Agriculture and Food in International Trade

G. Cornelis van Kooten

Professor and Canada Research ChairDepartment of Economics

University of Victoriaand

Senior Research FellowAgricultural Economics Institute (LEI)

The Hague, The Netherlands

Agriculture and World Trade Organization (WTO) Negotiations

• Agricultural programs are an obstacle to concluding trade deals (e.g., completion of WTO’s Doha Round)

• In 2012, state support for agriculture accounted for: – 5.7% of farm income in Brazil– 12% of farm income in America– 26% of farm income across the OECD– 29% of farm income in the European Union– 15% of farm income in Canada (2010-2012 average)

as % of Study Total world

GDPIMF and World Bank, 2002 128 0.4World Bank, 2002, static scenario 248 0.8World Bank, 2002, dynamic scenario 587 1.9USDA/ERS, 2000, static scenario 31 0.1USDA/ERS, 2000, dynamic scenario 56 0.2Anderson, 1999 165 0.5Francois en LEI, 2002 109 0.4

Why liberalize? Estimates of global welfare gains of removing global agricultural trade distortions

($US billions)

Source: Kuyvenhoven, A. & H. Stolwijk, 2011. Developing Countries and EU Agricultural and Food Policy. Chap 5 in EU Policy for Agriculture, Food and Rural Areas (pp. 121-138) edited by A. Oskam, G. Meester & H. Silvis. Wageningnen, NL: Wageningen Academic Publishers. p.129

WTO Agricultural Boxes

• In WTO terminology, subsidies in general are identified by ‘boxes’ that are given the colours of traffic lights: – green (permitted)– amber (slow down — i.e. reduce)– red (forbidden).

• In agriculture, things are more complicated. In the Agriculture Agreement: – There is NO red box – Amber box: domestic supports that exceed reduction commitment levels;

any measures that distort production and trade– Blue box: subsidies that are tied to programs that limit production (e.g.,

supply-restricting marketing boards) – Green box: acceptable (supposedly non-trade distorting) policy– S&D box: exemptions for developing countries.

Amber Box

• All domestic support measures considered to distort production and trade (with some exceptions) fall into the amber box, which is defined (Article 6 of the Agriculture Agreement) as all domestic supports except those in the blue and green boxes. These include measures to support prices or subsidies directly related to production quantities.

• These supports are subject to limits: ‘de minimis’ (minimal) supports are allowed (5% of agricultural production for developed countries, 10% for developing countries); the 30 WTO members that had larger subsidies than the de minimis levels at the beginning of the post-Uruguay Round reform period are committed to reduce these subsidies.

Blue Box• Created in 1995• This is the ‘amber box with conditions’ – conditions designed

to reduce distortions. Any support that would normally be in the amber box is placed in the blue box if the support also requires farmers to limit production (see Paragraph 5 of Article 6 of the Agriculture Agreement).– Set aside programs/cross compliance– Supply management (?)

• At present there are no limits on spending on blue box subsidies. In the current negotiations, some countries want to keep the blue box as it is because they see it as a crucial means of moving away from distorting amber box subsidies without causing too much hardship.

Green Box

• Defined in Annex 2 of the Agriculture Agreement• To qualify, green box subsidies must not distort trade, or at

most cause minimal distortion (paragraph 1). They have to be government-funded (not by charging consumers higher prices) and must not involve price support.

• Tend to be programs not targeted at particular products, and include direct income supports for farmers not related to (i.e., decoupled from) current production levels or prices.

• Include environmental protection and regional development programs. “Green box” subsidies are therefore allowed without limits, but comply with other criteria in Annex 2.

Green Box: Summary

To be eligible to be categorized as “green box”, a support measure must meet two basic criteria:

1. The support must be government funded2. The support must not have the effect of

providing price support to producers as price support is viewed as distorting production and trade

• Example: Safety Nets such as Single Farm Payment, Whole Farm Insurance

Green Box Criteria: Safety Nets

Specific criteria apply for safety nets:i. Eligibility for such payments shall be determined by an

income loss that exceeds 30% of some reference level (moving 5-year Olympic average or moving 3-year average).

ii. Payments shall compensate for ≤70% of the producer’s loss. (If threshold of 85% is used, as in Canada’s Growing Forward program, difference would be assigned to blue box)

iii. Payments shall relate solely to income; it shall not relate to the type or volume of production

This is the main reason why countries have turned to crop insurance, particularly whole farm insurance.

Question: Does whole farm insurance distort production?

Canada – European Union Comprehensive Economic and Trade Agreement (CETA)

• Elimination of tariff and non-tariff barriers could increase Canadian agri-food exports from $2.7 billion to $3.2 billion in the long run

• Average Canadian duty on agricultural products: 21.9%– Average duty on non-agricultural commodities: 3.5%– Average duty on imports of supply-managed products (milk,

chicken, eggs, turkeys): 159.1% but over 200% at margin• EU imposes high duties on beef (142%), pork (32% –

70%), fruits &vegetables (31.8%), fish & seafood (12.5%), and wheat & oats. – EU favors durum production in its CAP subsidies– Average duties on non-agricultural commodities: 2.2%. 

Canada’s Agri-food Trade Balance with the European Union, 2001–2010

Source: http://www.parl.gc.ca/content/lop/researchpublications/cei-25-e.htm?Param=ce5

CETA: European issues of sensitivity

• Genetically modified organisms (GMOs)• Fish & seafood: imports from Canada could threaten European

industry• Sectors with high duties:

– beef & pork products– Grains– processed foods

These are export markets that Canada hopes to develop.

• EU wants Canada to recognize ‘geographical indications’: – A ‘geographical indication’ refers to named region and is used to describe a

local agricultural or food product or manufacturing process from that region. – Recognition of ‘geographical indications’ could result in loss of market

share by Canadian food industry exporters.

CETA: Canada’s Sensitive Issues• Canada wants to protect its supply managed industries,

using prohibitive tariffs for amounts exceeding the tariff-rate quota (TRQ).– Under CETA slightly more quota is allocated to the EU (e.g.,

TRQ on cheese raised by 16,000 tons)– Negotiations to reduce the tariff applied on quota

• Canada wants clarity on ‘rules of origin’ for agri-food, especially livestock because: – North American market is highly integrated– EU rules would require modification of the traceability system

now in place.

CETA:  Non-tariff Barriers

• European issues:– length of Canada’s process for approving new veterinary drugs– delays in processing applications for authorization of food

additives– Canadian standards on the composition of cheeses

• Canadian issues:– European regulations on beef, including ban on growth

hormones– delays in approval process for genetically modified organisms

(GMOs) – GMO traceability and labelling requirements

Agricultural Programs and Subsidies

• Agricultural subsidies and farm programs are an obstacle to free trade, both with regards to CETA and WTO

• Slow convergence of programs through the WTO process mentioned earlier

European Policy

• After WWII, it was easy to establish an agricultural policy regime that provided farmers with large subsidies– Experience with shortages during and shortly after WWII– Large rural population with political clout

• Program continued despite large costs to consumers and/or taxpayers and declining farm population– Rent seeking: fewer farmers with more to gain have greater

incentive to lobby politicians– Consumers/taxpayers are less concerned with costs of farm

programs as proportion of income spent on food declines– Consumers increasingly concerned with food safety (e.g., BSE

crisis, pig flu, hoof & mouth disease, etc.): Rationale for continued government support of food and agriculture

European Policy: Issues with CAP

1. From beginning of CAP: High and increasing costs– Growing stocks of wine, butter, etc.– Growing international resentment of export subsidies– Need to reform CAP to facilitate trade negotiations– Desire to have budget to pursue objectives other than

agriculture

European Policy: Issues with CAP (cont)

2. Beginning 2004, integrating new Central and Eastern European members into the EU– Very expensive proposition: 10-year program to get

to full benefits– June, 2013 CAP reforms and convergence of payments:

• between EU-15 (average payment: €295/ha) and new members (€187/ha)

• between countries (e.g., average Dutch payment : €440/ha)

Dutch De-coupled Payment based on Historic 2000-2002 Yields

CropPayment

(€/ha)

wheat 377.5barley 377.5

seed potato 0edible potato 0starch potato 1,043.1

sugar beet 687onions 0

Source: Boere and van Kooten (2014)

European Union Budget, 2014

Smart & inclusive growth44.9%

Agricultural Guaran-tee Fund (EAGF)

30.7%

Agricultural Fund for Rural Development

(EAFRD)9.8%

Maritime & Fisheries Fund (EMFF)

0.7%

Environment & Climate

0.3%

Security & citizenship1.5%

Global Europe5.8%

Administration & Misc.6.3%

TOTAL = € 142,649.5 million

European Policy: Issues with CAP

3. Environmental concerns– Shift of lands out of forestry into agriculture unless prohibited

by other laws– Soil depletion– Chemical pollution from agriculture

Chemical Use, kg per cultivated ha, 2000

020406080

100120140160180200

AC-10 EU-15 EU-25 AC-Next Turkey N. AmericaU.S. 103 kg/ha; Canada 54 kg/ha

AC-10: Slovenia, Slovakia, Poland, Hungary, Malta, Czech Rep, Cyprus, Lithuania, Latvia, EstoniaAC-Next: Romania, Bulgaria

Is Canada Falling Behind? Who Needs CETA Most? A Tale of Two Countries

• Canada thinks of itself as a large exporter of agricultural commodities but we are outdone by the Netherlands. – Many years the Netherlands is the largest exporter of

agricultural products by value after the United States• Let’s look at some statistics and see what Canada

might aspire to:

Rank Commodity Mt Flag $ billions $/tonne1 Wheat 148.27 1 46.85 316 2 Food Prep Nes 12.29 16 46.72 3,800 3 Soybeans 91.02 3 45.03 495 4 Palm oil 37.05 5 40.57 1,095 5 Rubber 7.50 26 33.89 4,520 6 Maize 109.65 2 33.73 308 7 Wine 10.39 19 32.11 3,090 8 Bever. Dist.Alc 4.22 56 27.34 6,485 9 Coffee, green 6.72 33 27.15 4,037

10 Beef&Veal 4.98 49 26.72 5,368 11 Cheese 5.22 46 26.46 5,068 12 Soybean cake 64.91 4 25.40 391 13 Chocolate 4.85 50 22.98 4,739 14 Pastry 7.15 29 22.73 3,177 15 Chicken meat 12.47 15 22.07 1,770 16 Cotton lint 8.20 25 20.85 2,543 17 Cigarettes 1.12 133 20.70 18,468 18 Sugar Raw 31.97 6 18.50 579 19 Sugar Refined 23.11 8 17.36 751 20 Pork 5.23 45 16.63 3,181

Top Twenty Agricultural Commodity Exports, Global, 2011(Ranked by value)

Source:FAO

Rank Country Commodity Value ($’000s)1 USA Soybeans $17,563,8682 Malaysia Palm oil $17,452,1773 Indonesia Palm oil $17,261,2484 Brazil Soybeans $16,327,2875 USA Maize $13,982,4046 Indonesia Rubber $11,735,1057 Brazil Sugar Raw $11,548,7868 USA Wheat $11,134,6599 Thailand Rubber Nat Dry $10,634,724

10 France Wine $9,941,49511 Argentina Soybean cake $9,906,72512 USA Cotton lint $8,425,17913 UK Bever. Dist.Alc $8,330,05714 Brazil Coffee, green $8,000,41615 Brazil Chicken meat $7,063,21416 France Wheat $6,738,29917 Italy Wine $6,075,40418 Canada Wheat $5,742,11119 Australia Wheat $5,709,03620 Brazil Cake of Soybeans $5,697,860

Major Commodity Exporters, 2011

Source:FAO

Rank Country mil tonnes $ ×109 $/tonne1 Germany 1,024.25 4.060 3,963 2 Netherlands 917.85 3.528 3,843 3 China 1,317.13 2.580 1,959 4 Italy 777.50 2.470 3,177 5 France 526.55 2.261 4,293 6 Thailand 770.45 1.632 2,118 7 UK 322.14 1.572 4,881 8 Belgium 462.09 1.506 3,260 9 Denmark 295.43 1.444 4,889 10 Canada 448.95 1.397 3,112

Ranking of Exports of Food Prep Nes by Country, 2011

Food prep nes: Includes both crop and livestock products: homogenized composite food preparations; soups and broths; ketchup and other sauces; mixed condiments and seasonings; vinegar; yeast and baking powder; stuffed pasta; couscous; and protein concentrates.

Comparison of Cereal Grain Production, 2011Rank Country mil tonnes $ millions $/tonneBarley

7 Canada 1.055 313.6 29717 Netherlands 0.274 77.9 284

Maize11 Canada 1.070 359.6 336

Oats1 Canada 1.658 429.8 25912 Netherlands 0.029 10.2 351

Rapeseed/Canola1 Canada 7.891 4645.0 58914 Netherlands 0.180 123.7 688

Rye2 Canada 0.200 57.8 28913 Netherlands 0.018 3.6 204

Soybeans5 Canada 2.651 1445.8 5458 Netherlands 0.738 405.9 550

Wheat3 Canada 16.335 5742.1 352

Comparison of Other Crop Production, 2011

Rank Countrymillions tonnes $ millions $/tonne

Potatoes1 Netherlands 1,942.4 1,007.5 5195 Canada 614.1 229.5 374

Lettuce and Chicory4 Netherlands 118.5 165.8 1399

11 Canada 24.0 24.4 1017Spinach

4 Netherlands 20.2 12.7 63111 Canada 1.2 2.7 2352

Sugar Beets2 Canada 194.3 22.0 1134 Netherlands 265.0 13.0 49

Comparison of Meat and Dairy Production, 2011

Rank Country'000s

tonnes $ mil $/tonneBeef & Veal

3 Netherlands 164.16 1,017.3 6,197 15 Canada 32.53 167.7 5,155

Pork3 Canada 729.44 2,285.6 3,133 6 Netherlands 333.69 1,003.9 3,008

Cheese2 Netherlands 678.41 3,733.2 5,503

Whole Milk Condenced1 Netherlands 64.02 139.4 2,177

Whole Milk Evaporated1 Netherlands 210.12 409.8 1,950

Whole Milk Dried3 Netherlands 145.10 747.6 5,152