http://www.economist.com/ Ditching the peace Jan 1st 2004 >From The Economist Global Agenda
Nine years ago, members of the World Trade Organisation agreed not to take each other to court over farm subsidies. But the "peace clause", as this agreement is known, expired on December 31st. Will its end mean the beginning of a trade war? IT IS one of the age-old functions of government: doling out taxpayers' money to favoured national industries. It is, by contrast, one of the most laudable functions of the World Trade Organisation (WTO) to proscribe and police these subsidies. It gives members the right to retaliate against countries that stuff illegal feathers into the beds of their domestic firms. But not all subsidies are equal under the law. Hundreds of billions of dollars of largesse that governments bestow upon their farmers cannot be contested at the WTO. Until now. The so-called "peace clause", agreed nine years ago, gave most agricultural subsidies immunity from the WTO's punishments and procedures for settling disputes. But the clause expired on December 31st. The peace is over; is a trade war about to begin? There are certainly a lot of subsidies to shoot at. The OECD, a club of rich nations, reckons that the agricultural subsidies of its members cost consumers and taxpayers about $230 billion in 2001 alone. The European Union, the United States and Japan were to blame for about 80% of those transfers. The typical milk producer in the OECD makes half its money from selling milk, and the other half from milking its government. Rice and sugar producers do the same. So what? If profligate governments want to play sugar daddy with their taxpayers' money, surely that is their sovereign right? What business is it of the WTO? The problem is that subsidies distort trade. Export subsidies do so by design, encouraging firms to increase their share of foreign markets. Other kinds of handout distort trade indirectly. By making production cheaper, they encourage more of it. This oversupply depresses world prices or accumulates unsold, in the wine lakes and butter mountains that used to characterise European agriculture. Slowly, the EU is moving away from paying farmers to overfarm. It wants to "decouple" subsidies from production. Countries that import food (many of them poor) benefit from the largesse of rich-world subsidies, but agricultural exporters suffer. They are no longer willing to suffer in silence. The 17 countries of the Cairns Group, which includes Australia, Brazil and Argentina, have campaigned long and hard against export subsidies. But as long as the peace clause remained in place, they could not mount a legal challenge. The EU had hoped to wangle an extension of the peace clause earlier this year at the WTO's ministerial meeting in Cancún, Mexico. But the Cancún talks fell apart when the G22, an ad hoc coalition of developing countries, proved to be feistier than anticipated. The G22 remains in contentious mood. Indeed, as one EU official told the Associated Press: "In this sort of atmosphere, everyone might start throwing things at each other." Brazil might cast the first stone. It is already challenging America's cotton subsidies, arguing that they violate a term in the peace clause that caps subsidies at 1992 levels. Now the clause has expired, other targets will present themselves and other countries may join the fight. WTO members will be able to challenge any subsidy reserved for a specific industry (a sugar subsidy, for example) that can be shown to cause "serious prejudice" to their interests. Such prejudice is easy enough to prove. Richard Steinberg of the University of California, Los Angeles, and Timothy Josling of Stanford University have read the statutes and crunched the numbers. They show that America's extensive subsidies to its barley producers, for example, helped keep foreigners out of American markets. Its subsidies to corn producers helped to displace rival producers from third-country markets, such as Mexico, Canada and the Philippines. Meanwhile, by subsidising exports, the EU is depressing world butter prices by as much as a fifth, according to one economic model. If a plaintiff wins his case, the offender would be forced to withdraw the subsidies and offset their damaging effects, or face the consequences. The penalties for non-compliance can be severe. The WTO sees export subsidies as a particularly egregious breach of free-trade principles. It came down hard on America's tax breaks for exporters, giving the EU the right to impose more than $4 billion-worth of sanctions in retaliation. The Americans are now scrambling to comply with the WTO's ruling before the tariffs kick in next March. With the expiry of the peace clause, the great trading powers-who are also the great subsidisers-may lose rather more than they win Some, especially in America, see the WTO as an infringement of their sovereignty. But the great trading powers tolerate the WTO's rulings in the spirit of "you win some, you lose some". America may have lost on export tax breaks and steel tariffs, but it won on bananas and beef hormones. With the expiry of the peace clause, however, the great trading powers-who are also the great subsidisers-may lose rather more than they win. Their enthusiasm for the WTO may wane. If so, they may choose to shrug off any retaliatory duties slapped on their exports. It may be less painful to ignore the ruling, neglect their WTO obligations and face the sanctions, than to abide by the ruling and face their own irate farmers. A country such as Brazil, after all, can block only a tiny fraction of European or American exports. Angry farmers, on the other hand, can block their roads. For the moment, however, America and the EU would much prefer to remain WTO members in good standing. This gives agricultural exporters a handy bargaining chip if and when global trade talks resume in the new year. As Messrs Steinberg and Josling put it, America and Europe will have to negotiate "in the shadow of this legal vulnerability". They may be goaded into cutting subsidies more steeply than they would like. Messrs Steinberg and Josling think the expiry of the peace clause will "light a fire" under farm-trade negotiations. For the past nine years, the WTO has given peace a chance. In the years ahead, its courts will be busier and the trade scene tetchier. But something is needed to push the big subsidisers into serious agricultural reform. Dispute is better than deadlock.
