Domestic support policies were recognized as one source of market and trade distortions in negotiating the Uruguay Round Agreement on Agriculture (AoA). Countries, therefore, agreed to limit domestic policies presumed to be the most trade distorting and to exempt non- or minimally trade-distorting policies from any limitations.
Policies were categorized by color according to whether and how they were disciplined. Policies that directly influence production decisions, such as price support policies (amber box policies), were capped and subject to cuts. Support levels from amber box policies are quantified, according to the AoA, by calculation of an aggregate measure of support (AMS), which combines estimated support levels for all commodities into one overall measure.
The AoA exempted three types of domestic programs from reduction commitments. The first type of exempt support is amber box policies deemed to be de minimis-defined as support that is less than 5 percent of the value of production. The second type of domestic program exempt from reduction commitments is expenditures that are entirely government funded and do not vary with prices. This type of support ( green box policies)-deemed to have little or no effect on production or trade-includes research programs, domestic food aid, environmental programs, and certain crop insurance and income-support programs. The third type of exemption (blue box policies) includes direct payments that are related to production-limiting programs (e.g., subsidies paid as a result of production quotas or those that require producers to set aside land in order to qualify for subsidies).
In the Doha Ministerial Declaration, members committed to negotiations to achieve "substantial reductions in trade-distorting domestic support." As with market access, negotiators in the Doha talks have agreed that there will be an element of harmonization in the reductions made by developed countries. Specifically, countries with higher levels of permitted amber box trade-distorting domestic support will be subject to deeper cuts. In a departure from the AoA commitments, blue box expenditures will be capped and, along with de minimis support, reduced. Amber box, blue box, and de minimis policies will be aggregated together, named Overall Trade-Distorting Domestic Support (OTDS), and subject to cuts.
As for special and differential treatment for developing countries, there is agreement to provide developing countries with longer implementation periods and lower reduction coefficients for all types of trade-distorting domestic support.
See the AoA Domestic Support section of the recommended readings page for more information regarding domestic-support issues related to the WTO Agreement on Agriculture.
Other Agreement on Agriculture Issues:
AoA Issues Series: Domestic Support Policies
Frederick Nelson, Edwin Young, Peter Liapis, and Randall Schnepf
USDA, Economic Research Service
Domestic support policies were recognized as one source of market and trade distortions in negotiating the Uruguay Round Agreement on Agriculture (AoA). Countries, therefore, agreed to limit domestic policies presumed to be the most trade distorting but to exempt other policies from any limitations. A key issue in the next round of trade talks is identification of further limits or exemptions for domestic policies. A critical question is whether, and to what extent, policies exempt from limitations actually alter production and trade. The continuing challenge for WTO negotiations is obtaining effective commitments about domestic support policies to reduce world market distortions in agricultural trade while allowing countries the flexibility they need to achieve their unique national priorities.
Domestic and trade policies are interrelated, change in one has implications for accomplishing the goals of the other. Trade policies, by directly influencing imports and exports, facilitate domestic price and income goals; domestic price, income, and production policies by changing production and prices affect a country's ability to compete in world markets.
Limits of any kind on domestic agricultural policies are unprecedented in a trade agreement. But, because of the interrelationships among policies, limits on domestic policies were thought to be essential to the success of the primary WTO goals of increased market orientation and reduced protection in world trade. Under the Uruguay Round Agreement on Agriculture (AoA), support levels from domestic policies presumed to be the most trade distorting are subject to upper limits that decline over time.
Negotiators of the AoA recognized the need for individual countries to use domestic policies to address certain issues, especially those related to
- equity (e.g., aid to the needy),
- market failure (e.g., environmental programs), and
- the absence of risk markets (e.g., income safety net programs).
As a result, expenditures on selected policies were exempt from reduction commitments, as long as these policies were considered to be no more than "minimally distorting" of production and trade.
A traffic light analogy is used to categorize types of policies. WTO strategies for limiting support were tailored to the different categories or "boxes." Red box policies must be stopped or eliminated. Amber box policies are subject to limitations. Green box policies are exempt from any limitations. An additional category, blue box, was created especially for payment programs that limit production and meet specified criteria.
Red box policies were prohibited.No domestic support policies are prohibited or scheduled to be phased out under the current AoA.
Amber box policies are subject to reductions.Support levels from nonexempt (or amber box) domestic policies are quantified, according to the AoA, by calculation of an aggregate measure of support (AMS), which combines estimated support levels from all nonexempt policies for all commodities into one overall measure. Nonexempt policies in the AMS include
- commodity-specific market price supports based on administered prices,
- government payments to producers related to current production or prices,
- other commodity-specific transfers, and
- non-commodity-specific measures of support received by producers, such as capital, input, and insurance price subsidies.
A traffic light analogy is used to catergorize WTO domestic support policies and to place them in one of four colored policy boxes
Red light image for Trade Policy/WTO topic Prohibited policies that must be stopped (an emptyred box, as no domestic policies were prohibited)
Amber light image for Trade Policy/WTO topic Policies subject to careful review and reduction over time areamber boxpolicies (includes market price support, payments related to current production or prices, and input subsidies)
Blue light image for Trade Policy/WTO topic Payments made in conjunction with production-limiting programs are in theblue box(includes the 1986-95 deficiency payments in the U.S.)
Green light image for Trade Policy/WTO topic Green box policies are considered nontrade-distorting and are not subject to any limitations (includes domestic food aid and environmental programs)
As a domestic measure, the AMS excludes export subsidies and the impacts of import restrictions that are not also tied to domestic administered price programs.
Countries that committed to reducing domestic support (see table 1) agreed to reduce their AMS below the level that existed during the 1986-88 base period, a period of relatively high support resulting from depressed market prices. Small levels of support (less than 5 percent of the value of production in developed countries (10 percent in other countries) do not have to be disciplined under the so-called de minimis rule. Developing countries were given special and differential treatment through special policy exemptions and by lower reduction commitments that are implemented over a longer period of time. Least developed countries were not required to make any commitments to reduce domestic support.
Table 1-Distorting domestic policies are limited
Least developed countries
* Least developed countries agreed not to increase domestic support policies from the base period.
Green box policies are deemed non-trade-distorting and exempt from reductions.Domestic policies presumed to have the minimal impact on trade were excluded from the AMS and limits on support levels.
To be considered in the green box, policies must
- have no, or, at most minimal, effects on production or trade ( decoupled);
- not increase market prices or consumer costs;
- be financed by the Federal budget; and
- meet other more detailed policy specific conditions (none of which limit the level of subsidy per se).
Blue box policies have exempt status.Government payments related to current production or prices and to production-limiting programs are exempt if the payments are based on fixed production levels or are made on no more than 85 percent of the base level of production. The production-limiting features of such payments might or might not offset, to some extent, expansionary production effects of the payments. Inclusion of the blue box provision, however, was basically a political strategy required to bring the negotiations to a close, and the specifics primarily benefited the United States and the European Union. Blue box policies are excluded from AMS calculations for 1995-2000, but not from the base year AMS.
How has support from domestic policies changed since the 1986-88 base?Governments have reduced domestic support levels relative to 1986-88, as measured by the AMS. While intervention continues, there has been a shift away from the use of market price support toward less distorting payments. Information on AMS's reported in the notifications provided by member countries to the WTO shows that the level of domestic support expressed as a percentage of the commitment ceilings varied widely among countries. However, three-quarters of the country support levels were less than 80 percent of their respective ceilings.
Table 2-Actual support (AMS) as a percent of commitment levels, latest year during 1995-1998 *
0 to 19 % Canada, Colombia, Costa Rica, Czech Republic, Mexico, Morocco,
New Zealand, Poland
20 to 39 % Australia, Brazil, Cyprus, United States, Venezuela
40 to 59 % Hungary
60 to 79 % European Union, Iceland, Japan, Slovak Republic, Switzerland, Thailand
80 to 100 % Argentina, Israel, Korea, Norway, Slovenia, South Africa, Tunisia
* Last year notified as of April 2000. Twenty-seven countries had notified for at least one year. Bulgaria and Papua New Guinea had not yet notified.
Assuming future trade agreements will place further limits on domestic support programs, there are several procedural and research issues remaining:
- Effectiveness of current agreement.Support from trade-distorting domestic policies has declined since the base period. Non-trade-distorting green-box expenditures have increased. What have been the effects on world markets and trade?
- Trade-off between market orientation and other goals.The challenge for the future is to negotiate substantive reductions in support from trade-distorting domestic policies while allowing countries adequate flexibility to pursue non-trade-distorting policy objectives. There are potential trade-offs between the goals of reducing distortion and of pursuing non-trade concerns. Countries disagree about the combination of support reductions and restrictions that should be employed to achieve WTO goals; namely more effective cuts in the amber AMS; equalization of amber support levels, elimination of the blue box exemption, or tightening up of the definitions of exempt green box policies.
- Future reductions in the aggregate measure of support.While most countries are already well under their current support reduction commitment ceilings, some countries might be very concerned that future requirements will mean new or increased support reductions, especially if blue box policies are reclassified as amber box. Some countries appear to be looking to coupled domestic support policies, instead of using green box policies, to help accomplish nontrade goals related to rural communities, which would place their national priorities squarely in conflict with WTO market orientation goals.
- Definition and criteria for the exempt green box policies.An issue concerns the current vague requirement that green box policies must have, at most, minimal "trade-distorting effects or effects on production." Exactly what this means quantitatively is subject to judgment, challenge, and negotiation. All policies involve some amount of subsidy to agriculture, otherwise it would not matter if they were exempt or not.
- Limits on green box subsidies.There is currently no limit on the total amount of subsidy that can flow through individual green box policies. There is, also, no WTO limit on the total amount of green box expenditures. What is the overall effect of green box policies on world markets and trade?
- Decoupled payments.Decoupled payments increase the wealth of farmers. Does this increased wealth affect farmers' production decisions?
- Role of blue box.Blue box policies are not market oriented because they reduce domestic and world output and increase prices by idling resources. When such policies negatively distort production, however, a country's export competitors may benefit. Product importers may then have to pay higher prices with decreases in output. Production may be increased in the future by these programs through risk reduction and increased wealth, especially if payments are larger than needed to compensate for resource idling. What is the impact of blue box policies on production, prices, and trade?
- Adjustments for inflation.Support from nonexempt policies are currently measured in nominal terms but member countries are encouraged to "give due consideration" to countries with significant inflationary problems when reviewing their compliance with commitments. Ignoring inflationary trends in reporting support measures complicates evaluation of policy effects. How would accounting for inflation impact compliance?
- De minimis rules.The rules allow exclusion from the AMS measure amber support that could amount to as much as 5 to 10 percent of the total value of agricultural production in developed countries (10 to 20 percent in developing countries). Up to 5 percent of the value of production of each commodity in developed countries, for example, could be excluded under the de minimisrule, plus up to another 5 percent of the total value of production in the country could be excluded by applying the rule to the non-commodity-specific policy category. What are the overall effects of the de minimisrules?
- Non-commodity-specific policy category.Policies can be categorized as non-commodity-specific even if only a subset of a country's commodities were actually involved in a program. Are these policies really non-commodity-specific?
- Aggregate or commodity-specific AMS?The aggregate AMS approach gives countries flexibility to seek competitive advantages in one area while reducing subsidies in another commodity area. This may be a problem for some countries faced with an increase in commodity-specific subsidies by another country. Would market impacts differ if commodity-specific limits were imposed?
- Relationship between domestic and trade policies.Market price support programs depend on border restrictions and export subsidies. If trade or border polices are substantially constrained, how important are additional restraints on domestic policies?
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