As indicated above, concern that has been expressed about the proposed Business Risk Management program is that it may invite a trade dispute. This concern has at least three elements:
• The distinction between “green” and “amber” payments and Canada’s limits on aggregate support. AAFC proposes to change the definition of what is green and what is amber in reporting payments to farmers under the new program.
• A possible US countervailing duty action.
• Possible implications for supply managed commodities because of the definition of green and amber. (This issue was discussed in section 7.0).
The first of these issues stems, in part, from the definitions of what is green and what is amber under the proposed programs, a distinction defined under the 1995 WTO agreement. Green instruments are those that governments could continue to use without having to reduce their expenditure, and without concern about countervailing duties being imposed by importers of the product whose producers are the beneficiaries in the domestic market. Amber instruments are those for which government spending was supposed to be reduced after the 1995 agreement, and which remained countervailable8. Governments are required to report to the WTO each year the amount of expenditure on amber instruments. They each have a limit on the amount of money that can be spent on amber instruments, so the reporting mechanism is the way that the WTO monitors compliance with the agreement.
A government program that directly compensates farmers for “losses” is defined as green under the 1995 WTO agreement if two requirements are met:
• Compensation must be generally available for losses to the entire farm, not to an individual commodity.
• Compensation must be for losses of 30 percent or more of “income” during a base period. Based on these requirements, Canada historically classified payments under NISA as amber and those under the Disaster program as green. This is because, by definition, NISA withdrawals from Fund 2 could be made in a year when a farmer’s net income was lower than in a reference period by less than 30%. Disaster payments were regarded as green because they were made
when income in a given year declined by more than 30% from a reference period9. An important distinction is that, under the existing programs, payments under the disaster portion restored producers’ incomes to 70% of the reference margins.
The proposed program essentially integrates the disaster and NISA concepts into a single new structure. Therefore, the definitions of amber and green are not so clear because a loss of more than 30% now triggers a payment that can restore a farmer to 100% of a reference. For example, a loss of 40% of the reference margin will trigger a payment that would restore a farmer’s
income to 100% of the reference, so long as the farmer’s deposit is sufficient. So the issue arises with the proposed program as to whether, when a payment is triggered by a loss greater than 30% of the reference, the payment is green or amber.
AAFC has chosen, on the basis of a legal opinion, to argue that the definition should be based on what triggers a payment. Therefore, a payment triggered by a loss of less than 30% remains amber. But a payment triggered by a loss of more than 30% is regarded as green, whether the payment is in the portion of the program that is shared 80/20, or the portions that are shared 70/30 or 50/50.
This means that a higher portion of the proposed program will be regarded as green if Canada’s definition is accepted. The upside of this is that Canada will be better able to ensure that its Aggregate Measure of Support limit is met. We estimated the difference in the simulation of the proposed program for Ontario, as reported in section 3.0, compared to payments from the
existing program under NISA and MRI. Green payments with the current programs were for about $123 mil from 1998 – 2001. Under the proposed program, they are estimated at $455 mil for the same period, based on the NISA database.
The issues are whether this is the correct definition of green and amber and, if not, what might be the consequences. The first question is not answerable according to information from Canadian trade officials. To date, each country has interpreted the WTO rules and submitted their data accordingly. To date, no country has appealed another’s definition. Moreover, the European Union recently changed the nature of its farm programs to decouple payments from production. This will materially redistribute its payments to farmers from amber to green. This decision is regarded as a major breakthrough that will lead to progress in the current round of negotiations. The proposed Canadian program is less questionable than the EU’s. While there are no
guarantees, we do not perceive that there is a substantial risk.
Another way to look at this question is to estimate the impact if the definition is questioned. If so, then we assume that Canada would need to amend its definition to include only the portion of payments triggered by losses greater than 30% of the reference margin that bring farmers back to 70% of the reference. It was possible to estimate this in the simulations for the proposed
program. The simulation shows that, with this alternative definition, the estimated green payments for Ontario would have been $224 million from 1998 – 2001.
9 Of course, income was measured on a cash basis for NISA, and on a modified accrual basis for the disaster component, so less than or greater than 30% was of two different levels of income.