Agricultural Economics

1. Agricultural Economics Lecture 7: International Influences

2. Agricultural Trade Issues and Policies • Relationships • Trade Issues • Geopolitical Centers of Influence

3. International Policy • Live in a global economy where: • Interdependence of policies • Global Agriculture Markets • Few commodities are isolated through barriers to trade (successful only in varying degrees)

4. Trade Policy does NOT exist in Isolation A component of Foreign Policy Intertwined in Domestic/Economic Policy Intertwined in Ag & Food Policy

5. Food Diplomacy Increased Market Access Building Markets Developing Market Economies Increasing Food Security Protectionist Policies Trade Policy Issues

6. Why do we want market access? Why would we refuse others access? Access is gained by reducing barriers to trade Bilateral & Multilateral Trade Agreements Free-trade Agreements Customs Unions Common policy toward non-members Common Markets Free movement of factors of production Alignment of major economic & agricultural policies Economic Unions Unified social/economic policies Market Access

7. Building Foreign Markets • Market Intelligence • Export Credit and Enhancement • Cash or Commodity Subsidies • Credit Guarantees

8. Building Market Economies • Typically Mingled with Multiple Objectives for Developing Economies • Partnerships with UN, World Bank, Voluntary Organizations • Institution Building • Technical Assistance • Infrastructure Development • Applied Research

9. Food Security • Global Food Availability • Individual Food Security • Food Safety

10. Protectionist Policies • Barriers to Trade • All Domestic Farm Policies • Trade Remedy Laws • Anti-Dumping Provisions • Countervailing Duty (Tariff)

11. Geopolitical Centers of Influence • Countries or groups (blocs) of countries that have (or could have a major impact on agriculture and agribusiness • Some individual countries are in this position now, have been, or will be • Mexico • Canada • Japan • China • Russia • Some are organized into blocs • NAFTA • EU • MERCOSUR/FTAA • Cairns group • APEC

12. Geopolitical Centers of Influence • Then there are the developing countries • Largely ignored up to now • Want preferred access to developed country markets • There are interest groups outside the countries and blocs that try to influence the world agenda • Greenpeace • UN/FAO

13. NAFTA (North American Free Trade Agreement) 3 Separate Agreements • Canada – US Trade Agreement (CUSTA) effective in 1989 • Canada – Mexico Trade Agreement effective in 1994 • US – Mexico Trade Agreement effective in 1994

14. NAFTA Trade • U.S Absolute (Comparative) Advantages Corn, Soybeans, (Poultry, Fed beef, Hogs) • Canada Absolute (Comparative) Advantage (Wheat, Oats, Barley, Canola, Flax, Fed Beef) • Mexico Absolute (Comparative) Advantage • Vegetables, (sugar)

15. NAFTA Issues • Countries maintain separate domestic farm policies • U.S. – Price/Income Support to Farmers, Conservation • Canada – State Trading (CWB), Production Controls, Conservation, NISA • Mexico -- Direct Support, Price Supports • Dispute Settlement, 5 member panel of judges

16. MERCOSUR Argentina, Brazil, Paraguay, and Uruguay • Established in 1991 • Competitive in Corn, Soybean, Beef, and Orange Juice Production • U.S. has lost some beef markets because of the freer trade within MERCOSUR • Strong Advocate for Eliminating Subsidies • Opportunities • Expand to include Bolivia, Chile, Peru, Ecuador, Colombia, Venezuela • Potentially a part of FTAA • Problems • Political and Economic Instability

17. Cairns Group • Established in 1986 in Cairns, Australia • 18 southern hemisphere countries • Major members include Australia, New Zealand, Brazil, Argentina, Chili, Thailand, Canada • All export dependent • Wheat, rice, coffee, beef, dairy, soybeans • Ag policies • Works largely through WTO • Seeks removal of barriers to trade • Seeks elimination of ag subsidies (Critics of U.S. and EU) • Members not free of ag policies that impede trade

18. APEC • Asian Pacific Economic Cooperation, • 21 countries that border Pacific Ocean • Highly diverse membership including: U.S., Japan, China, Russia, Mexico, Chile, Australia, New Zealand, Vietnam, Thailand • Accounts for 60% of World GDP • Accounts for 60% of U.S. ag exports • Accounts for 50% U.S. of imports • Objectives • Free trade among developed country members by 2010 • Free trade throughout by 2020

19. Japan • 125 M people • Ag • 40% self-sufficient on food needs • Income increases encourages dietary change • Ag Policy • Conversion from rice to F&V • “Control” dietary change through Japan Food Agency purchases in international market. • 3rd largest US customer but Australia and New Zealand has location advantage. • Strong Protectionist Stance

20. China • 1.3 Billion people • Ag • Essentially self-sufficient • Undergoing substantial dietary change • Ag Policy • State dominated • Transition to market economy • Entry into WTO

21. Russia • 145 M people • Ag • Grain, sugar beets, rapeseed/canola, beef, milk • Net importer (major market for U.S. meat) • Ag Policy • Slow conversion to market economy • Privatization of land • State control of imports

22. Developing Countries • 67 Countries (40% of world population) • Low-Income (< $2000 per capita) • Net-Importers (dependent on food aid) • Mostly trade with developed countries • Policies Center Around Increased Income • Expansion of Exports • Difficult to establish export markets • Reluctant to allow imports

23. EU Common Agricultural Policy (CAP) • EU History • 1957 Treaty of Rome formed European Economic Community • Customs Union: No internal barrier to trade among members; common external tariff; Free movement of labor and capital • 1992 Maastricht Treaty formed European Union to establish common currency • 1999 European Monetary Union (Adoption of the Euro)

24. EU Common Agricultural Policy (CAP) cont. • 25 Members • Original Treaty of Rome Included: • France • Germany • Italy • Belgium • Netherlands • Luxembourg

25. EU Common Agricultural Policy (CAP) cont. • Governance • Council of the European Union • Decision body with heads of state for each country (like Senate) • European Parliament • Legislature body with 626 members appointed by population (like House) • European Commission • Executive branch implements policy • Commission on Agriculture manages CAP • Court of Justice • Dispute settlement body

26. EU Value of Ag Production and Processing ($B)

27. Dimensions of the EU’s Common Agricultural Policy • Price Supports • Intervention price (EU purchase for storage) • Direct Payments • Related to historical yield and current acres • Payment per head for livestock • Production Controls • Set aside percent of cropland • Marketing/production quotas in dairy • Export subsidy to prevent stocks in storage from becoming excessive

28. Dimensions of the EU’s Common Agricultural Policy • Multifunctional Payments • Noncommodity outputs that are jointly produced by agriculture • Countryside benefits of farming • Notion that agriculture can become too intensive and farmers need to be compensated for making it less intensive • Organic Farming • Sanitary & Phytosanitary Standards • Import restrictions on hormone treated beef • Import restrictions on GMOs

29. Why Expand? • EU • Political influence • Security • Globalization • Trade

30. Common Elements in CAP Reforms andPolicy Change in Turkish Agriculture • a) Basic reasons; External: WTO Reform Process Internal : Efficiency, Taxpayer and ConsumerConcerns • b) Overall Sectoral Change; Market Orientation, Higher Competitiveness • c) New Objectives; food safety, environment, rural development • d) Procedural; Registration and Control Mechanisms

31. AGRICULTURAL PAYMENTS UNDER THE BUDGET Agricultural payments covered under National Fiscal Budget are; • • Payments for General Services • • Operating Expenses • • Investments (related with annual investment program) and • • Agricultural Support Payments Agricultural payments, which are explained in detail in the • presentation for State Aids, are dispersed between the budgets of three • different institutions: • • Ministry of Agriculture and Rural Affairs (MARA) • • Ministry of Environment and Forestry (MEF) • • Undersecretariat of Treasury (Treasury) Main agricultural supports are placed under MARA and Treasury

32. Trade Issues • Benefits of Trade: • More efficient use of resources • Reduce world hunger • Problems: • Interdependence among nations

33. Barriers to Trade • Tariffs: Tax on imports • TRQ: Tariff varies in increments with quantity imported • Tariffs preferred because transparent • Subsidies • Export subsidies • Domestic production/price subsidies • Nontariff tariff trade barriers • Restrictions on imports other than tariffs • Quotas • Embargos • Sanitary and phytosanitary • Technical barriers (definitional)

34. Origins of WTO • General Agreement on Tariffs and Trade (GATT) • Established in 1947 as a forum to reduce trade barriers • WTO replaced GATT in 1995 as legal and institutional foundation of multilateral trade relations • Designed to strengthen the trade rules by providing a stronger set of institutions for resolving disputes and enforcing agreements • Negotiations take place in “rounds” • There have been 9 to date • Begins with an agreement among members on agenda • Most recent completed round was Uruguay Round • Currently on Doha Round

35. Three Basic Principles • Once a tariff concession is agreed to, it cannot be raised • MFN, any advantage given to one country must be given to all • Imported goods treated the same as domestic goods in terms of regulation and taxes

36. Three Pillars of URAA (Uruguay Round Agreement on Agriculture) • Market access: Convert import quotas to tariff or TRQ and reduce over time • Domestic support: Reduce domestic support by 20% from 1986-89 level • AMS = Aggregate measure of support = total of red and amber box (trade distorting subsidies) • Limits on value and volume of export subsidies from 1986-89 level

37. Loop Holes in URAA • Precautionary principle: WTO requires that S&PS decisions be based on science. This principle allows restrictions when scientific evidence is deemed to be insufficient. Requires seeking evidence over reasonable time period. • Safeguards permit imposition of higher tariffs if there is a surge in imports above specified levels • Multi functionality: Green box justification for subsidies based on contributions to the environment • Programs are classified by “box” by the reporting country, but is subject to challenge by WTO or a complaining country

38. 4 Pillars of Doha Round(Reflects broader US goals in trade policy) • Market access: Substantially reduce tariffs and increase quantities in TRQs • Export competition: Eliminate export subsidies, variable export taxes, and exclusive import rights by state trading importers • Domestic support: Substantially reduce amber box subsidies and simplify into exempt and nonexempt • Developing countries: Enhance input into WTO and their benefits from international trading

39. Boxes of WTO • Green box: Not trade distorting • Blue box: Minimally distorting because production is controlled • Amber box: Trade distorting, subsidies tied to price and/or production • Red Box: Subsidies that must be stopped (empty box)

40. Amber Box Limits for U.S. and E.U.

41. WTO Classification • These classifications are based on recent US notifications to the WTO • The fixed payments and conservation programs have been classified as green box • Direct payments on a fixed payment base are considered as income support • Conservation program payments are considered exempt as long as the payments do not exceed the actual cost of conservation efforts or the opportunity cost from idling land or producing under conservation production practices

42. WTO Classification • The marketing loan benefits, dairy programs, and sugar price support have been classified as commodity-specific amber box. • All of these programs require production of the commodity to receive a payment and the size of the payment is contingent on the amount of production. • Price support programs (such as dairy) are also placed here. Even though no payments flow out because of the program, the amount of price protection is charged against the WTO limit (calculated as the product of production eligible for price support and the price gap between the price support level and a reference price).

43. WTO Classification • The countercyclical and crop insurance programs have been classified as non-commodity-specific amber box. • The countercyclical program falls into the amber box because payments depend on current prices and into the non-commodity-specific box because production is not required to receive payments. • Crop insurance has been placed here and reported in aggregate (net indemnities across all crops). Given the nature of crop insurance, it probably should be classified as commodity-specific. Insurance at or under 70% coverage could be reported as green box, while higher coverage could be reported as commodity-specific amber.

44. De Minimis Rule • The de minimis rule exempts “small” domestic support payments • Whether payments are “small” or not is defined by the product covered by the payment • For the U.S., a five percent rule is applied for de minimis • For commodity-specific support, payments are compared to 5% of the value of production for the commodity • For non-commodity-specific support, payments are compared to 5% of the total value of U.S. agricultural production

45. Why Classification Matters • The classification of the new countercyclical program in the non-commodity-specific amber box helps the U.S. in meeting the domestic support limits • Expenditures from programs in the non-commodity-specific category are compared against the value of all agricultural production in the country (as opposed to crop value for commodity-specific programs) • Given U.S. agricultural production values of $200 billion, the non-commodity-specific amber box can hold up to $10 billion in support before reaching the de minimis mark and counting against the domestic support limit

46. Where We Are in Doha Round? • Most recent Ministerial in Cancun – failed • Open rift between developed and developing countries • Meetings came to abrupt end in Sept ‘03 when four African countries submitted a proposal to eliminate the U.S. cotton program • G-22 (coalition of 22 developing countries) unwilling to open their markets in return • Peace clause expired in Dec. 2003 • Can’t challenge other members export and domestic subsidies on agriculture

47. Trade Tools • Import Quota • Import Tariff • Export Subsidy

48. An Import Quota by Importing Country Exporting Country Trade Importing Country Quota $ S Excess Supply S World Price Excess Demand D D Q/yr Quantity Traded is reduced

49. An Import Quota by Importing Country Exporting Country Trade Importing Country Quota $ S Excess Supply S World Price Excess Demand D D Q/yr Quantity Traded is reducedPrice in the Importing Country is raised

50. An Import Quota by Importing Country Exporting Country Trade Importing Country Quota $ S Excess Supply S World Price Excess Demand D D Q/yr Quantity Traded is reducedPrice in the Importing Country is raisedPrice in the Exporting Country is reduced