Think big and ignore the law: U.S. corn and ethanol subsidies and WTO law.

Author:Cai, Phoenix X.F.


Everyone should care about what happens at the World Trade Organization (WTO) in Geneva. It affects our lives in large and small ways. Decisions made in Geneva affect the price of food on our tables, gas at the pump, and the prices and availability of most of what we buy.

This Article argues that new challenges to U.S. corn and ethanol subsidies are highly likely. Even though at first glance this Article deals with the specialized and esoteric field of international trade law, its sweep is much broader. The subject of this Article is also both timely and salient. The agricultural subsidies debate is highly salient in the current political context of high food costs, high fuel prices and Doha development round sensitivities. The year 2008 saw rocketing food and fuel prices, food rationing in many countries, and the controversial passage of the 2007 Farm Bill over a presidential veto, all of which focused the spotlight on agricultural policies. At the same time, Doha Round ministerial negotiations, which seek to significantly reform the agricultural subsidies regime, resumed in July of 2008. A primary goal in Doha is to ensure that the world trading system more fully benefits developing countries.

This Article explores in depth Brazil's successful challenge of U.S. cotton subsidies in the Upland Cotton case. The case is significant in a number of ways discussed in detail in this article in Part IV. Moreover, the arguments Brazil raised in the case apply to corn and ethanol subsidies as well. In fact, the Upland Cotton case provides developing nations greater incentive to broadly attack U.S. subsidies by opening the door to a broader range of remedies. Challengers may use the stronger remedies of the Agreement on Subsidies and Countervailing Measures (SCM Agreement) as well as the Agreement on Agriculture. As Doha talks continue to stall, challenges by developing or middle-income nations to U.S. corn and other subsidies becomes more likely.

Beyond the exploration of the doctrinal and practical implications of the Upland Cotton case, this Article also makes a number of broad theoretical and policy points. First, the case provides a useful lens through which to view the role of developing nations and their access to the WTO's dispute settlement process. Developing nations are very interested in broadening market access for their agricultural products. There are primarily two methods of achieving this goal in the WTO: negotiation or litigation. Developing nations are actively pursuing the negotiation route in Doha, but many are also considering litigation. The Upland Cotton case will be a linchpin in any litigation strategy. Agricultural subsidies litigation may open the floodgates to greater activism by developing nations in WTO dispute settlement proceedings.

Second, this Article examines the concept of relative judicial power: the idea that the WTO's Appellate Body is powerful relative to other international adjudicative bodies only because the political branch (the WTO General Council consisting of all member-states) has failed to exhibit political leadership. It argues that the General Council has a chance in Doha to reassert itself. Agriculture provides a unique opportunity for the members of the WTO to reverse the trend of political capitulation.

A third and related point is that Doha represents an opportunity for not just the usual players (the United States, the European Union, China, Japan, India, and Russia) but also emerging blocs of developing nations to play a leadership role in agriculture. Both developing and developed nations must yield for a consensus to emerge from future Doha talks. Failure of Doha to achieve meaningful reform Would be a devastating blow to the legitimacy and continued viability of the WTO as an institution. However imperfect the WTO may be, it would be a shame to abandon it now to fragmented bilateralism and opportunistic protectionism.

Before proceeding, a few short notes on scope are in order. First, this Article will not focus on U.S. farm policy in general. Rather, farm bills are considered only to the extent that they contribute to an understanding of the potential conflicts between U.S. subsidy policies and WTO rules. Second, this Article focuses primarily on the international regulation of agricultural subsidies and does not consider in any detail the domestic regulatory and legal regime, which is subject to international scrutiny at the WTO level.

The Article proceeds in six parts. Part I explains the multi-layered WTO regime on agriculture and subsidies, with particular emphasis on the delicate interplay among multiple WTO agreements. It also highlights the main ways in which U.S. subsidies programs conflict with WTO rules on agriculture and subsidies. The Doha negotiations are an attempt to address some of these conflicts. However, because Doha's fate is uncertain, the future of U.S. subsidies is also uncertain. Part II discusses the Upland Cotton case (1) in detail, highlighting in particular the implications for other U.S. commodity subsidy programs, including corn. Part III examines the legal and political likelihood of a new WTO challenge against U.S. corn and ethanol subsidies and suggests that such a challenge is highly probable. Part IV analyzes the significance of the Upland Cotton Case. Part V presents a normative lesson for international governance derived from the cases and agreements considered in this article. Part VI concludes with a call to bring Doha to a successful conclusion.


    1. WTO Rules

      Nations often subsidize their domestic agricultural producers. These subsidies have a significant impact on international trade because they reduce production costs, giving subsidized producers an unfair advantage on the international market. Nations have negotiated international trade agreements, many of them under the aegis of the WTO, to facilitate free trade and minimize the harmful effects of subsidies. The WTO legal regime for agricultural subsidies is rather complex. Two different agreements apply and the interplay between them is intricate. The Uruguay Round of negotiations, which created the WTO, subjected agricultural subsidies to serious restrictions under international trade rules for the first time. (2) However, it did so in a bifurcated way, with the SCM Agreement (3) on one hand and the Agreement on Agriculture (4) on the other. The SCM Agreement applies to subsidies and countervailing duties (5) generally, across all industries. Although agriculture has been subject to the GATT from its inception, it was always singled out for special treatment due to its particular social, cultural, and political importance. (6) The Agreement on Agriculture formalized this special treatment by subjecting trade in agriculture to its own regime within the WTO. (7) Subsidies for agricultural products are regulated by both the Agreement on Agriculture and the SCM Agreement.

      While the Agreement on Agriculture is the principal document governing trade in agriculture, it does not operate in a vacuum. As a WTO agreement, it is subject to the dispute settlement procedures of the WTO as well as pre-WTO GATT jurisprudence dealing with agricultural trade. In addition, there are complex linkages to other WTO agreements, such as the SCM Agreement. Agriculture is also subject to special rules under the Agreement on Safeguards, permitting trade restrictions of agricultural products and product standards and health and safety standards under the Agreement on the Application of Sanitary and Phytosanitary Measures (SPS Agreement).

      However, the two agreements are not equal. The SCM Agreement is subservient to the Agreement on Agriculture due to an extraordinary supremacy clause in the Agreement on Agriculture. (8) Article 21 of the Agreement on Agriculture explicitly states that provisions in other WTO agreements are subject to the Agreement on Agriculture. (9) This provision sets the stage for the complicated interplay between the SCM Agreement and the Agreement on Agriculture.

    2. The SCM Agreement

      The SCM Agreement regulates all subsidies in any economic sector. (10) It differentiates between legal and non-legal subsidies (11) and allows countries to impose WTO-consistent countervailing duties (12) on subsidized imports to offset the effects of illegal or actionable subsidies. (13) The SCM Agreement generally aims to limit the use of the most trade-distorting subsidies, such as export subsidies.

      The SCM originally recognized and distinguished between prohibited and actionable subsidies. Prior to 2000, Article 8 of the SCM Agreement created a safe harbor provision for certain "green light" subsidies. When this article expired in 2000 due to WTO gridlock, the two remaining types of subsidies, prohibited or "red light" and actionable or "yellow light," remained.

      1. Prohibited or Red Light Subsidies

        Prohibited--or red light--subsidies are the most trade distorting subsidies. (14) They consist of export subsidies and import substitution subsidies. (15) Export subsidies are those given by a government to domestic producers on the condition that the subsidized product is exported. They are per se illegal due to their direct and serious trade-distorting effects. (16) Import substitution subsidies consist of government payments to private domestic producers that buy domestic goods rather than imported goods for use in domestic manufacturing. They are essentially payments to domestic producers for using domestic, rather than imported, content. They distort trade by lowering the cost of domestic content and suppress competition from foreign imports by making it artificially cheaper to buy domestic content. To give a simple example of both types of prohibited subsidies, imagine that the United States gives a $0.50/bushel subsidy for all corn that is exported as well as a separate $0.50/bushel subsidy to any U.S. ethanol...

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