European Soybean Subsidies Ruled Illegal

In a significant victory for U.S. farm interests, an international dispute settlement panel has declared that a portion of the subsidies paid by the European Community to its soybean farmers and processors is illegal under current global trade rules.

The ruling, which is to be announced formally later this week, is important to the United States because it establishes a precedent declaring that some agricultural subsidies are illegal. Washington has been arguing this point in broader global trade negotiations.

The decision now goes to the policy-making council of the Geneva-based General Agreement on Tariffs and Trade, which is expected to consider it at a meeting in late January. If the ruling is upheld, the EC will have to eliminate its subsidies or face possible retaliation.

U.S. officials declined to comment on the ruling Monday, pending its formal disclosure by the 96-country GATT. But authorities said Washington may agree to include the issue in the broader trade talks now under way, rather than retaliate immediately.

The dispute, simmering for several years, has become a major bone of contention among U.S. soybean growers and processors. U.S. producers contend that they frequently have been priced out of the market in Western Europe because local farmers and processors are subsidized.

The United States has long complained that European subsidies, in addition to creating unfair competition for U.S. exports, provide incentives for European farmers to produce more than they otherwise would. Although the U.S. government provides price supports for many American agricultural products, they generally try to prod farmers into producing less.

Washington filed the complaint in 1988, but the EC blocked action on the case for a full year before finally agreeing to allow a GATT panel to assume jurisdiction. The panel began its work last June and decided the case late last week.

John Baize, former Washington representative for the American Soybean Assn., hailed the decision as one with “far-reaching implications. The panel effectively said that the EC simply cannot subsidize, even if it has the money, if it hurts any of its trading partners.”

Baize estimated that the ruling could cost the EC $1.5 billion a year if Washington decides to retaliate. By contrast, a dispute over EC refusal to accept hormone-fed U.S. beef products, which almost caused a trade war early this year, involved only $100 million in damages.

U.S. exports of soybeans to the European Community exceed $1 billion a year.

In essence, the two-part ruling came to these conclusions:

* The payments the EC makes to soybean processors violate existing GATT rules because they provide benefits to domestic processors that are not available to foreign processors. GATT rules say domestic and foreign firms must be treated alike.

* The subsidies that the EC pays to soybean farmers are legal under GATT, but by paying them the EC is “nullifying and impairing” trade concessions it offered the United States during the 1960s, when it agreed to eliminate tariffs permanently on imported soybeans.

In view of the impact that changing the soybean program might have on European farmers, the panel recommended that both sides allow “an accommodative approach” that would provide time for the EC to alter the program before any action is taken.

If the United States agrees as expected to include the soybean issue in the broader trade liberalization talks now under way, the EC would have almost a year to negotiate a solution to the problem. The trade talks, known as the Uruguay Round, are scheduled to end in late 1990.