Against the Green Box Illusion

Three fallacies are commonly encountered when talking about EU agricultural policies and the WTO’s Green Box for domestic support.

1) The Single Farm Payment and all second pillar subsidies comply with Green Box disciplines, so that they cannot be challenged under the WTO dispute settlement system.

Most importantly, the Single Farm Payment obliges farmers to keep land for which they claim subsidies in good agricultural and environmental condition. This could contravene the WTO discipline on decoupled income support stating that ‘No production shall be required in order to receive such payments.’ (URAA Annex 2 Art. 6(e)). The second pillar is equally vulnerable to legal challenges. The way the EU spreads its Least Favoured Area payments with little differentiation across large shares of cultivated area is not consistent with WTO disciplines that require payments to be “limited to the extra costs or loss of income involved in undertaking agricultural production in the prescribed area” (URAA Annex 2 Art. 13(f)). Another example is EU support to young farmers that set up a farm. This is hardly in line with the WTO discipline that limits eligibility for structural adjustment assistance to help with “the financial or physical restructuring of a producer’s operations in response to objectively demonstrated structural disadvantage” (URAA Annex 2 Art. 11(a)).

2) Green Box subsidies are not or only marginally trade-distorting.

Several examples contradict this claim. Structural investment aid is clearly aimed at enhancing production. Income insurance and natural disaster payments encourage farmers to produce more by raising and stabilising profitability. Payments under regional assistance programs that attempt to keep land under farming use stimulate production as a side-effect. The Single Farm Payment contributes to production through indirect channels. Farmers can directly invest the payments on their farms, and they gain better access to credit, under the condition that support is likely to continue well into the future (thus reducing bankruptcy risks and driving up land values that can serve as collateral). If farmers expect entitlements for decoupled payments might be updated in the future, they are furthermore enticed to build reference quantities.

3) Green Box subsidies, even if possibly trade distorting, are justified by the non-trade objectives they pursue.

The Green Box conflates subsidies of a very different kind. Some may indeed efficiently serve domestic objectives, such as stockholding for food security purposes or environmental payments. Others have no such rationalisation. Decoupled income support is less efficient in reducing inequality and fighting poverty than measures that are directly targeted at low incomes and that are independent of how much farmland and livestock the household possessed at the time period on which payment entitlements are based. Structural investment aids for disadvantaged producers have no justification in domestic objectives either. Provided that capital markets work smoothly, publicly-provided investment aids distort resource allocation and reduce economic wealth (and furthermore, governments should focus on improving capital markets rather than outguessing them). Payments under regional assistance programs go to all farmers of a disadvantaged region. If they are intended as a distributional instrument that diminishes spatial income disparities, rural development programs that promote the rural economy as a whole (such as investment in education) are more efficient than support to agriculture. If regional assistance serves environmental objectives (e.g. to maintain agricultural production in disadvantaged mountain regions where they embellish the landscape and offer habitats to animals), this should be justified as an environmental program to assure its ecological efficiency.

These fallacies are dangerous. They give a green light to supposedly Green Box compliant subsidies, legitimising their continuation with an international stamp of approval. They also allow EU policy makers to lean back and applaud themselves for gradually moving all or almost all EU agricultural subsidies into the Green Box. The less people know about the details of the CAP, the more credulously they buy into this rhetoric. And, understandably, most people understand little about the CAP.

Those who want to see a CAP that better serves the public interest should therefore challenge the erroneous claims about EU policies and the Green Box. In addition, they should strive for a re-definition of domestic subsidies at the WTO. The Green Box should be split up into several boxes that better reflect the different nature of the subsidies that are currently grouped together.

This article is based on the following paper, published on February 20, 2009: A Blueprint for Reform of the WTO Agreement on Agriculture, ECIPE Working Paper No. 01/2009, by Valentin Zahrnt.

3 comments posted

  • Tiina Vares Estonian Mission in Geneva March 2nd, 2009

    Green Box measures are GREEN until they are income support without any reference to any produce and farmes have free choices. I truly believe, that direct payment scheme (SPS) in the NMS have no effect on the agri markets.

  • Brian Gardner March 3rd, 2009

    There is no such thing as a ‘production-neutral’ subsidy. Simple economic analysis demonstrates why: any payment to land holders in particular at the margin of viability resulting from poor soil fertility, unfavourable climate or distance from markets, keeps them producing when they would not do so without the subsidy. Therefore all subsidies including claimed green box mechanisms such as, most obviously, the EU’s single farm payment and the US’ counter-cyclical payments. maintain production at levels higher than in a completely subsidy free market.

  • trade assets May 24th, 2009

    For agriculture most of the money is needed, So if government gives some payments and subsidies to the farmers and keeping their land till then the farmer not return the full payment. you explain it in the meaningfull way i appriciate from your site. i don’t know more about it, but now i think your site give me an appropriate knowledge about this field. Thanks for the information.

PUBLICATION DATE

23 Feb 2009

AUTHOR

Valentin Zahrnt

FURTHER INFORMATION

Valentin Zahrnt is a Research Associate and Resident Scholar at the European Center for International Political Economy based in Brussels.