Food Security and Poverty, International Relations/Trade,

Cardwell, Ryan T.

Fridfinnson, Brooke

Rude, James

English

Research Papers in Economics

 
  1
 
 
 
 
 
FOOD AID AS SURPLUS DISPOSAL?  
THE WTO, EXPORT COMPETITION 
DISCIPLINES AND THE DISPOSITION OF 
FOOD AID 
 
 
 
TRADE POLICY BRIEF 2007-1 
 
May 2007 
 
Ryan Cardwell, Brooke Fridfinnson and James Rude  
Department of Agribusiness and Agricultural Economics 
University of Manitoba 
 
 
 
http://www.catrade.org 
 
 
 
Trade Policy Briefs are short summaries of studies funded by the CATPRN.  As such, the briefs omit 
many of the details and most of the references contained in the longer reports.  This brief is based on 
CATPRN Commissioned Paper CP 2007-3.   The CATPRN is funded by Agriculture and Agri-Food 
Canada but the views expressed in this paper are those of the authors and should not be attributed to the 
funding agencies.   
  
  2
1.0 BACKGROUND 
 
Agricultural exporters have long been dissatisfied with international efforts to curtail the 
use of food aid as a tool of surplus disposal.  The Doha Development Agenda (DDA) 
round of WTO negotiations includes discussions on food aid in an attempt to bring 
binding rules on aid deliveries under the umbrella of the WTO’s dispute settlement 
mechanism.  This, combined with the renegotiation of the Food Aid Convention (FAC), 
has generated momentum towards new international disciplines and guidelines for food 
aid shipments.  
 
On one level, there is an inherent conflict between guidelines that ensure the viability of 
food aid and trade rules that discipline shipments.  Development advocates seek 
guidelines that ensure the delivery of adequate aid volumes, while policy makers from 
competing exporting countries seek to discipline the use of food aid as means of 
circumventing export competition disciplines. 
 
Food aid disciplines that emerge from a trade agreement may not tell the whole story of 
how food aid shipments may be affected, however.  Rules that govern export subsidies 
and credits may play important roles in the size and disposition of food aid shipments.  
Export subsidy and credit arrangements have been the primary outlets for agricultural 
surpluses for some time, and WTO members are poised to tighten export competition 
disciplines in the DDA.  This could apply increased pressure on food aid as a means of 
surplus disposal.   
 
2.0  US DISPOSAL OF AGRICULTURAL SURPLUSES 
 
The Commodity Credit Corporation (CCC) administers the USDA’s loans and purchase 
programmes.  The primary avenue through which the CCC has traditionally acquired 
commodity stocks is nonrecourse support loans to primary producers.  In cases where a 
commodity’s market price is below the current US loan rate, producers forfeit the 
collateral, thus adding to the CCC’s stocks.
1  Once the CCC has acquired stocks, it is 
faced with either storing or disposing of its surplus.  The disposal takes two primary 
forms, export programmes and food aid.
2 
 
The CCC’s export programmes are comprised of export credits and export subsidies.  
Export credit programmes include Export Credit Guarantees (GSM 102 and 103
3), the 
Supplier Credit Guarantee Program and the Facility Guarantee Program.  Export 
subsidy programmes include the Export Enhancement Program
4 (EEP) and the Dairy 
Export Incentive Program (DEIP) which pay cash bonuses directly to exporters.   
 
US food aid policy is driven largely by domestic policy motivations.  US aid shipments 
have been shown to be positively related to grain production in the recipient country, 
                                                 
1 The USDA’s loan deficiency payment programme has tempered the CCC’s acquisition of stocks. 
2 The CCC also operates domestic assistance programmes that provide commodities to the Bureau of 
Indian Affairs, the armed forces, correctional facilities and a range of charities.   
3 GSM 103 is to be discontinued as a result of the Brazilian cotton case. 
4 The EEP, though still on the books, has not been used for more than ten years.  
  3
and are closely related to US domestic stocks (figure 1).  There is ample anecdotal 
evidence that the US uses food aid as a tool of surplus disposal.   
 
3.0  INTERNATIONAL GOVERNANCE OF FOOD AID 
 
Disquiet over the use of food aid as a tool of surplus disposal predates its formal 
inclusion in trade negotiations.  The Food and Agricultural Organisation’s (FAO) 
Consultative Subcommittee on Surplus Disposal (CSSD) is charged with monitoring 
member countries’ food aid practices.  Two key principles govern the CSSD; Usual 
Marketing Requirements (an attempt to ensure that food aid does not displace 
commercial imports) and notification of food aid shipments.  The second principle has 
gone largely unfulfilled.  Two important points are worth making about the CSSD.  First, 
the CSSD does not have a development agenda; it serves as an oversight body for the 
disposition of commodity surpluses as food aid.  Second, its principles are not binding 
and are unenforceable. 
 
The Kennedy Round of trade negotiations in 1967 included the International Wheat 
Agreement, and generated the FAC.  The FAC was a non-enforceable agreement 
between signatory countries for minimum annual food aid donations, and has been 
renewed several times over the past 40 years.  The current convention has been 
extended to July 2007 in the hope that the DDA negotiations will be completed before a 
new convention has to be convened.   
 
The Uruguay Round Agreement on Agriculture (URAA) contains food aid guidelines in 
an effort to prevent the circumvention of export subsidy commitments.  The first of these 
guidelines calls for food aid to be untied; that is, aid should not be dependent on 
procurement from a specific country (usually the donor) or group of countries.  This 
guideline has been widely flouted by donor countries.  The second guideline defers to 
the FAO’s “Principles of Surplus Disposal and Consultative Obligations” as outlined by 
the CSSD.  The third guideline calls for food aid to be provided in grant form - most 
donors comply with this guideline, with the notable exception of the US which provides 
up to 20 percent of its food aid as concessional sales (Young).  
 
The URAA also contains disciplines on export subsidies.  Member countries agreed to 
bound levels of export subsidies and instituted schedules of reduction over a six-year 
implementation period.  The URAA does not contain disciplines on export credits.  As 
such, there still exists limited use of export subsidies, and relatively undisciplined use of 
export credits, food aid and storage as tools of surplus disposal under the current 
agreement. 
 
DDA draft modalities
5 and chair’s reference papers
6 contain provisions that outline the 
direction that food aid disciplines are likely to take.  The most persistent proposal is the 
creation of a “safe box” for emergency food aid.  Safe box aid would not be subject to 
WTO disciplines, akin to a “green box” for domestic support programmes.  The 
stumbling block for this proposal is determining under what circumstances food aid 
                                                 
5 WTO. 2006. Draft Possible Modalities on Agriculture. TN/AG/W/3. 22 July.  
6 WTO. 2007. Communication from the Chairman of the Committee on Agriculture. 30 April.  
  4
would qualify for the safe box.  It appears as though an appeal from either a United 
Nations agency or the International Committee of the Red Cross would be the “bedrock 
standards” for conformity with the safe box. 
 
The draft modalities also contain reference to non-emergency (programme and project) 
food aid.  Proposals include: allowing programme food aid only when based on an 
assessment of need by a third-party, improved targeting of recipients, and phasing out 
programme aid by 2013.   
 
Despite the growing emphasis on food aid in trade negotiations, WTO rules on export 
competition might have the most significant effects on food aid shipments.  Stricter trade 
rules that reduce allowable levels of export credits and eliminate export subsidies might 
increase the pressure for disposal of domestic surpluses through other channels. 
 
The most recent DDA draft modalities indicate that export subsidies are likely to be 
eliminated.  Export credits are also likely to be disciplined in an effort to bring their use 
more in line with commercial transactions.  The availability of export subsidies and 
credits as outlets for domestic commodity surpluses will decrease with a new WTO 
agreement and pressure may mount on alternative outlets (i.e. food aid).  However, the 
DDA is likely to include constraints on the domestic support programmes that create 
surpluses from which a large share of food aid is drawn.  Whether these cuts will be 
large enough to reduce domestic surpluses by an amount commensurate with required 
reductions in export competition remains to be seen. 
 
4.0  THE RELATIONSHIP BETWEEN FOOD AID AND EXPORT COMPETITION 
 
Our Commissioned Paper develops a conceptual and empirical model that estimates 
how changes in one outlet for surplus wheat (export subsidies and credits) have 
affected changes in other outlets (food aid or carry-over stocks) in the US.
7  T h e  
model’s results provide insight into how a trade agreement that affects export subsidies 
and credit guarantees could impact food aid shipments. 
 
Historical time-series data for US food aid shipments, commodities shipped under 
subsidy or credit guarantees and carry-over stocks are assembled as an endogenous 
group of surplus outlets, and the relationship between them is examined using time-
series econometrics.  The model is then shocked in the form of a decrease in the 
volume of commodities shipped under export subsidies and credit arrangements, and 
the time paths for the other endogenous variables are traced out.  Figure 2 illustrates 
the model’s results. 
 
A one-time decrease in the volume of commodities shipped under export subsidies and 
credit arrangements creates a contemporaneous increase in both food aid shipments 
and carry-over stocks.  As one vent for surplus disposal contracts, a larger share of that 
surplus is pushed through alternative outlets.  The effect is persistent; the response of 
food aid shipments to the decrease in subsidy and credit sales lasts several periods 
                                                 
7 The empirical analysis focuses on the US.  The US is the largest donor of food aid and has been 
accused of being the worst offender of using food aid as a tool of surplus disposal.    
  5
before decaying towards zero.  The economic significance of the estimated responses 
is ambiguous.  A decrease in subsidy and credit shipments of approximately 2 million 
tonnes generates a small immediate jump in food aid shipments and carry-over stocks 
(figure 2).  The effect on food aid shipments peaks at approximately 400,000 tonnes 
after four years, and decays thereafter.  The small immediate increase likely reflects 
institutional barriers to quickly arranging aid shipments, and is certain to have a 
negligible effect on world prices.  There is the possibility for such an increase to be 
important beyond its effect on world prices, however.  A large aid shipment arriving in a 
single location could be enough to trigger local production disincentive effects.  Such a 
shipment could also displace commercial imports and trigger a trade grievance from a 
competing exporter.   
 
It is important to note that the empirical results from this study are not forecasts of the 
effects of a trade agreement on food aid shipments.  The econometric relationships that 
are estimated in this study are based on a sample period during which there were no 
binding limits on any of the outlets for surplus.  A trade agreement that introduced 
binding caps on export subsidies and credit arrangements would likely generate larger 
responses in the endogenous variables.  The empirical model does demonstrate that 
food aid, export subsidies/credits and carry-over stocks have been used as alternative 
outlets for surplus disposal in the US, and that a new trade agreement could increase 
pressure on food aid as a means of skirting disciplines on export competition.   
 
6.0 CONCLUSION 
 
The implementation period for URAA disciplines on export subsidies is past and there 
will be no new constraints imposed on their use without a DDA agreement.  Donor 
countries retain export subsidies (subject to URAA limits), export credits and food aid as 
outlets for surplus disposal. 
 
The status of the DDA is murky, at best.  If a breakthrough occurs and new deal is 
done, then an agreement that resembles recent draft modalities and ministerial 
declarations could have two effects on food aid shipments.  First, a DDA agreement 
would restrict the use of export subsidies and export credits.  This is likely to increase 
pressure on food aid as an outlet for disposing of surplus commodities.  Second, an 
agreement could limit the circumstances under which food aid shipments are allowed.  
Though such rules could theoretically reduce food aid volumes, their actual effects on 
donations are uncertain.  It is unclear how eager a WTO member country will be to 
pursue a case against a competing exporter over the delivery of food aid.   
 
There may be room for another multilateral organisation to put forward new rules on 
food aid if the DDA collapses.  The current FAC expires in July of 2007 and is currently 
being renegotiated.  However the effectiveness of the FAC is constrained by its nature 
as a voluntary non-binding agreement.  Non-binding agreements on food aid have a 
chequered past; one of the primary motivations for bringing rules on food aid into the 
WTO was to coerce member nations into changing their behaviour by making their 
actions subject to the WTO dispute settlement mechanism.  Another important factor is 
that nations may be less willing to make concessions on their food aid positions outside 
of the reciprocal deal-making environment of the WTO.  
  6
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Source: USDA 
 
 
 
 Figure 2. One Standard Deviation Shock to 
Subsidy/Credit Sales ('000 tonnes)
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Credit/Subsidy (Left) Food Aid (Right) Carry-Over Stocks ( Right)
Figure 1. Aid and Stocks, Wheat
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Beginning stocks (Left) Aid ( Right)

Food Aid as Surplus Disposal? The WTO, Export Competition Disciplines and the Disposition of Food Aid

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