003 (Table 5). The only other big country in term of WTO agricultural domestic support is China that since 1999 has notified slightly above Japan, more than two thirds of it under the green box. Other countries have much smaller weight in total support, including countries with high relative levels of support according to the OECD’s PSE, such as Norway and Switzerland. The Trio represents 85 percent of amber box notifications, 97 percent of blue box notifications and 79 percent of green box notifications. The participation in the de minimis notification is slightly lower (63 percent), indicating that other countries use this exemption relatively more.

Total support has been reduced from $294bn in 1995 to $213bn in 2003 (Table 6). Most of this reduction was observed in overall trade-distorting support, but green box expenditure has also been reduced. The main trends in total WTO notified domestic support between 1995 and 2003 are the following: amber box expenditure is halved from $122bn to $52bn; blue box expenditure is reduced to $30bn; de minimis grows to around $11bn; and green box expenditure is moderately reduced to around $121bn. Nearly half of total support across all WTO notifications is green box expenditure, and its percentage has increased progressively: it represented 45 percent of expenditure in 1995 and 57 percent in 2003. The biggest reduction in relative terms occurs in the amber box, reducing from 41 percent of support in 1995 to 25 percent of support in 2003. The de minimis expenditure grows but represents only 4 percent of the total in 2003, while the blue box fluctuates around 9–14 percent of the total.

[[Figure 4 here]]

[[Table 5 here]]

[[Table 6 here]]

The share of each country in each box differs significantly, depending on the pattern of domestic support expenditure of each one. For instance, in the amber box, the EU represents the highest share of notified expenditure, with an average 56 percent for the period 1995–2003. Japan has 17 percent, the US has 12 percent, and all other countries amount to 15 percent of the amber box. The EU’s share of amber box expenditure does not change significantly between 1995 and 2003. The EU is even more important in the blue box, with 92 percent of all notified support in the same period. The US and Japan had 3 percent and 2 percent, respectively, and the remaining countries notified the remaining 3 percent.

The US accounted for 55 percent of the de minimis expenditure in 1995–2003, with only 10 percent and 2 percent coming from the EU and Japan, respectively. Other countries notified the significant additional 37 percent. Finally, the highest share of green box expenditure also corresponds to the US (42 percent), followed by Japan (18 percent) and the EU (18 percent); the remaining 21 percent is distributed among all other WTO members. Since 1999 this is dominated by China with around 20 percent of all green box notifications.

The trends of total WTO support can be explained to a great extent by the changes that have occurred in the Trio. In particular, the progressive reduction in amber expenditure reflects mainly the reductions in the EU’s and Japan’s notifications. The slight increase in amber, de minimis and total support in 1999 and 2000 and the subsequent reduction reflects mainly the countercyclical behaviour of domestic support in the US. The increase is relatively small due to the significant reduction in Japanese amber expenditure since 1998, the same year in which US payments are triggered for the first time. The higher total notified levels in 1999-2001 reflect the years for which there are notifications from China.

4 Focus of green box spending: types of green box measure Section 2 has already discussed the requirements imposed by the URAA on each of the 12 green sub-boxes. The green box represents an increasing share of all notified domestic support in the WTO, with 57 percent in 2003, and the Trio covers nearly 80 percent of this spending: the US is the main user of the green box, with 42 percent of expenditure for the period 1995–2003, followed by Japan and the EU (18 percent each). In this section, the pattern of green box expenditure of the Trio countries is analysed, including the evolution of each of the 12 sub-boxes. For the purpose of the graphs, these 12 sub-boxes are aggregated into six sections: general services and public stockholding, domestic food aid, decoupled income support, insurance and relief, structural adjustment, and environmental, regional and other.

4.1 Green box spending in the European Union

Green box spending in the EU represents around €20bn, with a slight increasing trend, particularly since 1997, and some fluctuations from year to year (Figure 5). The four green sub-boxes with the highest levels of spending are structural adjustment assistance provided through investment aids (highly variable, but above 30 percent in several years), general services (20–30 percent), environmental programmes (15–30 percent) and regional assistance programmes (10–15 percent); the latter two show increasing trends. During the notification period 1995–2001, there is no evidence of sharp increases in green box spending or shifts in support among different green sub- boxes.

Most EU green box expenditure is notified as environmental/regional programmes, general services and structural adjustment, and – except for general services – it is provided through the set of programmes under the second pillar of the CAP that is devoted to rural development policies. This idea of the second pillar, which complements the first pillar of more market-oriented support, was introduced under the Agenda 2000 reform of the CAP (Council Regulation 1257/99). This second pillar grouped and reoriented some already existing measures.

[[Figure 5 here]]

[[Table 7 here]]

The EU’s rural development policy is driven by a common EU framework, which provides a menu that each EU member state can adapt to the reality of its regions and rural areas. All these measures are co-financed between the EU budget and national/regional budgets at different rates. The types of programme in the menu are relatively general, and only a few implementation criteria are imposed on member states. There are numerous measures under common rural development headings, but applied with different detailed rules in each country and monitored at the EU level. More than three-quarters of EU green box spending is framed under this rural development set of programmes, and most is notified under the structural adjustment, environmental and regional sub- boxes. The EU notifications to the WTO on green box measures are not very detailed when describing the exact measures covered by each sub-box.

General services spending represents around €5bn, or around a quarter, of green support along the notification period (see Table 7 and Table A.2 in Appendix 2). The most important type of service in the EU is pest and disease control, which normally represents €1–2bn and has a tendency to increase. Expenditure on research on animal and plant selection and production techniques fluctuates around €1bn. Expenditure on inspection services for livestock and quality control is €0.2– 0.4bn. None of these three groups of measures is included in the rural development policy framework, but most other spending in general services is included. Training services, extension and advisory services and other services have been reduced from a total of €3bn in 1995 to €0.5bn in 2003. Infrastructural services include drainage, collective irrigation, production of electricity, roads and flood protection; spending fluctuates by year between €0.6bn and €2.4bn. Expenditure on marketing and promotion has increased from €0.5bn in 1995 to €1.2bn in 2001 and includes at least part of the spending on the operational funds for the producer organizations of fruits and vegetables. Between 1995 and 2003, spending on general services has shifted from training and other services to pest and disease control and marketing and promotion.

The EU spends relatively very little money on public stockholding for food security purposes (€0.06bn in 2003) and on domestic food aid (€0.3bn in 2003 for distribution of agricultural products for deprived people). In total, these two represent less than 2 percent of EU green box spending.

Decoupled income support includes only the agri-monetary aid that was spent in EU member countries with strong currencies in the context of main payments and price levels being defined at the EU level in ecus, but these payments have been drastically reduced from a maximum €1bn in 1999 to almost zero, particularly with the introduction of the common currency, the euro. This sub- box could experience a very significant increase after the application of the 2003 and subsequent CAP reforms, to the extent that the new SFP is notified as green. If this were the case, then this shift – mainly from the blue box – may add more than €25bn to this green sub-box and to total green box expenditure. This would imply more than doubling the EU’s green box expenditure. However, it may not occur until the notification for 2008 when the reform of the fruit and vegetables sector and the elimination of the prohibition of cultivating some products is applied. Meanwhile, it is possible that only the SFP paid with no prohibition of producing fruits and vegetables and table potatoes, may be declared as green. These payments under the SFP scheme are given under the so-called “regionalization” option, adopted by some member countries, and the new members’ scheme.

The income insurance and safety net programmes sub-box is almost empty in EU notifications. Payments for relief from natural disasters have increased in the latest notifications, but in 2003 they were still only 3 percent of green box spending, mainly from national budgets.

The structural adjustment assistance is the main type of green expenditure in the EU. This is provided mostly through the rural development second pillar of the CAP. In 2003, spending included €0.8bn for producer retirement programmes, €0.1bn for resource retirement and €6.8bn for investment aids. Early retirement programmes intend to provide income to farmers over the age of 55 years if they decide to stop commercial farming, while encouraging replacement and reallocation of agricultural land. Resource retirement programmes include voluntary set-aside, and expenditure has been reduced since 1995. Investment aids include restructuring and conversion of wine production, plus several measures in the rural development pillar. Among these are payments and interest concessions for investment in agricultural holdings, setting up of young (under 40 years of age) farmers, and promoting the adaptation and development of rural areas (land improvements). The provisions in the EC Regulation 1257/99 on rural development do not specify some of the constraints imposed by the URAA Annex 2 for investment aids, such as the amount of the payment being limited to compensation for structural disadvantage.

The EU’s payments under environmental programmes have increased from €2.8bn in 1995 to €5.2bn in 2003. Payments seem to include mainly spending under the rural development second pillar, mainly agri-environment measures and forestry, and also support for organic production and conservation of genetic resources. The provisions in EC Regulation 1257/99 on agri-environmental measures list general objectives that would be promoted with such measures (for instance, ways of using land that are compatible with the improvement of the environment) and specify that the amount of the support has “to be calculated on the basis of” income forgone, additional costs resulting from compliance and the need to provide an incentive. This provision seems less restrictive than the URAA requirement of the amount of the payment being limited to the extra costs or loss of income. Finally, regional assistance programmes cover mainly the expenditure on less favoured areas (LFA) and mountain areas under the second pillar of the CAP. They represent slightly less than €3bn in 2003 and have remained at around this level throughout the notification period. Expenditure has not been notified under the residual category of other direct payments in the EU.

There have been no big changes in the amount or composition of green box support in the EU in the notification period 1995–2003, except for some increases in environmental programmes. The 2003 CAP reform established a compulsory 5 percent modulation that cut first-pillar direct payments in order to shift this spending to the second pillar. Financial discipline provisions have implied that total expenditure on this second pillar will barely increase when the reform is applied, but the door may be opened to further voluntary modulation of 20 percent, which some EU member countries may decide to apply and which may involve a significant increase of spending on structural adjustment, environmental and regional green sub-boxes. However, this potential future shift may not imply big additions increases in green box expenditure, since most of the additional spending may come from the SFP, which may be notified as green decoupled income support.

4.2 Green box spending in the United States

The US has notified about $50bn of support under the green box every year between 1996 and 2001 and progressively increased to $72 bn in 2002-05 (Figure 6, Table 8). US green box support is highly concentrated in domestic food aid (65–80 percent of total). Other sub-boxes with high levels of spending are general services (13–18 percent) and decoupled income support (8–12 percent since 1996). The only shift of support observed in the green box since 1996 has been an increase of $13bn of domestic food aid, accompanied by increases of $5bn of general services and large variability of payments for relief from natural disasters in the range $0-2bn a countercyclical pattern. Most of these programmes are part of the successive Farm Bills, the latest approved in 1996, in 2002 and most recently in 2008.

US green box notifications single out each programme and responsible agency with more detail than in the notifications of the EU. The list of programmes includes more than 70 different entries.

US spending on general services has increased significantly from $6.4bn in 1995 to $11.3bn, or 16 percent of green box expenditure in 2005. It is the second-largest sub-box for the US, and it includes a list of 40 different programmes that are not grouped following the list of service types in Annex 2 of URAA. The main line in this list, with nearly 50 percent of spending of general services ($4.3bn in 2005), corresponds to “state programs for agriculture”. This is sub-national expenditure net of fees and taxes made by state governments in order to “provide a number of generally available services” such as extension, marketing and research. No further details are provided about this type of support.

[[Figure 6 here]]

[[Table 8 here]]

Leaving aside the state government programmes, research can be singled out as the most important area of general services in the US, with $1.9bn spent on the Agricultural Research Service and the Cooperative State Research Service in 2005. Pest and disease control is executed by the Animal and Plant Health Inspection Service (APHIS), with expenditure of $1.2bn in 2005. Expenditure on the Extension Service, the Conservation Programme technical assistance and conservation operations of the Natural Resource Conservation Service corresponds to extension and advisory services and amounts to $1.2bn in 2005. Finally, in 2005 $0.8bn was spent on the Food Safety Inspection Service (FSIS). None of the other programmes in the general services sub-box exceeds $0.2bn, and together they represent less than 10 percent of expenditure in general services.

The US has not notified any programme on public stockholding for food security.

The sub-box with highest spending is domestic food aid. This had $19bn in the reference period 1986–88, which increased to $37bn in 1995 and fell to $34bn in 2001 and progressively increased to $51bn in 2005. This represents 21 percent of the US notified value of agricultural production, which illustrates the relative dimension of this expenditure. There are three main domestic food aid programmes notified by the US. The Food Stamp programme gives low-income people financial assistance to purchase nutritious food. Its total expenditure was $26bn in 1995, $18bn in 2000 and $33bn in 2005. The Child Nutrition programme increased expenditure from $7.5bn in 1995 to $12bn in 2005 and is designed to assist children to eat adequate diets. The Special Supplemental Nutrition Program for Women, Infants and Children, which is also oriented towards elderly people, represented an additional $5bn in 2005. Domestic food aid programmes in the US are an important part of the social policies of this country.

Decoupled income support in the US began in 1996 with the Farm Bill which came into force that year and introduced PFC payments. Spending in this programme was $6.3bn in 1997 (10 percent of total green box spending) and was reduced progressively to $4.1bn in 2001 (8 percent of green box spending). Since 2002 the program was called Direct Payments program with a constant annual expenditure of $5.2bn. These payments are paid on the basis of historical crop area, with high flexibility on what to do with the land, including idling. Under the Cotton Case, the WTO Dispute Settlement Body has already declared this type of payment (including the so-called Direct Payments Programme, which substituted PFC payments in the 2002 Farm Bill) as not conforming to green box provisions. Other expenditure included under decoupled income support is the quota buyout programs for for peanuts (2003) and tobacco (2005) of around $1bn each.

The US has not notified any programme under the income insurance and safety net programmes sub-box.

Payments for relief from natural disasters are, by nature, countercyclical and vary along the notification period, depending on declarations of natural disasters in different years. They have never represented more than 5 percent of total green box spending and were a maximum of $2.1bn in 2000. They were above $1.4bn in 1986–88 and in 1998–2004 and less than $0.2bn in the remaining years. There are 12 different programmes notified in this sub-box, all of them run by the Farm Service Agency (FSA). The three main programmes ordered by average spending are the following: crop disaster payments for crop producers suffering losses of more than 30 percent due to damaging weather or related conditions; emergency feed programme, which compensates livestock producers for feed crop disaster; and non-insured crop disaster assistance programme, for crops that are not insurable under other programmes.

The US has not notified any programme under the structural adjustment through producer retirement sub-box.

The only measure notified since 1995 in the structural adjustment through resource retirement programmes is the Conservation Reserve Programme (CRP) administered by the FSA and financed by the Commodity Credit Corporation (CCC). In the reference period 1986–88 there was also a dairy termination programme. Total spending in this sub-box has been relatively stable, with $1.6bn or 3 percent of total green box expenditure in 2001. The CRP provides annual rental payments for planting permanent vegetation on idle, highly erodible farmland. Since 2002 the CRP has been notified under the environmental programs sub-box. There is a maximum of $0.1bn of spending under the structural adjustment through the investment aids sub-box. These aids are mainly farm credit programmes providing loans at preferential interest rates.

Up to 2001 there was only $0.3bn of spending, or less than 1 percent of green box expenditure, under the environmental programmes sub-box. However, there are 18 different environmental programmes in US notifications, most of them with yearly spending below $0.1bn. Each programme has different patterns of higher and lower expenditures in different years. The two biggest programmes in terms of spending are the Wetland Reserve Program (WRP) and the Environmental Quality Incentives Program (EQIP), both run by the US Natural Resources Conservation Service (NRCS). The WRP is a voluntary programme offering landowners technical assistance and financial support to protect, restore and enhance wetlands on their property. The EQIP offers financial and technical help to assist eligible participants to install or implement structural and management practices that promote agricultural production and environmental quality as compatible goals. The EQIP promotes contracts that provide incentive payments and cost-shares to implement conservation practices, and at least half of the funding is usually for environmental concerns associated with livestock production. Since 2002 the Conservation Reserve Program is notified under this sub-box, whose weight in US green box increases to 5% in 2005.

There are no notifications on regional assistance programmes or other direct payments.

Green box expenditure in the US jumps in 1995, relative to the reference period 1986–88, and again in 1996. The reason for these two increases is a shift in support from the amber box, in the case of the first increase, and a shift from the blue box, in the latter case. In the period 1996-2001 total green box spending has been very stable. Policy changes resulting from the 2002 Farm Bill have mainly implied an increased in domestic food aid and a shift of CRP to the environmental sub-box Under the recently approved 2008 Farm Bill no big changes in the structure of the green box are expected.

4.3 Green box spending in Japan

Japanese expenditure on green box measures has decreased from 3169bn yen ($34bn) in 1995 to 1802bn yen ($15bn) in 2006 (Figure 7). It represented 73 percent of total support notified by Japan in 2006. The general services sub-box included 85 percent of all green support in 1995 and 76 percent in 2006, after a reduction that accounts for most reduction of green support (Table 9). Each of the other sub-boxes represent less than 10 percent of total green box expenditure. The structure of expenditure in the remaining sub-boxes has been stable, except for environmental programmes, which have increased from 3 percent to 9 percent of green box spending between 1995 and 2006, and for structural adjustment through producer retirement programmes that has also increased to 9 percent of green box spending in 2006. Structural adjustment through investment aids has fallen from 4 percent of green box spending to less than 1 percent in 2006, so the share of all structural adjustment has remained fairly stable at around 7–10 percent of green box spending. Finally, payments for relief from natural disasters represent 2-3 percent every year, slightly more than public stockholding for food security purposes.

General services is the biggest green sub-box for Japan, with nearly 2700bn yen in 1995 and 1374bn yen in 2006. The main rubric is infrastructural services, with the programme on “construction of irrigation/drainage facilities and rural roads, land consolidation” representing two- thirds of green box spending in 1995 and less than half in 2006. The reduction of spending on this off-farm public investment programme to 784bn yen explains the reduction in green box support. The second main rubric in general services is extension and advisory services, with more than 250bn yen in every notification year. There are six different programmes notified as such, some of them also including some infrastructural services. In 2006, notified spending on research was 88bn yen, and notified spending on pest and disease control was 20bn yen. Smaller amounts were spent on marketing and promotion and on inspection services.

[[Figure 7 here]]

[[Table 9 here]]

Spending on public stockholding for food security purposes has been reduced from 60bn yen in 1995 to 21bn yen in 2006. Domestic food aid has also been reduced, from 28bn yen in 1995 to 2.5bn yen in 2006.

Japan has not notified any programme under decoupled income support or under income insurance and safety net programmes.

Payments for relief from natural disasters were 50bn yen ($0.4bn) in 2006. This is a stable amount because, in contrast with the US and the EU, most of this expenditure corresponds to government subsidies on premiums for the agricultural insurance scheme. Japan notified under the non-product specific de minimis an additional 19bn yen for subsidies on insurance for production loss not exceeding 30 percent of the average production. Eligibility for losses over 30 percent of average production is a requirement for government financial participation on insurance subsidies in the corresponding green sub-box. Both the US and the EU notified all their insurance subsidies as non- product-specific de minimis.

Structural adjustment assistance through producer retirement programmes was increased in 2002 to around 160bn yen, or 8 percent of the green box. The only set of programmes notified as a single rubric in this sub-box is farmers’ pension programmes (payments of pensions to retired farmers on condition of transfer of the management). Neither the EU nor the US has included in their notifications farm specific pension schemes, and green box provisions do not make any specific reference to pension schemes.

The payments under the structural adjustment assistance provided through resource retirement programmes were 10bn yen in 1995 but less than 1bn yen since 1996. They include land retirement programmes for citrus production and programmes for reduction of number of livestock (slaughtering payments to avoid overproduction of pork and milk).

Structural adjustment through investment aids has been reduced from 117bn yen in 1995 to 7bn yen in 2006 (less than 1 percent of the green box). These are interest concessions for investments in farming.

Environmental programmes is the second green sub-box in terms of expenditure. Spending has increased from 81bn yen in 1995 to 210bn yen in 2002 and 170bn yen in 2006 (9 percent of green box spending). The main programme is the payments for conversion of rice production. This consists of payments for maintaining paddy fields in good environmental condition but growing any plant other than rice. There is a second, smaller line since 1999 for dairy producers that comply with environmental conditions.

Since 2000, there has been some spending on regional assistance programmes in the form of direct payments to farmers in hilly and mountainous areas. Green box spending in Japan has decreased in the notification period 1995–2006. Its main component is general services on infrastructure, which have been reduced steadily. Environmental programmes is the sub-box that has increased more significantly. Japan is involved in an agricultural reform process that is gradual in nature and it is not expected to imply any radical changes in green box notifications from 2006 onwards.

4.4 Green box spending across all World Trade Organization countries

Again, aggregating green support across countries can induce misinterpretations due to variability in exchange rates and the number of notifying countries. With this caveat, it seems that total green box support across all WTO members has not increased since 1995 and is above $110bn (Figure 8, Table 10). However, the share of the green box in total notifications has increased from 45 percent in 1995 to 57 percent in 2003. Therefore, today green box notifications represent more than half of total notified domestic support expenditure. According to the latest available notifications, the green box represents 28 percent of domestic support in the EU, 79 percent in the US and 73 percent in Japan (Table 11). These three countries’ share of total green box notifications is around 79 percent, above its share of de minimis but below its share of amber and blue boxes. The US notifies the largest green box expenditure, with 42 percent of total, followed by Japan and the EU (19 percent each).

[[Figure 8 here]]

[[Table 10 here]]

[[Table 11 here]]

The two biggest green sub-boxes among all WTO notifications are general services (average 39 percent between 1995 and 2003) and domestic food aid (30 percent). The three structural adjustment sub-boxes add up to about 10 percent, with investment aids leading this expenditure. Decoupled income support and environmental programmes each have 5-6 percent of green box expenditure. Regional assistance (3 percent), payments for relief from natural disasters (2 percent) and public stockholding for food security purposes follow. Income insurance and safety net programmes represent only 0.1 percent of green box spending. In several green sub-boxes, the share of a single country of the Trio is very large, sometimes above 50 percent.

General services accounts for the largest share of green box WTO notifications. The Trio countries represent 74 percent of expenditure, below the green box average. However, Japan notifies 44 percent of all general services expenditure, well above its green box average (21 percent), compared with 16 percent for the US and 13 percent for the EU. General services is generally the green sub- box with the largest share of green box expenditure across the rest of the WTO notifying countries, with more than 50 percent their notified green box support. In the case of Japan, infrastructural services form the greater part of general service expenditure. For the EU, the service categories with largest spending are pest and disease control and research; in the US, the categories are sub-national state programmes that are not singled out and research. Share and expenditure on general services have a slight decreasing trend in the period 1995–2003.

Public stockholding for food security purposes represents no more than 2 percent of green box expenditure, and the Trio’s share of this sub-box is one of the lowest (average 17 percent in 1995– 2003). Japan is the main user among the Trio.

Domestic food aid is the second-largest sub-box and is lead completely by the US, with 96 percent of all WTO notifications on domestic food aid. Decoupled income support represents 5 percent of the green box, most of it (69 percent) corresponding to PFC payments in the US. The EU is likely to increase substantially its notification under this sub-box because of the 2003 and subsequent CAP reforms. If this were the case, then in future the EU’s SFP could become the main programme under this type of support in WTO.

The income insurance and safety net programmes sub-box is barely used, either by the Trio or by other WTO members.

Payments (made directly or by way of government financial participation in crop insurance schemes) for relief from natural disasters represent 1–5 percent of the green box. Of these payments, 76 percent are notified by the Trio, 40 percent by the US, 21 percent by Japan and 15 percent by the EU. Among the Trio, only Japan declares insurance subsidies (for losses above 30 percent of average) in this sub-box. The remaining insurance subsidies, including all insurance subsidies in the US and the EU, are normally notified as non-product-specific AMS and qualified for the de minimis.

The three sub-boxes on structural adjustment measures have reduced their share in green box expenditure, from 12 percent in 1995 to 10 percent in 2003. At the same time, environmental programmes have increased their share, from 4 percent to 9 percent, and regional assistance programmes have a stable 3 percent. The EU is the main WTO provider of structural adjustment (58 percent), environmental programmes (66 percent) and regional assistance (74 percent), mainly through the so-called second pillar of the CAP. Ongoing CAP reforms may lead to further shifts of support from the first to the second pillar, with likely increases in EU future notifications under these green sub-boxes.

Among the structural adjustment sub-boxes, investment aids represent the highest share, with 7 percent of the total green box, followed by resource retirement (2 percent) and producer retirement (1 percent). Japanese producer retirement programmes represent 53 percent of this sub-box in the WTO, with its farmers’ pension scheme. The US notifies 69 percent of the total of the resource retirement sub-box. This expenditure corresponds to the CRP up to 2002. The EU notifies 64 percent of the investment aids sub-box, with several rural development programmes such as “setting up of young farmers”.

Environmental programmes have the EU as the main and increasing provider, followed by Japan (15 percent). Regional assistance programmes are even more dominated by EU spending (74 percent), followed by Japan (2 percent).

Among all the green sub-boxes, the notifications of the EU, the US and Japan add up to a large share of all notified green support; they plus China are also the main origin of changes in composition or levels of green sub-box spending. This is likely to be the case also in the near future.

5 Concluding remarks

This is an analysis of agricultural support notification to the WTO, with particular attention paid to green box measures in the EU, the US and Japan. Further assessments about the levels, patterns and changes in domestic support may deal with two aspects: first, assessing the compliance with URAA provisions on level of support (amber box and de minimis) and on the implementation rules (blue and green boxes); and second, assessing the economic impact of these changes in terms of production and trade impacts and/or distortions.

[[Table 12 here]] Since the URAA reference period 1986–88, and particularly since 1995, the first year of agricultural support notifications, there have been several changes in agricultural policies, reflected in WTO notifications by the EU, the US and Japan. Table 12 lists ten significant changes. Six of these changes are shifts in support from one box to another, always following the same direction pointed out in the URAA: from amber to blue, from blue to green, or directly from amber to green. Also in this list are three changes that imply a reduction or an increase of support in one or more boxes with no apparent “compensatory” movement of opposite direction in other boxes (US increase in amber and de minimis from 1998 and green box increase since 2002, and Japan’s reductions in amber in 1998 and green since 1998).

Each of the six shifts in boxes listed in Table 12 has an underlying policy change that implies significant changes in the way the programme is implemented. By “significant”, we mean that they are relevant from the point of view of the type of implementation criteria used to classify measures in the URAA, many of which are also relevant from an economic impact assessment point of view. For instance, it is significant that market price support in the EU was substituted for direct compensatory payments based on land in 1992, because these are direct area payments with set- aside requirements, quite a different programme from price support. It is also significant that the PFC payments in the US since 1996 give larger freedom to produce or not to produce, because they are based on historical area and yields and no production was required.

Shifts among green sub-boxes have, in most cases, occurred in a progressive way, with more fluctuations from year to year than in other boxes. Despite the increase in green box share in total notified support, there have not been many cases of increases in green box support. There has been little increase in green box spending in the EU, there has been stability in the US since 1996 and increases since 2002, and there have been important reductions in Japan. Large increases in the green box occurred before 1996: the US duplicated domestic food aid from the reference period 1986–88 to 1995 and introduced PFC payments as decoupled income support in 1996; and Japan increased in general services (mainly infrastructure) from the reference period to 1995. There is a pending large shift to the green box that could occur in the next few years when the EU’s SFP is notified as green and, possibly, more budget is transferred from the first to the second pillar of the CAP.

It is beyond the purpose of this paper to assess the legal question of whether these changes make the new programme conform to the rules for the new notifying box. Monitoring these aspects of notifications should be part of the review process under the URAA, or, potentially, the dispute settlement mechanism. It seems to be the case that the three countries have found ways of providing support to achieve their own defined domestic objectives through the different categories in the green box. This is particularly the case for the US, with its domestic food aid programmes, and the EU, with its rural development and environmental programmes. Dispute settlement panel reports have dealt with the decoupled income support programmes. The Cotton Case panel report declared that the US PFC and direct payments did not conform to the corresponding sub-box criteria. The same argument of excluded commodities is potentially applicable to the EU’s SFP. Both the EU and the US have already eliminated the prohibition of some agricultural productions in order to guarantee compliance. Japan has made smaller moves to use other forms of support that may fit with its own domestic objectives and with green sub-boxes criteria, for instance through increased spending on environmental programmes.

The second aspect of the assessment would deal with the production and trade impacts of observed changes. This is an economic assessment that differs from the legal assessment. However, both are linked through the general green box criterion of having “no, or at most minimal, trade-distorting effects or effects on production”. Section 2 has already developed the complexities associated with these economic impacts, which may be caused by relative price effects, risk effects or dynamic effects, or a combination of all three. Additionally, due to several difficulties, looking at total expenditure in boxes is not enough to assess the economic impacts of support.

One difficulty of assessment of the impact arises from shifts that involve the reduction of market price support included in the amber box. This support is calculated on the basis of administered prices and fixed external reference prices. This calculation has little economic meaning and can be affected by government decisions on lower levels of administered prices, which may not have the effect of fully reducing the economic level of support sustained mainly through border measures. There are technical alternatives for measuring the economic impacts of price support, for instance using market price support estimated by the OECD and using the value of tariffs directly.

However, this is not the major difficulty of an economic assessment. Response to each of the specific programmes may, unfortunately, be different for different countries, different years and different details of implementation. The URAA review process itself, and the few examples of disputes affecting the classification of domestic support and compliance with green box rules, prove that assessing the economic impact of each programme requires analysis specific to each measure. There are economic reasons to argue that measures that comply with blue box and green box requirements would potentially have smaller impacts on production than would measures with no implementation requirement in the amber box. In the green box, specific implementation rules differ significantly from one sub-box to another, and it is difficult to make an assessment of all sub- boxes simultaneously. The quantification of the impact and the assessment of being “minimally” distorting requires further empirical analysis. Some programmes have been analysed empirically, particularly in recent years, but so far there is no robust, comprehensive body of empirical literature that can solve the problem of quantification of impact across boxes and sub-boxes. The references in this paper give several examples of empirical analysis of impact of different programmes. There are gains from promoting this type of empirical work by research institutions, governments, international organizations and non-governmental organizations, because there are still many open questions.

Are domestic objectives achieved with current green programmes? Are domestic objectives well defined? Do impacts on production remain, to a certain extent, in green box measures? If so, and in the context of relatively high levels of green box expenditure, do these impacts on production generate spill-over effects on other countries, particularly developing countries? Do developing countries have room in the green box to develop policies that meet their own sustainable development objectives? Can the green box rules be improved in order to reduce the impacts on production? Is it always possible to achieve domestic objectives with “at most, minimal trade- distorting effects or effects on production”?  Appendix 1 Summary of World Trade Organization notified support by the European Union, the United States and Japan

[[Table A.1 here]]

[[Table A.2 here]] Appendix 2 Detailed green box notifications by the European Union, the United States and Japan [[Table A.3 here]]

[[Table A.4 here]]

[[Table A.5 here]] Notes

1 The terms “Uruguay Round Agreement on Agriculture” and “WTO Agreement on Agriculture” are used synonymously in this paper and are often denoted as URAA. 2 For the aggregate of all WTO notifications across all WTO member countries, the source used is the ERS database (www.ers.usda.gov/db/Wto/AMS_database). 3 For developing countries, the de minimis measures may add up to 10 percent of the value of production of the basic agricultural product and the total value of agricultural production for, respectively, product-specific and non-product- specific de minimis. 4 See the set of papers in OECD (2005a) and, particularly, OECD (2001a) and OECD (2006a). 5 Some other effects are mentioned in the literature but are not mentioned specifically in this section, even if normally they are included under one of the three types of effect mentioned. These include, for instance, the effects due to fixed cost that may be covered by support measures, and the effects through labour and leisure decisions that may have positive or negative impacts on production. 6 In this paper, countercyclical support is any support that is triggered or increased by low farm income, prices or yields, regardless of the underlying causes of these low values. In general, this type of support reduces the variability of farm income. 7 The abbreviation “bn” denotes US billions, that is thousands of millions, or 109 units. The abbreviation “mn” denotes millions, or 106 units. 8 Following the notation already used during Doha Round negotiations, we describe “overall trade distorting support” as the sum of the notifications under amber, de minimis and blue boxes. 9 See EU Commission (2006a), which questions this calculation of beef market price support. The main argument is the heterogeneity of low- versus high-quality beef. References and further reading

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