The WTO Trade Negotiations and the U.S. Farm Bill Harry de Gorter Cornell University

1. The WTO Trade Negotiations and the U.S. Farm BillHarry de GorterCornell University Presentation for the Agribusiness Economic Outlook Conference, Cornell University, 6 December 2005

2. Progress in the Doha Round • Push for an agreement on modalities in Hong Kong next week • WTO talks very shaky right now • US-EU influence on trade agenda now superseded by developing countries • Tough political decisions still needed to reach a substantive agreement • Focus is on the 3 pillars of Market Access, Export Competition and Domestic Subsidies • But other issues important too like GIs, GMOs, etc.

3. Context of the WTO Negotiations • Brazil, China and India taking a more active role in trade discussions (G-20) • WTO litigation may impact domestic policy: key cases (cotton and sugar) and GI case: GMO report due in January • US talks on regional FTAs continues with Andean Pact and Thailand • We are in a critical time period for US agricultural trade policy

4. The Rise of Agriculture in Brazil Emerging Markets becoming More Feisty in Economic Terms too

5. Brazilian Agri-food Exports US$ Billion

6. Market Access is Key • Ambitious tariff cutting formula proposed with tariff caps (latest US proposal has a maximum tariff of 75%) • But exceptions for “Sensitive Products” (EU & G-10 balk; US & G-20 on a similar page) • Because of tariff peaks in agriculture, research shows that 2% of tariff lines as Sensitive Products eviscerates most gains from trade liberalization • Also have the problem of “water” in the tariffs • Applied tariffs < bound tariffs • Tariff import quotas binding • Preferential tariffs

7. Other Issues in Market Access • Tariff escalation • Erosion of preferences • Specific tariffs • Tariff rate import quotas (expand to compensate for Sensitive Products?) • Special Safeguards, countervailing and anti-dumping, and other contingent measures • Rationalizing product regulations (SPS, labeling etc.) • S&DT for developing countries to protect against instability and food security concerns

8. Export Competition • EU to eliminate explicit export subsidies if other countries reduce indirect export subsidies (need to set a deadline) • US will move on export credit guarantees and perhaps on modifying food aid programs • State Trading Enterprises still an issue • Consumer financed export subsidies (implications of WTO panels on CDN dairy and EU sugar policies)

9. Domestic Support • US offer of 60% reduction matched by the EU • But probably will have no real effect on policy reform because lots of “water” in domestic support commitments as well: • ‘Aggregate Measurement of Support’ (AMS) is poorly defined • Includes a “price-gap” measure that can easily vaporize (e.g., Japan abolished rice price support in 1997 with no change in import policy and so reduced their AMS by $20 bil. overnight) • De minimis exemption is huge • Box shifting • EU 2003 policy reforms • Expanded definition of the Blue Box

10. Other Agricultural Trade Issues • Geographical Indicators • Negotiations ongoing on multilateral list for wines • Discussions continuing about extension of coverage of “enhanced” protection for other food products • EU will want some concessions on this at Hong Kong • Peace Clause • No mention in 2004 Framework Agreement • US has argued for its revival • G-20 pretty adamant not to be

11. WTO Litigation: The Cotton Case • Step-2 payments and export credit guarantees will need to be substantially modified if not eliminated • Need only reduce marketing loan and countercyclical payments to 1992 levels? • Direct payments deemed trade distorting b/c of fruit & vegetable acreage restriction (did not rule on updating base) • But direct payments deemed non-actionable because did not cause price suppression • So will it need to be in the Amber Box? Rulings do not automatically translate into policy changes

12. Implications of WTO Litigation on US Policy • Other countries may continue to challenge farm policies through WTO panels (unless there is a new Peace Clause but even that did not stop the Cotton Panel) • Can easily find more farm programs that are inconsistent with the WTO SCM Agreement • Other cases brewing against US rice (Uruguay) and corn (Canada) programs • Domestic resistance to Panel rulings may continue (e.g., EU and Beef Hormones)

13. Global cost of agricultural tariffs and subsidies • $278 billion per annum by 2015 (World Bank) • 2/3rds accrues to rich countries • But as % of GDP, the cost for developing countries twice that for rich countries • Current policies fail to increase farm income because: • Economic inefficiencies • Leakages to unintended beneficiaries • Bulk of transfers often capitalized into land or quota values • World market prices lower due to distorted trade incl. self-defeating effects of all countries’ policies • hurt the agricultural sector and export earnings of developing countries the most • developing countries now more dependent on a few export crops • more international aid is then required

14. What for the Future? • We are in a period of significant change in agricultural trade relations • Developing countries are overriding the traditional gladiatorial contest between the EU and US • Yet developing countries may resist trade liberalization in other sectors if no significant progress made in agriculture • Regional/bilateral trade deals may be the major source of trade liberalization • Litigation under the WTO may put pressure on domestic support programs • Other issues are also becoming important like IPRs (GIs etc.), SPS and TBT relating to standards and health restrictions, biotech such as GMOs, invasive species, etc.

15. What’s in it for the United States? • Current Agreement on Agriculture in the WTO has inconsistencies, loopholes and flawed rules • Agricultural trade liberalization is a positive-sum game and lowers adjustment costs (current US agricultural exports = $62B) • Reciprocity mobilizes exporters so political economy dynamic changed • Governments able to make credible commitments to own private sector (call for retaliation if not executed) • Locks in reforms (prevents backsliding) • Developing countries now provide countervailing power in form of G-20 • Meaningful progress in the WTO on agriculture will instill confidence in principles and rules to continue to adhere • Leads to improved relations, new interests in continued cooperation and further expansion of activities into new policy spheres (e.g., democracy/development & aid/trade facilitation)

16. Further Reading on 3 Pillars 3 chapters in a recent World Bank publication 6. Market Access Barriers in Agriculture and Options for Reform ...................... 85 Kym Anderson, Harry de Gorter and Will Martin 7. Domestic Support in Agriculture: The Struggle for Meaningful Disciplines ... 97 Harry de Gorter and J. Daniel Cook 8. Export Subsidies: Agricultural Policy Reform and Developing Countries ..... 109 Harry de Gorter http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/TRADE/0,,contentMDK:20732399~pagePK:148956~piPK:216618~theSitePK:239071,00.html