Rescuing the Doha Round

There is a final window of opportunity to rescue the Doha Development Round of trade talks. This paper suggests how this can be achieved.

The EU has repeatedly asserted, with support from WTO head Pascal Lamy, that a Doha Round agreement could be achieved if the US would simply reduce its $20-22 billion in agricultural subsidies by $5 billion or so as a signal of seriousness to the EU and to the developing countries. If the EU is itself serious about this, then we should have a deal, because the $5 billion (and more, if necessary) is already there and needs only to be officially acknowledged.

Where does the $5 billion come from? The answer is the biofuels revolution in the United States, which the chief economist of the US Department of Agriculture has recently described as the “most profound” change in American agriculture in 200 years. The result is a dramatic increase in demand for - and thus the price of - corn so that corn subsidies, which are based on price and not output, have been virtually eliminated. These subsidies amount to almost half of the US agricultural subsidy total—hence the availability of the $5 billion or more in cuts.

How did this come about? The revolution results from a combination of environmental requirements, high oil prices, tax incentives, and an effort by the Administration to diversify away from the American “oil addiction” to alternative energy. Since most of this history is unknown in Europe, it merits a little explanation.

The environmental requirements stem primarily from the 1990 Clean Air Act Amendments which required cleaner gasoline, in the form of a reduction in highly toxic components, for which today the only available clean substitute is ethanol and related products. In part because of the much cleaner nature of biofuels, ethanol enjoys a 50 cent tax incentive for marketers who blend ethanol into gasoline (which in the US is permitted up to 10%, as compared with a 5% limit for the same cars in Europe). More recently and for many of the same reasons, the US Congress with White House support adopted a Renewable Fuel Standard (RFS), which mandates that all US gasoline contain at least 7.5% ethanol by 2012 (with interim benchmarks), which equals 5% of total US gasoline usage.

President Bush’s call in January 2006 to eliminate U S dependency on oil, combined with skyrocketing oil prices, brought intense focus on the issue and triggered an acceleration of investment in the existing ethanol infrastructure in the Midwest. The investment, coming from Silicon Valley, Wall Street and the Midwest main street, has been so big that actual ethanol production is way ahead of the Congressional schedule. EIA and Environmental Protection Agency estimates now are that ethanol production will equal or exceed l0 billion gallons before 2012. As a result, the price of corn has increased by more than 50%, obviating any need for subsidies.

Some experts have already anticipated the Doha implications by wondering whether the subsidy cuts will last if OPEC manages to reduce the price of oil below $50, which is generally considered the break-even oil price for ethanol to be cheaper than gasoline. This is a valid concern, but one that is very likely to be addressed this year, when Congress is expected to provide a number of ethanol incentives, not the least of which is a doubling of the RFS to 15 billion gallons, or 10% percent of the US gasoline market. This would lock in the subsidy cut for a decade or more, if not forever, as worldwide demand for corn will continue to grow.

There are, of course, continuing environmental pressures which will support the demand for clean-burning ethanol. There is, for example, a pending proceeding at the Environmental Protection Agency to reduce further the toxic aromatic compounds which still account for about 25% percent of all gasoline and for which ethanol is still the only clean substitute. And there are, of course, climate change considerations, which in the US have resulted in mileage regulations which are an incentive to sell flexible fuel vehicles (FFVs) that can run on any combination of gasoline or ethanol. There are now 5 million FFVs on the road in the US with a million or so more coming out every year.

It may be that official US recognition and extension of these subsidy cuts will not trigger a sufficient EU response on increased market access for sensitive products like beef, pork and poultry to make a Doha deal achievable at the end of the day. There are also issues of market access to developing countries, which is linked by the rules to the size of the EU’s market opening, and India has special agricultural sensitivities of its own.

But the biofuels trend that is unmistakable in the US (and Brazil, now the second largest ethanol producer behind the US) will surely migrate to Europe and the third world, removing agriculture as the main sticking point for multilateral trade talks. Indeed, the biofuels revolution is such that the big problem for NGOs now is not over-capacity which dumps unwanted surplus food on third world farmers but undercapacity to meet world food needs until the so-called second generation cellulosic technology is commercialised to allow conversion of non-food products like wood and switchgrass to biofuels.

There does not appear to have been any public mention of this solution: it is to be wondered why not. The relevant facts are indisputable.