By Mollie Woods and Lorie Srivastava

Domestic support for agriculture is being carefully scrutinized under continuing reform of the World Trade Organization Agreement on Agriculture. The authors begin by detailing the differences between “amber” and “green” box policies. It is noted currently, subsidies that distort production and trade (with some exceptions) fall into the amber box. As reduction commitments are being increasingly sought for direct payments to agricultural producers, it is expected that some WTO countries will shift producer support to subsidy regimes that fall under the green box classification, thereby ensuring compliance with WTO requirements while still providing subsidies to domestic producers.

As direct support payments are phased out to meet WTO obligations, member countries may alter agriculture support programs so that they qualify as green box subsidies. If major agricultural producers like Canada, EU, and US, do shift agricultural subsidies into green box programs, will world markets be affected? Will consumer and producer welfare change? The authors work addresses these questions and is important for a number of reasons. First, this paper will improve understanding of the effect of green box programs on international commodity markets. Second, despite the difficult financial times for farmers around the world and the slowing global economy, the demand for improved environmental quality has not diminished. The authors suggest policy makers need to provide incentives to farmers so that they can meet societal environmental quality objectives, while still adhering to both domestic support and international trade agreement obligations in cost-effective ways.

This preliminary investigation of the wheat market modeled in this paper shows the effects for converting these subsidies into green box compliant programs. It is found that though these programs may not be intended to be production distorting, they may still increase supply, at least in the short run due to asset specificity and by making inputs more affordable. The authors make note that these finding provide caution to policy makers who expect green box compliant payments to reduce the supply of wheat. The authors findings from their hypothesis in actuality show the opposite occurring, an increase in production, thereby negating initial environmental policy objectives.
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