GENEVA: A truce over the multi-billion dollar subsidies which the big trading powers pay their farmers may collapse if talks to slash them do not make progress by the end of the year.

For the past eight years, since the World Trade Organisation (WTO) came into being, members have been prevented by a pact from suing each other in the WTO trade court for the damages which the vast subsidies can cause.

Under the pact, providing a country was abiding by ceilings for state aid agreed in previous free trade negotiations, it could not be charged with causing commercial harm regardless of how much its own farmers were hurting.

But from January 1, 2004, the so-called peace clause lapses, leaving the United States and the European Union, in particular, open to legal assault by angry farm goods exporting countries, such as Australia or Brazil.

“The peace clause is going to expire and the EU and the United States will both be vulnerable to charges that their subsidies are causing severe problems to some of their trading partners,” said Australia’s WTO ambassador David Spencer.

Some analysts argue that the looming deadline could focus minds and help trade negotiators forge the deal that has so far eluded them on how to reform world farm trade and cut back subsidies running to some $300 billion a year — more than the combined annual total of rich state aid to the developing world.

Efficient exporters, such as New Zealand and Argentina, and poorer states producing mainly for their own markets, such as India, are united in accusing the EU and the United States of distorting world trade with their massive farm programmes.

But EU farm trade chief Franz Fischler has warned that resort to the legal weapon could “poison the atmosphere” at WTO free trade talks and make an accord even more difficult to get.

“If WTO members start using this possibility in an exaggerated manner...I think this would influence the (negotiating) process very badly,” he said in an interview with the Financial Times.

The pact makes farming an exception to WTO rules outlawing outright certain types of subsidy. In industry, for example, direct support for export, which the EU uses widely for farm goods, is banned. Severe restrictions are set on others.

Countries which feel that they have been hurt by another’s subsidies can bring a case to the WTO’s dispute settlement body.

With agriculture ceasing to be a special case, the way will be open for potentially bruising trade battles along the lines of the current fight over steel import duties pitting the United States against some of its key trading partners.

Although they have kept quiet in public, the exporter countries have let it be known they are ready to extend the truce if talks to reform world farm trade, a crucial part of the WTO’s overall Doha Round of free trade talks, make progress.

But the round, in trouble virtually since its launch in late 2001, has stalled badly following the collapse of ministerial talks in Cancun, Mexico, in September, which revealed a rift between rich and poor countries, particularly over agriculture.

Trade envoys are trying to reach in Geneva the deal that eluded ministers in Cancun. But diplomats are skeptical of success before senior trade officials gather in mid-December at the WTO to take stock.

“It was understood in Cancun that if there was potential for moving on Doha, there would be an extension of the peace clause,” said Geneva-based trade analyst David Woods.

Without progress in the negotiations, “the potential for a great deal of dispute settlement activity next year is very severe,” he added.

With the end of the peace clause, it is not just developing countries and exporters such as Australia which may be putting in calls to their trade lawyers. The United States and EU have said that they could take action against each other.

“Clearly the Europeans feel the most exposed, but they say that they will fire back. There is plenty in the United States that is challengeable,” said Woods.

In what could become a test case, Brazil has already brought a complaint against US cotton subsidies on grounds, it says, that are not covered by the peace clause. By the time WTO judges rule on whether the clause applies, it may have expired anyway.—Reuters