agricultural economics lecture 7: international influences
TRANSCRIPT
Agricultural Economics
Lecture 7: International Influences
• Agricultural Trade Issues and Policies• Relationships• Trade Issues
• Geopolitical Centers of Influence
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)
Trade Policy does NOT exist in Isolation A component of Foreign Policy Intertwined in Domestic/Economic Policy Intertwined in Ag & Food Policy
Trade Policy IssuesTrade Policy Issues
Food Diplomacy Increased Market Access Building Markets Developing Market Economies Increasing Food Security Protectionist Policies
Market AccessMarket Access
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
Building Foreign MarketsBuilding Foreign Markets
Market Intelligence Export Credit and Enhancement
Cash or Commodity Subsidies Credit Guarantees
Building Market EconomiesBuilding 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
Food SecurityFood Security
Global Food Availability
Individual Food Security
Food Safety
Protectionist PoliciesProtectionist Policies
Barriers to Trade All Domestic Farm Policies Trade Remedy Laws
Anti-Dumping Provisions Countervailing Duty (Tariff)
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
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
NAFTA (North American NAFTA (North American Free Trade Agreement)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
NAFTA TradeNAFTA Trade
U.S Absolute (Comparative) AdvantagesCorn, Soybeans, (Poultry, Fed beef, Hogs)
Canada Absolute (Comparative) Advantage(Wheat, Oats, Barley, Canola, Flax, Fed Beef)
Mexico Absolute (Comparative) Advantage Vegetables, (sugar)
NAFTA IssuesNAFTA 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
MERCOSURMERCOSUR
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
Cairns GroupCairns 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
APECAPEC 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
JapanJapan 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
ChinaChina
1.3 Billion people Ag
Essentially self-sufficient Undergoing substantial dietary change
Ag Policy State dominated Transition to market economy Entry into WTO
RussiaRussia
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
Developing CountriesDeveloping Countries
67 Countries (40% of world population) Low-Income (< $2000 per capita) Net-Importers (dependent on food aid) Mostly trade with developed countries Policies Center Around Increased Income
Expansion of Exports Difficult to establish export markets Reluctant to allow imports
EU Common Agricultural EU Common Agricultural Policy (CAP)Policy (CAP)
EU History 1957 Treaty of Rome formed European
Economic Community Customs Union: No internal barrier to trade among
members; common external tariff; Free movement of labor and capital
1992 Maastricht Treaty formed European Union to establish common currency
1999 European Monetary Union (Adoption of the Euro)
EU Common Agricultural EU Common Agricultural Policy (CAP) cont.Policy (CAP) cont.
25 Members Original Treaty of Rome Included:
France Germany Italy Belgium Netherlands Luxembourg
EU Common Agricultural EU Common Agricultural Policy (CAP) cont.Policy (CAP) cont.
Governance Council of the European Union
Decision body with heads of state for each country (like Senate)
European Parliament Legislature body with 626 members appointed by
population (like House) European Commission
Executive branch implements policy Commission on Agriculture manages CAP
Court of Justice Dispute settlement body
EU Value of Ag Production EU Value of Ag Production and Processing ($B) and Processing ($B)
US EU 15
Ag Production 222 526
Processed Products 364 784
Dimensions of the EU’s Dimensions of the EU’s Common Agricultural PolicyCommon 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
Dimensions of the EU’s Dimensions of the EU’s Common Agricultural PolicyCommon 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
Why Expand?Why Expand?
EU Political influence
Security
Globalization
Trade
a) Basic reasons;External: WTO Reform ProcessInternal : Efficiency, Taxpayer and Consumer
Concerns b) Overall Sectoral Change;Market Orientation,Higher Competitiveness c) New Objectives; food safety, environment, rural
development d) Procedural; Registration and Control Mechanisms
Common Elements in CAP Reforms and Policy Change in Turkish Agriculture
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
Trade IssuesTrade Issues Benefits of Trade:
More efficient use of resources Reduce world hunger
Problems: Interdependence among nations
Barriers to TradeBarriers 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)
Origins of WTOOrigins 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
Three Basic PrinciplesThree 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
Three Pillars of URAA Three Pillars of URAA (Uruguay Round Agreement on Agriculture)(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
Loop Holes in URAALoop 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
4 Pillars of Doha Round4 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
Boxes of WTOBoxes 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)
Amber Box Limits for U.S. and E.U.
19,1
67,1
0
10
20
30
40
50
60
70
U.S. Bill $ E.U. Bill $
WTO ClassificationWTO 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
WTO ClassificationWTO 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).
WTO ClassificationWTO 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.
De MinimisDe Minimis Rule 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
Why Classification MattersWhy 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
Where We Are in Doha Round?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
• Trade Tools
• Import Quota
• Import Tariff
• Export Subsidy
An Import Quota by Importing Country
Q/yr
Exporting Country Trade Importing Country
$SS Excess
Supply
DD Excess
Demand
World Price
Quota
Quantity Traded is reduced
An Import Quota by Importing Country
Q/yr
Exporting Country Trade Importing Country
$SS Excess
Supply
DD Excess
Demand
World Price
Quota
Quantity Traded is reduced
Price in the Importing Country is raised
An Import Quota by Importing Country
Q/yr
Exporting Country Trade Importing Country
$SS Excess
Supply
DD Excess
Demand
World Price
Quota
Quantity Traded is reduced
Price in the Importing Country is raised
Price in the Exporting Country is reduced
A Tariff by Importing Country
Q/yr
Exporting Country Trade Importing Country
$SS Excess
Supply
DD Excess
Demand
World Price
Excess Supply is raised by the amount of the tariff
A Tariff by Importing Country
Q/yr
Exporting Country Trade Importing Country
$SS Excess
Supply
DD Excess
Demand
World Price
Excess Supply is raised by the amount of the tariff
Quantity Traded is reduced
A Tariff by Importing Country
Q/yr
Exporting Country Trade Importing Country
$SS Excess
Supply
DD Excess
Demand
World Price
Excess Supply is raised by the amount of the tariff
Quantity Traded is reduced
Price in the Importing Country is raised
Price in the Exporting Country is reduced
An Export Subsidy by the Exporting Country
Q/yr
Exporting Country Trade Importing Country
$SS Excess
Supply
DD Excess
Demand
World Price
Excess Demand is increased by the subsidy
Quantity Traded is increased
An Export Subsidy by the Exporting Country
Q/yr
Exporting Country Trade Importing Country
$SS Excess
Supply
DD Excess
Demand
World Price
Excess Demand is increased by the subsidy
Quantity Traded is increased
Price in the Importing Country is reduced
An Export Subsidy by the Exporting Country
Q/yr
Exporting Country Trade Importing Country
$SS Excess
Supply
DD Excess
Demand
World Price
Excess Demand is increased by the subsidy
Quantity Traded is increased
Price in the Importing Country is reduced
Price in the Exporting Country is raised
What does it mean when currency exchange rates rise & fall.
What happens to Excess Supply Excess Demand Quantity Traded
Impact of Exchange Rates
Can you draw each of the three trade tools? Then Identify
New Price in each country New Quantity traded New Quantity supplied and demanded in exporting country New Quantity supplied and demanded in importing country
Can you explain the impact of exchange rates?
Wrap up