Food & Agricultural Trade Liberalisation: Can a balance be found?

1. 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

2. 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

3. 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”

4. Market Access

5. 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

7. 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

8. Pw=import price To = within-quota tariff T1 = out-of-quota tariff D = import demand curve q1 = the quota quantity q2 = total imported quantity Higher tariff paid on q2-q1 What is the quota rent? D2 P Pw(1+T1) D1 D0 Pw(1+To) Q q0 q1 q2

9. Export Competition

10. 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

11. 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?

12. Domestic Support

13. Background: Domestic Support • Boxes and categories of instruments • What is ‘decoupled’? • The AMS • Trend from distorting to less-distorting instruments – US U-turn?

16. 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

19. 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

20. 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

21. 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?

22. 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

23. 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

24. 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

25. 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

26. 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

27. 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?

28. 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

30. 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)

31. 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

32. 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

33. 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%

38. NON-TRADE CONCERNS: Changes to domestic subsidies TRADE CONCERNS: Changes to tariffs & export subsidies WHAT IS A “SOUND BALANCE”?

46. 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

47. 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