Biofuels boom may make WTO accord possible, cut US farming subsidies

In what was undoubtedly one of the most important stories last year, the World Trade Organisation's so-called Doha Round of trade negotiations collapsed over disagreements between the US and the EU over agricultural subsidies (earlier post). The talks, already on the table since 2001, were originally aimed at boosting free trade worldwide in such a way that developing countries might benefit from it. Proponents of free trade have called the collapse dramatic and a major set-back for the world economy, but countries in the South have been less negative since they viewed the direction in which the negotiations were going as working against their interests.

Several people, including Ted Turner (earlier post) and Nobel-prize winning economist Joseph Stiglitz (earlier post), have noted that the biofuel revolution may hold the key to revive the talks. In a remarkable announcement, the US ambassador to the EU now seems to agree, after initial skepticism (and also because Canada has meanwhile filed a complaint with the WTO against 'illegal' US corn subsidies). Continuing demand for corn for the production of ethanol may make it easier for the US to cut the enormous amount of subsidies US farmers receive. But obviously, this would seriously impact the competitiveness of American corn-based ethanol.

Still, "I am very confident that we are going to get a deal," C. Boyden Gray told reporters in Washington yesterday. "This whole alternative energy revolution is taking hold. This will take the whole issue of agriculture off the table as a sticking point" between the US and European Union, Gray said. Gray was in Washington for the summit between US President George W. Bush yesterday and European Commission President Jose Manuel Barroso.

Both leaders reaffirmed their support for the negotiations in the WTO. Barroso told reporters yesterday that he saw „unequivocal signals, very clear signals from President Bush, that he wants a deal for Doha.” Bush's trade negotiating authority expires at the end of June:
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Gray said negotiators will try to make progress early this year, and the administration will ask Congress to extend so-called Trade Promotion Authority through the end of 2007. Negotiators „will be close enough to probably get an extension,” Gray said. Congress, „probably would not extend trade promotion authority” unless the trade talks looked promising, he said.

Corn prices reached a 10-year high in November, as the biggest US crop was in demand as a source of ethanol. Since then prices have fallen 8.8 percent. They are still higher than they were a decade ago. Higher prices mean lower US subsidies, because government payments are dependent on the gap between a minimum mandated price and the market price for a crop. As a recent report by the Global Subsidies Initiative revealed, US ethanol based on corn receives an enormous amount of subsidies under hundreds of schemes (earlier post).

Resistance from US farm lobby
Still, US farm groups say they are reluctant to give up the safety of the current subsidy regime for the promise of biofuels. "What we're looking for is a safety net that we hopefully won't have to use," said Jon Doggett, vice president of the National Corn Growers Association in Washington. Support for a WTO agreement "is going to be related to trade, not biofuels." At its annual conference this week, the American Farm Bureau Federation called for a continuation of the current subsidy programs. "We will be dealing with a lower budget baseline to start with for agriculture due to higher crop prices because of renewable energy production," Farm Bureau President Bob Stallman said January 7.

Stallman and Gray said a key for getting an agreement will be new pledges by Europe to reduce its tariffs on agriculture goods. The EU said this week that it's willing to improve its offer by adding „substantially” to the 39% average cut in agriculture tariffs it submitted a year ago. In return, the EU wants the US to make „real cuts” to farm subsidies to levels near to those demanded by developing countries.

This would mean a cut of about €6.1 billion ($8 billion) from current ceilings of €17.6 billion ($23 billion), according to the European Commission, the 27-nation group's executive arm. A WTO analysis last May concluded that the current US proposal would allow the US to actually increase its subsidies to €17.4 billion ($22.7 billion) a year from 2005's estimated €15 billion ($19.6 billion). The US has said it is willing to go further in return for deeper tariff cuts by other WTO members.