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25.02.2010 General posts
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Against the Green Box Illusion

It is often believed that subsidies that fall into the WTO’s Green Box are indeed 'green' or otherwise legitimate, and that the Single Farm Payment and the second pillar of the CAP deserve this stamp of approval. That's not true - here is why.

Fallacy 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 conditions. 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-Favored-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)).

Fallacy 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 stabilizing 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.

Fallacy 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 rationalization. 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 into 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, legitimizing 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.