Agricultural subsidies levied by industrial countries have been a source of contentious debate in multilateral trade negotiations. Developing countries argue that subsidies result in an overproduction of crops which depress prices on the world market. The 1996 and 2002 U.S. Farm Bills decoupled agricultural subsidies from current production, so the subsidies should be minimally trade distorting, but a provision in the 2002 Farm Bill that allowed farmers to update their subsidy base potentially broke this decoupling mechanism. The results suggest that farmers did anticipate a base update, which technically violates the classification of decoupled subsidies in the WTO's Green Box, but the magnitude of the distortion was small. However, under the assumption that farmers forecast a base update with certainty, which may be a more accurate relection of the current policy environment, the acreage distortions are larger, and this questions the future ability of the U.S. to classify decoupled subsidies in the Green Box. So while decoupled subsidies appear to have been minimally trade distorting, future base updates may play a role in depressing international prices.
Khandelwal, Amit. "Are U.S. Agricultural Subsidies Amber or Green?" Working paper, Columbia University, 2005.
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