Why Stop At $12 Billion?

The losses incurred by the ag sector might already exceed the size of the ag sector bailout proposed by Trump. One constraint is the WTO.

In the WTO Agreement on Agriculture, the US entered into some constraints on the amount of trade-distorting measures in the agriculture sector. Such measures fall into the “amber box”, which can be best understood by referring to this schematic, from a 2005 CBO analysis (I was a reviewer), back in the time when we were fighting to liberalize the agricultural trade regime.

Source: CBO, “Policies that Distort World Agricultural Trade,” CBO Paper, August 2005.

According to Politico “Morning Trade” today:

A USDA official provided some reassurance that the payments won’t push the U.S. beyond its dreaded “amber box” subsidy limits at the World Trade Organization. The U.S. agreed to a $19.1 billion cap on trade-distorting subsidies when it joined the WTO.

USDA trade counsel Jason Hafemeister said the U.S. currently reports to the WTO about $5 billion worth of domestic support that could potentially skew world trade.

“I think you can be confident that as we’ve looked at these programs, looked at our numbers, we should be below our ceiling for trade-distorting domestic support,” he said.

Taking this conclusion at face value requires that (1) no more than $12 billion of direct subsidies are disbursed, (2) the $5 billion current subsidy number is correct. I’m not sure regarding (2) — after all numbers and facts are malleable in this administration. In point of fact, consider CBO’s estimates of expenditures under the commodity and diaster program.

Source: Johnson, Monke, “What is the Farm Bill?” CRS Report RS22131 (April 26, 2018), Table 2.

The red portion of the bar for 2018 looks larger than $5 billion, although I don’t know how disaster payments fit into the WTO constraint.

On (1), I wonder how restrained Mr. Trump will be going forward, given the incurred costs might already exceed $12 billion. Even if the US stays under the limit, the additional intervention is sure to irritate our trading partners, who may in turn escalate their spending.

And hence, we retreat on our long-standing goal of reducing price-distorting subsidies in the agricultural sector. Perhaps it’ll take something like the ballooning of ag expenditures in the Reagan 1980s, and the 2000’s to spur a pruning back of these programs.

Source: Johnson, Monke, “What is the Farm Bill?” CRS Report RS22131 (April 26, 2018), Table 3.