Establishing the UK’s non-exempt limit on agricultural support after Brexit

One of the issues the UK must address in establishing its WTO schedule of commitments post-Brexit is the limit it will have on certain types of domestic support it can provide to its farmers. This limit will, in turn, have implications for the way in which the UK and its devolved administrations can design their post-Brexit agricultural policies, assuming that they might wish to continue to provide some support to their farmers.

Domestic support in the WTO is measured as an Aggregate Measurement of Support, or AMS. Countries which provided non-exempt domestic support in the base period (1986-88) for commitments under the Uruguay Round Agreement on Agriculture (AoA) entered a Total AMS commitment in Part IV of their WTO schedules of commitments (their Bound Total AMS or BTAMS). This sets the maximum limit on their allowed non-exempt support (often referred to as the Amber Box or, inaccurately, as trade-distorting support).

Where no Total AMS commitment exists in Part IV of a Member’s Schedule, a WTO Member is not allowed to provide support to agricultural producers in excess of the relevant de minimis levels (Art 7, AoA). Thus, a key issue in determining the degree of flexibility that the UK may have in future in determining its agricultural policy is whether it will have an Amber Box ceiling or whether it will be limited to de minimis support.

Establishing the UK ceiling on non-exempt domestic support

In previous posts on this blog, I have assumed that the UK would establish a BTAMS ceiling by separating out an entitlement from the EU’s BTAMS amount. Although I have previously argued that this would be unlikely to prove contentious, it will not be a straightforward matter.

First, there would have to be an agreement between the UK and the EU on how much of the EU’s BTAMS might be attributable to the UK and thus ‘transferred’ as the new UK BTAMS. This will be problematic not only because it is not evident what would be the appropriate allocation key to use, but also because, as Lars Brink has explained in this post, the appropriate amount to be allocated (i.e. the appropriate EU BTAMS to be divided) is also not clear.

Farmers’ groups in the EU might argue that they do not want to give up any of the EU’s BTAMS, although their argument is weakened by the fact that, currently, the EU notifies an amount of non-exempt domestic support well below its BTAMS limit. It is also weakened by the fact that, when it comes to the EU’s Tariff Rate Quota WTO commitments, farm groups will be actively seeking to transfer a significant proportion of these commitments to the UK.

We are also assuming here that the UK will actively want to maximise its limit on non-exempt support. However, the present Conservative government might decide that this is an ideal opportunity to bind its own hands and those of its successors by foregoing any entitlement to a BTAMS, thus ensuring that the maximum non-exempt domestic support it can provide is limited to de minimis amounts. To date, it has not given any indication of its intentions. In this post, I explore the pros and cons of different options.

Splitting the EU’s BTAMS ceiling will presumably be one of the many items on the Article 50 negotiations agenda, but for the reasons mentioned I assume this will not be among the more contentious items. It could also become part of the wider set of trade-offs in these negotiations; one could envisage, for example, the UK being prepare to ‘give up’ its claim to a share of the EU BTAMS in return for concessions in some other area of the negotiations.

The response of other WTO Members is more difficult to gauge. Both the EU and the UK will need to get the approval of all other WTO Members to certify their new schedules. In the EU’s case, splitting its BTAMS would reduce its overall ceiling on allowed non-exempt support. It is hard to see why any other Member should want to object to that. Similarly, if the UK decides to forego any entitlement to a BTAMS, this would also be welcomed by other WTO Members.

If, however, the UK seeks to include a specific BTAMS figure in its new WTO schedule, this might be challenged by other Members either on the basis of the specific calculations underlying the figure or because some Members dispute the UK’s entitlement to a BTAMS in the first place.

However, there is nothing to prevent the UK from operating on the basis that it has an entitlement to the specific BTAMS figure that it agrees with the EU. The EU has operated for years on the assumption that it has a particular BTAMS although this figure has never been certified by the WTO membership. A situation could arise where another WTO Member was sufficiently upset to bring a complaint that future UK agricultural policies had produced an actual level of non-exempt support (measured either as the UK’s Current Total AMS (CTAMS) or sum of de minimis amounts at that time) that exceeded what that Member believed to be legitimate. If that Member succeeded in having its complaint upheld in the WTO dispute settlement process, then the UK would be asked to bring its agricultural policies into compliance, or risk the possibility of tariff retaliation by the aggrieved Member.

In the remainder of this post, I want to explore the implications for future UK agricultural policy of the UK being limited to de minimis domestic support after Brexit. As noted, this could arise because of a deliberate policy choice by the UK government, or because of a successful dispute brought by another WTO Member challenging the UK’s right to insert a BTAMS in its schedule.

Policies exempt from reduction commitments

As noted, current WTO disciplines on domestic policy use the concept of the AMS as a basis for quantifying, and negotiating reductions in, support. The main components of AMS are: (i) market price support as measured by the gap between a fixed world reference price and a domestic administered price (which may not be the same as the domestic market price) at a particular point in time; and (ii) budgetary expenditures.

However, many types of domestic support to agriculture are excluded from the AMS and thus exempted from any limits because they are deemed to have no more than ‘minimally’ distorting effects on trade or production. These include Green Box and Blue Box policies. In addition, small amounts of AMS support that fall below de minimis thresholds are excluded when summing AMSs into a country’s CTAMS.

To qualify for the Green Box, support must involve public finance rather than transfers from consumers, and must not involve price support to producers. Currently covered as Green Box policies are: programmes that provide services or benefits to agriculture, but which do not involve direct payments to producers or processors, such as research programmes; pest and disease-control measures; public stockholding for food security purposes and domestic food aid policies; and direct payments to producers where they are not related to the type, volume or prices of production, or the employment of factors of production undertaken by the producer. The latter include ‘decoupled’ income support; income insurance and income safety-net programmes, agri-environment schemes, regional assistance measures, and structural adjustment aids provided through producer retirement and resource retirement schemes.

The Blue Box provision currently exempts direct payments made in conjunction with production limiting programmes. This covers direct payments if:
(i) such payments are based on fixed area and yields; or
(ii) such payments are made on 85 per cent or less of the base level of production; or
(iii) livestock payments are made on a fixed number of head.

Where the AMS for a particular product, or for non-product specific support, constitutes less than 5 percent of the total value of production of a specific commodity (product-specific support) or 5 percent of the value of total production (non-product specific support) respectively, the de minimis clause exempts that support from inclusion when calculating that country’s Current Total AMS (CTAMS). A country’s CTAMS is the sum of its actual product-specific AMSs plus its actual non-product specific AMS in any year and must be less than its BTAMS or scheduled Amber Box ceiling.

Implications of WTO domestic support discipline

WTO rules thus give a country wide scope to provide assistance to its farmers, but with limits on those forms of support which are most trade-distorting. How might these rules affect the future design of UK agricultural policy, assuming that the UK did not have a BTAMS and its non-exempt support was limited to de minimis amounts?

In answering this question, we must recognise that the UK will have four different agricultural policies administered by each of its devolved governments (with policies in England set by the UK Parliament). While any market price support policies would have to be implemented at a UK level, each devolved region will be free to design its own budgetary support for its farmers, subject of course to the constraint of being able to finance those policies.

Devolved administrations could continue to provide area-based direct payments for income support along the lines of the EU’s Basic Payment Scheme. Note that, although this scheme does not require production, payments are still linked to a factor of production and thus, potentially, vulnerable to a challenge from another aggrieved WTO Member. No country has deemed it worthwhile to test the Green Box consistency of the EU scheme to date because of the large gap between the EU’s CTAMS and its BTAMS. However, the UK on its own might be more vulnerable to a challenge if either the future gap between its CTAMS and BTAMS, assuming it had a BTAMS, or the future gap between its non-product specific support and its 5% de minimis non-product specific support ceiling if it does not have a BTAMS, were to be smaller.

Devolved administrations will also be able to provide payments without limit to farmers in less-favoured areas, payments under agri-environment schemes, and payments under risk management schemes, provided they meet the specific conditions for exemption in the AoA.

The trickier questions revolve around non-exempt support. Here, I see three possible policy instruments that the UK might wish to make use of in future that would be subject to limits. These are:

Administered support prices. I would expect the UK would wish to maintain some form of safety-net market intervention for some of its principal agricultural products, including cereals, beef and dairy products, as in the EU. Where there is an administered support price for a product, the level of support provided must be included as market price support in the calculation of a product’s AMS. The level of market price support is calculated as the difference between the administered price and a fixed external reference price multiplied by the quantity eligible for support. If allowed product support is limited to de minimis levels, this might constrain the level of administered support prices the UK could set. However, other countries reduce the amount of market price support they notify to the WTO by explicitly limiting the quantities eligible for intervention, so the UK might not find this a binding discipline in practice.

Deficiency payments. Although there seems to be no appetite among DEFRA Ministers to return to the use of deficiency payments which were the UK’s preferred method of farm support prior to EU membership, it cannot be ruled out. Deficiency payments (under which farmers are guaranteed a specific price and any gap (or deficiency) with the market price is made up as a product-specific coupled payment, have attractions if the UK intends to pursue a cheap food policy in future by eliminating most applied tariff protection or by entering into ambitious free trade agreements with competitive agricultural exporters. They might also be designed as non-product specific support which is how the United States has notified its Price Loss Coverage payments (a type of counter-cyclical deficiency payment scheme) in its 2014 WTO notification. For payments which are dependent on a price gap, notified support can be calculated either using the formula for market price support or by using actual budget expenditure.

Coupled payments. Coupled payments do not have to be linked to current levels of market prices. The EU allows extensive use of voluntary coupled support although the UK makes limited use of this possibility. While on average across the EU 10.0% of the overall direct payments envelope was used for coupled support in 2015 and 2016, the figure for the UK was only 1.7%. Nonetheless, again in the context where the UK may emphasise a cheap food policy after Brexit, the importance of coupled payments may rise particularly in the devolved regions other than England.

The constraints on providing these forms of non-exempt support to UK farmers post-Brexit if the UK were limited to its de minimis ceilings is shown in the following table. The table assumes that the UK’s commitments would be based on the three-year average 2013-2015. The table calculates the product specific de minimis ceilings as 5% of the identified commodity outputs in the UK Economic Accounts for Agriculture produced by DEFRA, and the non-product specific support as 5% of the value of agricultural output. In total, the UK could, if it wished, provide up to £1,155 million in product-specific support, and a further £1,155 million in non-product specific support, even in the absence of a specific BTAMS commitment.

For comparison, the total subsidies paid to UK farmers averaged over 2013-2015 amounted to £3,086 million (net of taxes paid on products). I could not easily find a breakdown of this expenditure by scheme, but we can safely assume that the bulk of this expenditure was on exempted direct payments.

A comparison of the level of current subsidies (most of which are exempt from WTO discipline) and the potential for de minimis non-exempt subsidies as calculated in the table suggests that, overall, the UK would not find living with only de minimis subsidy limits too constraining. However, I have argued above that, if the UK opts to pursue a cheap food policy after Brexit, it may wish to direct increased non-exempt support to some commodities which would be particularly vulnerable to the consequences of this policy.

This could give rise to some binding constraints particularly for product-specific support – I am thinking here particularly of beef and sheepmeat where direct payments currently make up a high proportion of farm income and where the external protection provided by the EU’s Common External Tariff is high, and thus where adjustment to the new UK agricultural policy post-Brexit may be particularly demanding.

This highlights the importance of, on the one hand, the UK obtaining a share of the EU’s BTAMS ceiling but, on the other hand, it underlines the fact that the size of the BTAMS amount need not be very high. This is because, unlike de minimis product-specific support, WTO rules do not require a country to spread its BTAMS amount across all products. Non-exempt support greater than the de minimis thresholds could be concentrated on a handful of particularly vulnerable commodities. Provided the UK does not intend to provide generalised support for its farm sector after Brexit, this concentrated support could be managed with a relatively small BTAMS ceiling.

Thus, I conclude that the UK is unlikely to want to forego an entitlement to BTAMS in its Article 50 negotiations with the EU. On the other hand, it may be willing to accept a relatively low BTAMS figure, assuming that it will use any BTAMS entitlement to provide support to a relatively small share of its total agricultural output.

This post was written by Alan Matthews

30 January 2017: First paragraph has been updated to recognise that only certain types of domestic support are subject to limits. The relationship of de minimis support to the AMS has also been clarified.

Photo credit: Sugar Beet waiting collection near to Middle Harling, Norfolk. © Copyright Keith Evans and licensed for reuse under a Creative Commons Licence.

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4 Responses to “Establishing the UK’s non-exempt limit on agricultural support after Brexit”

  1. Lars Brink
    January 30, 2017 at 03:45 #

    Thanks, Alan, for a post full of insights, as usual. A particular helpful feature, among many, in this post is this: it distinguishes in most places between domestic support that is exempted from limit and domestic support that is not exempted. The non-exempt support is accounted for in the AMSs. This distinction is so rarely recognized when discussing WTO “domestic support”. Not recognizing it focuses attention on support limits and shifts it away from the possibility of supporting producers using green box and blue box compliant support policies without any limit at all.

  2. Dirk De Schepper
    January 30, 2017 at 06:35 #

    I thought that the split would have to happen on the basis of CTAMS, not BTAMS, as in general it seems that a new schedule cannot contain bound items in excess of current ones. That goes with the principle of trying to reduce protectionist measures.

    If that were the case, I gather from this excellent article that it would not be a major concern?

  3. Deborah Mallender
    January 30, 2017 at 09:49 #

    Alan please stick to your E.U. brief as you are from an E.U. country and do not stray elsewhere why would you for what reason. You are an Irish National perhaps you could talk a bit about the live beef animal shipped into Shannon from Brazil that go on to do the round of markets in Ireland, labelled as Irish beef and exported to here undermining genuine home produce. When will you talk about that and suggest a solution.

  4. Alan Matthews →
    January 30, 2017 at 10:09 #

    @Dirk No, the WTO commitments and negotiations are only in terms of the bound (maximium) rates, whether these are tariffs or non-exempt domestic support. Countries are free to apply lower tariffs or to have a lower CTAMS but these are never the subject of negotiations.