The US governement's announcement on export subsidies puts the entire agriculture sector on edge because it could send a wrong signal to other countries.

On Friday, the US Agriculture Secretary announced allocations under USDA’s dairy export incentive program designed to help US dairy exporters meet prevailing world prices and encourage the development of international export markets in areas where US are not competitive.

The US move was essentially in retaliation to the EU which reinstated its export subsidy system in January.

But it still came as a surprise to many, including Prime Minister John Key who is reported to have discussed trade with US President Barack Obama during their recent phone call and in which he had highlighted concerns about protectionism.

Trade Minister Tim Groser was quick to express his disappointment.

“Dairy farmers the world over are under pressure, but this is a short-sighted response when the international dairy market has recently been showing signs of stabilising." Mr. Groser said in a statement.

"The decision is a setback, and will be damaging to world markets,”

The US export subsidy is expected to have a negative impact on the global dairy market that has recently shown some signs of recovery.

It directly affects New Zealand because dairy is its largest merchandise export earner with nearly 24% share in total goods exported.

However, given the quantum of dairy products that US would be subsidising, the impact wouldn’t be large, according to economists.

“The bigger issue is that it sets the tone for the market,” said National Bank economist Kevin Wilson.

According to Mr. Wilson, the subsidy is nothing new because the volumes are within the limits set by WTO which remained unused in the past few years when the dairy prices were high.

Indeed, the main worry is that the US step would encourage other countries to follow suit to protect their own industries in the current weak global environment.

“The major concern is the signal it will start sending to other countries. It could have a spiral effect,” NZ Institute of Economic Research’s deputy chief executive John Ballingall said.

The worry is very real because the agricultural sector is where most trade barriers continue to exist. And the meat industry in New Zealand is its second largest export earner with nearly 12% share in total exports.

The concern is reflected in the way the various affected parties have reacted to the US move.

The Dairy Association of NZ called it "a lousy signal to the global trading system.”

Kelvin Wickham Fonterra’s managing director of global trade said that the decision "sends a very negative signal to the market and the global community,”

Federated Farmers had the strongest reaction: “Federated Farmers will be asking the US’ Embassy’s charge d’affaires for a ‘please explain’ and our president, Don Nicholson, will be pushing this hard at the Cairns Group meeting in Indonesia next month.”