Food & Agricultural Trade Liberalisation: Can a balance be found? Allan N Rae Director Centre for Applied Economics and Policy Studies Supported by PGSF.

Food & Agricultural Trade Liberalisation: Can a balance be

found?

Allan N Rae

Director

Centre for Applied Economics and Policy Studies

Supported by PGSF and C Alma Baker Trust

Negotiations Timetable• URAA required new negotiations to begin by end

of 1999 - these commenced early 2000.• In Doha (end-2001) these incorporated into a

wider negotiations agenda: The Doha Development Agenda

• Timetabled for completion 1 January 2005.• Modalities to be established by 31 March 2003• Chair of Agric. Committee submitted draft of

above in Feb. Widespread criticism• Updated draft in mid-March, but little changed.• Deadline now extended to September• Round to be completed by 1 Jan., 2005

Doha Ministerial Statement

• For agriculture, to pursue “substantial improvements in market access; reductions of, with a view to phasing out, all forms of export subsidies; and substantial reductions in trade-distorting domestic support”

Market Access

Background: Agricultural tariffs

• Despite URAA cuts, all ‘bound’ tariffs for agricultural & food items average 62%. Highest are those on tobacco products, dairy, and meats

• Considerable ‘water’ in tariffs, especially developing countries

• NTBs: ‘Dirty’ tariffication in URAA exaggerated base levels of protection

• Large dispersion across countries & commodities• Ad valorem & specific tariffs

Averages of Global MFN Bound Tariffs (from ERS)(average = 62%)

0

10

20

30

40

50

60

70

80

90

% a

d va

lore

m

Background: Quotas

• URAA required NTBs to be replaced by equivalent tariffs.

• But in order to provide minimum market access where little or none had existed, TRQs were invented

• Out-quota tariffs often so high that these act like quotas

• In some cases, quotas are under-filled, even when in-quota tariffs are very low

P

Q

Pw(1+To)

Pw(1+T1)

q1 q2

Pw=import priceTo = within-quota tariffT1 = out-of-quota tariffD = import demand curve

q1 = the quota quantityq2 = total imported quantityHigher tariff paid on q2-q1What is the quota rent?

D0

D1

D2

q0

Export Competition

Background: Export Subsidies

• URAA’s twin reduction commitment

• Most effective component of URAA?

• Of total expenditure 1995-98, EU accounted for 89% (USA, 1.5%)

• EU subsidised nearly all its exports of coarse grains, dairy products and beef

Other export competition issues – in contrast to export subsidies, these have a Nth American focus

• Export credits: US programmes a focus. – But US subsidy value only 7% of the commodity value.

– Likely induce only small distortions

• Exporting STEs: Canadian Wheat Board– Are export subsidies provided?

• Food Aid: US programmes again a focus– Donations have tended to increase in times of surplus:

surplus disposal?

– In grant form only?

Domestic Support

Background: Domestic Support

• Boxes and categories of instruments

• What is ‘decoupled’?

• The AMS

• Trend from distorting to less-distorting instruments – US U-turn?

OECD trend is to less output-distorting assistance measures

0

50000

100000

150000

200000

250000

86/88 1999-2001

US

$ m

illi

on

s

Distorting Less-distorting

D o m e s t ic s u p p o r t h a s in c re a s e d s u b s ta n t ia l ly in th e U S

• T ra d e -d is to r t in g d o m e s t ic s u p p o r t c a n b e in c re a s e d i f c u r r e n t s p e n d in g is b e lo w th e c o u n try ’ s le v e l o f c o m m itm e n t

0

5

10

15

20

25

95 96 97 98 99 2000 2001

US

$ b

illi

on

Com m itm ent

ac tual

Domestic support: examples of exempted policies

• Research• Training and extension• Inspection/quarantine• Market information/promotion• Stockholding• Decoupled income support• Natural disaster relief• Structural adjustment assistance• Payments under environmental programmes

Category shares in total domestic support: 1999

0%10%20%30%40%50%60%70%80%90%

100%

EU Japan USA

%

de minimus

Green

Blue

AMS

Bound vs Applied AMS - 1999EU major user, but US close to limit

0

10000

20000

30000

40000

50000

60000

70000

80000

EU Japan USA

US

$ m

illi

on

AMS Bound

AMS Applied

Non-trade concerns• EU, Japan, Norway etc argue for

“multifunctionality”• Argue that agricultural has multiple objectives: eg

– Rural development and rural viability

– Environmental protection

– Food security

– Retain farming practices for tourism

• Seen as public goods – a market system will not produce them at optimal levels

• Therefore public support is justified• They are often joint products with food

Can farm payments be fully decoupled from production &

trade?• Even ‘decoupled’ payments may impact

production:– May reduce income variance, and farmers tend to be

risk-averse

– Increase wealth and move farmers to a less risk-aversion state

– May relax debt constraints

– May increase on-farm investment

– ..and base periods may be updated

Is there any empirical evidence?

• Limited evidence suggests degree of ‘coupling’ not strong– Nth American studies have looked at US and Canadian

programmes, and reached above conclusion.– A World Bank econometric study found elasticity of

net import demand wrt ‘non-exempt support’ = -0.10, and that for ‘exempt support’ was <0 but not significant

– The GTAP model provides rather similar elasticities

• How much negotiating effort to devote to reducing such spending, or limiting the green box?

Summary of Selected Proposals: Tariffs

• Cairns Group– Swiss formula (a=25) from bound rates, over 5 years

– Special treatment for developing countries

• USA– Swiss formula (a=25) from applied rates, over 5 years

– Tariffs simplified to either ad valorem or specific

• EU– ‘flexibility’ of the URAA formula, over 6 years

– Special treatment for developing countries

The Swiss Formula

• Proposed by Cairns Group and USA

• Swiss formula:• t1 = a.t0/(a + t0)• Maximum tariff

becomes 25%• Implies very large

tariff reductions in many cases

Swiss formula: a=25

0.0

5.0

10.0

15.0

20.0

25.0

0 50 100 150 200 250 300 350

t0

t1

TRQs• US

– Cut in-quota tariff to zero, and expand quota by 4% per year, over 5 years

– Quota expansion on MFN basis

• Cairns Group– Cut in-quota tariff to zero, and expand quota by 20% of

domestic consumption, over 5 years– Quota expansion on MFN basis– As for US, special consideration for developing

countries

• EU– No specific targets, but wants administration enhanced

Export Subsidies• EU

– Cut spending by average of 45%

– On condition all forms of export subdisation treated ‘on equal footing’

– Greater reduction for commodities important to developing countries

• US– Elimination over 5 years

• Cairns Group– Eliminate all forms of export subsidisation

– At least 50% cuts in export subsidies in first year

Domestic Support: Amber/Blue Boxes• EU

– Reduce ‘amber’ box by 55% using the URAA method– Retain current definitions of domestic support– Eliminate de minimus exemption for developed

countries

• Cairns Group– Eliminate on product-specific basis over 5/9 years– 50% downpayment in first year– Reduce de minimus exemption for developed countries– Applies to ‘blue’ box

• US– Reduce total AMS to 5% of 96-98 value of agr.

Production, over 5 years– Applies to ‘blue’ box

The Harbinson Draft

• Attempt to seek compromise among the proposals, released February 2003.

• Too ambitious for some, not ambitious enough for others!

• EU, Japan & others: ‘unbalanced’ between trade & non-trade concerns

• Revised in March• What were some of the major features?

Harbinson: Market Access

• Tariffs – reduce by 40%, 50% or 60%, depending on height of base tariff for developed countries

• For developing countries, reductions are 25%, 30%, 35% and 40%

• Additional flexibilities exist• Flat 10% cut for developing countries ‘strategic

products’• Cut made to bound rates• Special safeguard to be eliminated for developed

countries

Comparison of Tariff Reduction Modalities

0

50

100

150

200

250

0 100 200 300 400

base tariff (%)

new

tari

ff (5

) URAA

Harbinson

swiss

Harbinson: Export Subsidies

• Developed countries: for at least half of base outlay, eliminate over 5 years. Rest eliminated over 9 years. (10/12 years for developing countries)

Harbinson: Domestic Support

• Amber:– Reduce by 60% over 5 years– Reduced by 40% over 10 years for developing– de minimus to be halved over 5 years (maintain

for developing regions)

• Blue: reduce by 50% over 5 years

• Green: maintain, with possible amendments to provisions for exemption–

Some Modeling Results @ CAPS

• Global Trade Analysis Project applied general equilbrium model

• 1997 database has 66 regions & 57 sectors• Aggregated up to 11 regions & 15 sectors

– These include 8 farm and 4 food processing sectors

• Tariffs from AMAD database• Export subsidy data from WTO notifications• Domestic support from OECD/PSE data

Scenarios

• Reflect some major elements of various proposals• #1 (based on EU proposal)

– Tariff cuts: 36% ~ 24%– Export subsidy cuts: 45%– Amber box cuts: 55% ~ zero

• #2 (based on Harbinson draft)– Tariff cuts: as in Harbinson– Export subsidy cuts: 100% ~ 50%– Amber box cuts: 60% ~20%

• #3 (based on US & Cairns proposals)– Tariff cuts: Swiss (a=25) for developed– Cairns proposal for developing countries– Export subsidy cuts: 100% – Amber box cuts: 100% ~ 50%

Simulated changes in global export volumes

-10

-5

0

5

10

15

sim#1 sim#2 sim#3% c

han

ge

wheat

coarse grains

beef/sheepmeat

dairy

Simulated changes in global export prices

0

1

2

3

4

5

6

7

8

9

sim#1 sim#2 sim#3

% c

hang

e

wheat

coarse grains

beef/sheepmeat

dairy

Changes in NZ merchandise trade balance

-2500

-2000

-1500

-1000

-500

0

500

1000

1500

2000

2500

sim#1 sim#2 sim#3US

$m

dairy

beef_sheepmeat

other agr/food

non-agr/food

total merchandise

How might NZ farm production change?

-20

-10

0

10

20

30

40

sim#1 sim#2 sim#3% c

han

ge i

n o

utp

ut

wheat

coarse grains

vege_fruit

sheep_cattle

other animal prods

milk

WHAT IS A “SOUND BALANCE”?

TRADE CONCERNS:Changes to tariffs & export subsidies

NON-TRADE CONCERNS:

Changes to domestic subsidies 

Cutting tariffs in developed vs developing regions: impacts on global welfare

0

5000

10000

15000

20000

25000

30000

#1 #2 #3

US

$m

Developed

Developing

Cutting tariffs & export subsidies:impacts on global welfare

-5000

0

5000

10000

15000

20000

25000

30000

35000

40000

#1 #2 #3

US

$m tariffs

export subsidies

Cutting trade barriers & domestic support: impacts on global welfare

0

5000

10000

15000

20000

25000

30000

35000

40000

#1 #2 #3

US

$m

trade barriers

amber box support

Impacts of cuts to tariffs, export subsidies & amber box support on global export prices in

(scenario #2)

0

1

2

3

4

5

6

7

% c

han

ge

in p

rice

tariffs

export subsidies

amber box

Impacts of cuts to tariffs, export subsidies & amber box support on global export volumes

(scenario #2)

-10

-5

0

5

10

15

% c

han

ge

in v

olu

me

tariffs

export subsidies

amber box

Impacts of cuts in tariffs, export subsidies & amber box on NZ welfare: #2

0

100

200

300

400

500

600

US$m

Developed tariff cuts

Developing : tariff cuts

Export subsidies

Amber box

Impacts of policy reforms on NZ's agr_food net exports: scenario #2

-200

-100

0

100

200

300

400

500

600

700

800

900

US

$m

tariffs

export subsidies

amber box

Summary• Tariff cuts in developed and developing

regions account for nearly all global welfare gains – impact of former>>latter

• Tariff cuts the most important contributor to NZ’s welfare gain, especially by developed regions – both have more impact that cuts to export subsidies.

• Appropriate to give market access the highest priority, especially developed country reforms

• Harbinson does this thru larger cuts to higher tariffs

• Cuts to the amber box made very little impact on global welfare, and negligible contribution to NZ welfare gains.

• But they did contribute to higher international grains prices

• Tightening domestic support constraints may make tariff cuts difficult

• Loosening those constraints could ‘buy’ increased access to developed region markets & lead to significant gains: reinstrumentation

• Smaller cuts in the AMS & blue box could appease EU, and also moderate ToT impacts on food net importers

• Once progress made on trade policies, turn attention to the (less distorting) domestic support policies