Producer Subsidies and Decoupling in the European Union and the United States

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Case Study #10-2 of the Program: ''Food Policy For Developing Countries: The Role Of Government In The Global Food System''
Since 1986 agriculture has been a major part of multilateral trade negotiations under the General Agreement on Tariffs and Trade (GATT), and since 1995 under the World Trade Organization (WTO). The main objective of these negotiations is to promote free trade through disciplinary rules and reduction of trade-distorting policies. The Uruguay Round Agreement on Agriculture (URAA) from 1993 established the current disciplinary framework for agricultural liberalization of domestic support, market access, and export competition. Domestic agricultural support is considered trade distorting if it is coupled to production. The URAA introduced a reduction commitment of 20 percent on some types of coupled support. The reduction commitment was calculated on the basis of average support given in 1986–1988. Unfortunately, these years were peak years, when world market prices were low and therefore agricultural subsidies were high. Given that not all tradedistorting support was included in the commitment and that support in the reference period was already high, the domestic support reductions following the URAA have been disappointing and done little to open markets to more agricultural trade. The current WTO negotiations under the so-called Doha Development Agenda have not yet succeeded in pushing this agenda much further because major players like the European Union (EU) and the United States hesitate to make concessions. But such concessions are important for regaining momentum in the negotiations. Developing countries represented by Brazil, China, India, and Malaysia, among others, hold the entire negotiations in a deadlock while they wait for the EU and the United States to present proposals for serious liberalization of agriculture. A point often ignored in the international trade debate is that agricultural policy is deeply integrated into the domestic policy-making process. Agricultural policy is founded on a long series of historical events and conditional economic and political structures and institutions, which vary across countries. Despite external reform pressure from GATT/WTO and bilateral trade partners and internal reform pressure from increasing budget costs, high levels of overall agricultural support persist in the EU and the United States. Even though reforms have occurred and support has shifted toward decoupled, and hence non-tradedistorting, approaches, from a multilateral perspective these reforms are not enough. From a domestic perspective the results are more unclear. Overall, free trade improves the welfare of society, but some agents, like farmers and agribusinesses, also bear costs. These costs are large per agent compared with the average agent's gain. Together, these issues spill over into the policy-making process. At the end of the day, these costs create serious lobby pressure from farm interest groups, which make it difficult for the EU and the United States to promise serious liberalization of their agricultural protectionism. Taking into account the relatively slow agricultural policy reform process in the EU and the United States, your assignment is to consider and reformulate the WTO legislation on domestic agricultural support. The proposal must be written in terms of both the overall WTO objective of trade liberalization and the domestic policy-making process.
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16 pp.
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Cornell University Division of Nutritional Sciences
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Maria Skovager Jensen, Henrik Zobbe (2007). Case Study #10-2, ''Producer Subsidies and Decoupling in the European Union and the United States''. In: Per Pinstrup-Andersen and Fuzhi Cheng (editors), ''Food Policy for Developing Countries: Case Studies.''16 pp.
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