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Agriculture in the GATT : a quantitative assessment ofthe US 1989 proposal

Herve Guyomard, Louis Pascal Mahe, Christophe Tavéra

To cite this version:Herve Guyomard, Louis Pascal Mahe, Christophe Tavéra. Agriculture in the GATT : a quantitativeassessment of the US 1989 proposal. 1990, 42 p. �hal-01601026�

LN.R.A•• RENNES

[ 5 llLI. l~~O ]ECONOMIE RURALE

BIBLIOTHEOUE

AGRICULTURE IN THE GATT:

A QUANTITATIVE ASSESSMENT

OF THE US 1989 PROPOSAL

by

H. G~, L. P. Mronr*, C. ~~

x I.N.R.A. - Station d'Economie et Sociologie Rurales de Rennes - 65, ruede St-Brieuc - 35042 Rennes Cédex (France)

xx E.N.S.A. - Département des Sciences Economiques et Sociales de Rennes ­65, rue de St-Brieuc - 35042 Rennes Cédex (France)

September 1990

DOCUMENTATION ÉCONOMIE RURALE RENNES

11111111111111111 11111 11111 11111 11111111* 0 1 470 2 *

SUMMARY

An assessment of the implications of the US 1989 proposaI in

the GATT is simulated over a 5-year period.

The proposaI requires tariffication of aIl supports and

phasing out over 5 years for export subsidies and 10 years for

other measures (tariffs. deficiency payments). The proposaI was

simulated assuming that the EC can use production quotas to

cease being exporter in dairy and sugar so that the picture is

somewhat optimistic from the EC vlewpoint.

In spite of this. the proposaI would hurt farm income and

trade balance considérably more in the EC (resp. - 21.7 and - 13

billion ECU) than in the US (resp. - 4.6 and + 0.3 billion>' Budget

savings would be Iarger in the EC (+ 12.2) than in the US (+ 7.1).

The burder of adjustment on the EC appears quite heavler than

the one put on the US.

2

1 - INTRODUCTION

After the declaration of PUNTA DEL ESTE in 1986 launchlrig

the new round of GATT negotiations, the first proposaI of the

United States argued for a complete eiimination of farm

programmes in contracting parties by the year 2000 : the so-called

zero-option. While the committee for the trade negotiations of the

mid-term review session of 1988 could not reach an agreement on

the subsequent programme of negotiations, the april 1989 session

was concluded by an agreement such that before the end of 1990,

the contracting parties would implement a programme of long-run

reform of agricultural policies and set a time schedule for its

Implementation. ProposaIs aimed at achieving these objectives were

due before december 1989.

In october the US delegation has issued its new proposaI for

long-run reform which deals with four topics market access,

export competition, domestic support programmes and sanitary­

phytosanitary regulations. Broadly speaking, the proposaI argues

for three principles which were already included in previous

declarations tariffication, decoupling, export subsidy ban and

reinforcement of rules and disciplines. With regard to the

transition period, a general time horizon of 10 years is suggested

for most policies except for export promoting subsidies which are

to be eliminated after 5 years. Special treatment is also envisaged

for import quotas in the transition period which may lead to

diverging Interpretations.

3

In the paper we attempt to provide a quantitative

assessment of the impact of the US proposaI on the agricultural

sectors of the EC and the US and on world market priees. This

evaluation is carried with an enlarged and improved version of

the MISS model already used ln the EC study "Disharmonies in

Agricultural Policy Measures" (CEC, 19K! In the present context

the time dimension ls essential as policy reforms are explicitely

carried over well defined periods of time, so that technical change

and other trend factors cannot he neglected. As a consequence,

the assessment is made by a simulation of the US proposaI over a

5-year period of adjustment so as to reveal its effects on the EC

and the US.

The implications of the US proposaI may bé considered from

various stand points.

First, as the eventuai impact after la years ls a complete

trade liberalization, the scenario under consideration after 5 years

will reveal both the relative magnitude and the pace of

adjustment, imposed on US and EC farm policies as a result of the

US proposa!.

Second, the exercise will reveal what in the differential

impact on EC and US policy targets is due to the overall level of

support and what is due to the actual instrumentation of the

policies.

Third the economic rationale lying behind the results of

such a complex scenario where all policles are affected but ln

differential ways, will be elucidated and set lnto the perspective

of EC and US interactions.

4

Finally, the US proposaI can be assessed against the

historicai record of EC-US trade conflict over the CAP, in the

sense that, although dressed with the clothes of policy

instrumentation and principles rather than formulated as a

critique of EC protectionism in agriculture, it amounts to do away

with the principles of the traditional CAP.

5

2 INTERPRETATION AND IMPLEMENTATION ISSUES

QUANTITATIVE ASSESSMENT OF THE PROPOSAL.

FOR A

The US proposaI lncludes a number of considerations and

suggests specifie treatments of various policy measures alming at

"a long-run global reform of agriculture". Clearly, quantifying the

implications of the proposaI content for both EC and US

agrlcultural sectors raises a host of issues related to both the

actuai Interpretation of the proposaI wordlng ln terms of changes

ln policy instruments over the transItion perlod and to the

Implementation of such changes ln the context of a modelling

framework. In particular, as export and lmport protectionist

measures are meant to be phased out at a dlfferent pace, the

evolution of the trade position over time is the key element which

affects the pattern of adjusment. Moreover, farm policies are

complex and sorne commodlty programmes lnvolve both supply

management policies and trade measures, which leave room for

various comblnations of adjustments compatible with the proposaI.

2.1 - A brier discussion or the US proposa!

In the american proposaI the wide range of policy

instruments is divided into four categories ; (i) import access, (ii)

export competition, (Hi) domestic support, (lv) sanitary and

phytosanitary regulations. The proposai envisages a reform in the

four areas, which should be considered as an "integral part of a

globai reform rather than as distinct proposaIs".

In the introductory section of the text tabled in the GATT

(GATT, 1989), the US first emphasizes the various problems

created by current farm policies with respect to the cost they

impose on the budget, on consumers, on the environment and to

their distorting effects on trade. Then they propose that

"traditional forms of support which are directly tied to levels of

production and priees should be progressively elimlnated over a

period of 10 years". According to the proposaI, non-tariff barriers

to imports would be converted into border tariffs and, together

with preexisting tariffs, would be reduced over a 10-year period.

Export subsidies would be progressively eliminated over a 5-year

period. Export restrictions would be eliminated. For sanitary and

phytosanitary regulations, disciplines are proposed which would

establ1sh new notification, consultation and conflict solution

procedures. The latter non-tariff barriers are difficult to assess

and will he left aside in the present quantitative exercise, which

will deal only with the first three types of policy measures.

6

a - [mport access

The proposaI stipulates that tarlffs, including those

resulting from converting non-tariff barriers into tariffs, would be

bound on the first of January 1991, then phased out over a 10­

year transition period "down to final rates to be negotiated".

"Final rates would be zero or smaU".

It is worth noting that when 1t cornes to specifie items, the

proposaI leaves ground for negotiation. Whlle it ls said in the

introduction that aU pol1cy measures tied to priees and production

should be el1minated after 10 years, when it cornes to import

tariffs the US seem wllling to accept sorne non zero moderate

support, although in that case it is clearly not decoupled from

production and trade. Similarly safeguard mecanisms are envisaged

to prevent too large increases in imports from one year to the

next.

The proposaI suggests that tariff quotas would be used to

deal with non-tariff barriers in the transition toward an import

regime based on bound tariffs only. Import quota at agreed tariffs

would replace existing barriers and admitted quantities would be

progressively increased, whlle a tariff based on the gap between

domestic and border priees would apply to imports over and above

quotas. Quotas aUowed to specifie countrles would be

progressively eliminated. AU quotas would be progressively

el1minated over la years, and the only remainlng barriers would

be tariffs at bound levels.

7

As it is not. easy to predict what might be the eventual level

of bound tariffs to be expected from the negotiation. the present

exercise will consider that tariffs and tariff equivalents to existing

quotas will be eliminated over 10 years as implied by the phrasing

of the introduction of the proposaI.

b - Export competition

A period of 5 years is proposed for a progressive

elimination of export subsidies. A long list of rneasures to be

eliminated is provided which includes export subsidies as defined

by article XVI of the GATT treaty. Food aid would not be included

in the ban. but new rules to monitor food aid might be necessary

to ensure it does not distort normal commercial sales. Export

embargos and taxes. particularly those aiming at providing

cheaper raw materials to processing industries. will be prohibited.

Article XI ; 2a would be withdrawn so that export embargos would

not be allowed at aIl.

In the exercise. the export subsidy equivalents to export

enhancing measures are cut at a linear rate corresponding to a

complete elimination after 5 years. There may be cases however

where exports are eliminated before the end of the 5-year period.

The time profile of price support is then to be adjusted

accordingly.

8

c - Domestic support

The policy measures which contribute to domestic support

are divided into three categories according to their distorting

effects on production volumes and therefore on trade.

- Policies which have a significant impact on trade should

be progressively eliminated over the lO-year transitIon period.

The list includes administered prices, production and input

subsidies which are not granted on an equal basis (Le. which are

coupled with production levels).

- Policles providing subsidies to inputs or to investments on

an equal basis and those which have not led to excessive use and

are less distorting will be reduced and disciplined.

- Policies not tied to production volumes would still be

allowed. Conservation and environment policies, research, extension

and education programmes, bona fide domestic food aid and

resource retirement programmes are included into this category.

The quantification exercise will be concerned with measures

affecting directly production, consumption and use, together with

supply management policies. Although deficiency payments as such

are not explicitelY mentioned, they belong to this category even if,

combined with set aside as in the case of the US, their effect may

be lessened. As a consequence, deficiency payments have to be

eliminated over a lO-year period.

9

Processing subsidies for oilcakes or feed proteins in the EC

will be treated in the same way. In the proposai, there is room for

Interpretation for coresponsability ievy and domestic human

consumption programmes. For the sake of simplicity it will be

assumed that aIl these taxes and subsidies tied to production and

consumptlon are eliminated. Suppiy management policies, and more

specially production quotas which are not mentioned as such in

the US text, will be assumed acceptable and included in the

exercise in a way described below.

2.2 - ImpIlcations of the US proposai in terms of poIlcy

instrument changes.

The basic principies of the proposai are tariffication and

decoupling of support measures. The phasing out over a

transition period is impiemented at a constant annuai rate.

However, price support is eliminated over 10 years for import and

domestic measures and over 5 years only for export programmes.

The cruciai eiement which sets the pace of adjustment is the

initiai trade position and its evoiution over the transition period.

There will be essentiaIly two typified regimes of transition :

- The export restitution regime (caIled R5) where support is

cut at a pace of 20 % per year of the initial levei.

- The import tariff and domestic sûpport regime (caIled T10)

where support measures are phased out at the rate of 10 % per

year of the initiai ad-valorem tariff equivalent.

10

In the exercise, administered priees through variabie

restitutions or deficiency payments will no longer be pegged. but

they will be tied to world priees by the remaining tarif!

equivalent in each particuiar year. They will therefore depend on

deveiopments in worid priees occuring over the period as a resuit

of both exogenous factors and policy changes.

The pace of adjustment of support clearly depends on the

initial trade position and on the type of instruments used to

enhance production and trade balance. The EC will therefore start

with the R5 regime for most commoditles except oilseeds and grain

substltutes, as it is a net exporter in most commodities and uses

the variable-Ievy-variable-restltution system.

The US will mainly follow the TlO regime as it is using

deficiency payments for grains, and because the sugar and beef

quota are treated by the tarif! equivalent phased out over lO

years. There is one exception in the US case, namely the Export

Enhancement Programme (EEP) which is treated as the R5 regime,

but it is likely to have little effect on producer income.

a - Time profile of support and polJcy instruments

The evolution of the rate of support over the transition

period clearly depends on the type of instruments but also on the

trade position. As the latter may switch from net export to self

sufficiency or to net import, the time profile of the maximum level

of support is endogenous and cannot be specified a priori in the

11

1

case of export subsidization programmes. Moreover, when several

policy instruments coexist (e.g. production quota and export

subsidy) the margin of Interpretation of the proposaI increases.

Typified cases are described below to clarify this issue.

case 1 PrIee support Is phased out over 10 years

The simplest case (the country is importer and stays

importer) is illustrated in panel 1 of figure 1. It corresponds to

the permanent importer case where the country keeps being

importer during the transition perlod and after elimination of

import barriers. This case applies to existing tariffs or import

quotas after tarifflcation of the wedge between domestic and

border priees. The level of support provided to producers by the

tariff will follow the T10 schedule and be phased out at a constant

rate over 10 years. Presumably imports will increase (net exports

decrease), as shown in the lower part of panel l, during the

transition period. It is conceivable however that imports may

decrease at sorne stage in the particular case of a country with

low tariff when world (and therefore domestic) priees increase

significantly as a result of the reduction in support in other

highly protectionist countries. The beef regime in the US is a

possible candidate for such an example.

Case 1 also applies to domestic policy Instruments as

deflciency payments or varlous subsidy programmes. Ollseeds ln

. the EC will follow the TIO pattern. The US grain programme Is

more complex as deficlency payments are used jointly wlth the set

12

aside and with the EEP. Deflciency payments foilow the T10

schedu1e whlle the EEP is phased out over 5 years. Producer and

user priees wiil not be affected in a parailel fashion in these two

cases, while in the import tariff case they are.

Case 2 The Exporter country stays exporter (R5 schedule)

Figure 1 panel 2 exhibits such a case which is also fairly

simple; total support is elirnlnated after 5 years. Presumably if the

country keeps exporting after thls elimination, exports will start

rising again between years 5 and 10, when domestic priees

decrease less or increase after free trade is completed.

Case 3 ; An exporter country retums to self sufficiency

before the end of the 5-year period

In panel 3, the export subsidizing country ceases exporting

after 3 years. At this stage, it is not longer compeiled to stay on

the R5 schedule of level of support. At point A the level of

support is equal to 40 % of the initial level, but the country

cannot switch immediately to the T10 (at 70 % of initial protection)

schedule which would amount to restoring the exportlng, position.

In year 5, the level of support lies somewhere between zero and

DB, depending on the magnitude of trends and other policy

changes which affect the country net export curve. The solution

which corresponds to the highest possible level of support in year

5 is given by solving the model when the country is forced to be

13

no more than self sufficient in the commodity under consideration.

The country is allowed however to have a maximum tariff on

imports of 50 % of the initial tariff, thus prohibiting imports. This

approach was used in the EC for grains, beef and pork and

poultry, as going to free trade over 5 years brought the EC to a

net importing position.

This interpretation of the US proposaI is chosen so as to

find out what is the minimum adjustment in EC farm income

required by its content. The approach can be considered as fairly

optimistic in the sense that it reveals the upper Hmit of the

acceptability of the US proposaI by the EC.

b - specifie problems for some commodities and some poliey

instruments

- production quotas

Production quotas are implemented in the EC for dairy and

sugar. The proposaI does not deal speciflcally with those

instruments as it focuses on policies which enhance supply and

exports. In the present context the EC is assumed to be allowed to

adjust quota rights so that priee support eut can be kept as

small as possible. The EC may then wish to move to self

sufflciency by using supply control policies and tariffs. If the EC

is Just self sufflcient after 5 years, it is in a position to move on

the TIO schedule of support reduction and the decrease in the

nominal rate of protection can be limited to 50 % of the initial

level. This interpretation of· the proposaI amounts to a downward

14

shift of the net export curve trom X(t} to X9 (t) on panel 4 of

figure 1. In the present case the quota rights are reduced so that

the X9 (t) curve crosses the X axis 5 years after the reference

date. Given the interactions within the farm sector, the level of

the quota whlch ensures self sufficiency at 50 % of the initial

protection is a function of aIl other changes in pollcies and in

world priees.

The same logic was also applied to sugar in the EC with a

slight complication due to the ACP sugar import quota. The EC is

brought back to self sufficiency after 5 years and the ACP sugar

imports are supposed to be reexported at taxpayer cost. As in the

case of mllk, the freeze of the sugar production quota allows the

EC to move to the TIO schedule after 5 years and the nominal rate

of protection is eut only by 50 %.

In both cases the reduction in quota rights and the changes

in other policies, which amount to reduce the opportunity cost,

lead to a decrease in the shadow priee of milk and sugar. It is

necessary to check that the 50 % eut in the nominal rate of

protection does not take the producer priee below the shadow

priee where the quota would no longer be effective.

It is worth noting at this stage that the use of supply

control pollcies is designed to allow the EC to llmit the burden of

adjustment of producers. Its corresponds to a fairly optimistic

interpretation of the US proposaI since, without this flexibility,

the' EC would have been compelled to stick to the more severe R5

schedule of priee support reduction.

15

- specifie taxes and subsidies

Both EC and US farm programmes include a variety of

specifie measures often aimed at correcting the adverse effects of

16

the basic feature of the programme. Le. priee support.

Coresponsability levies. dairy product consumption subsidies. the

sugar levy. the skim milk powder premium.... are major cases.

These measures are aggregated with other measures and an

average level of protection is used for the typical producer or

user even if there is a discrimination in the implementation of the

schemes in favour of sorne specifie groups of producers or

consumers.

Consumption subsidies and coresponsability levies are

supposed to be eUminated after 5 years. Moreover. to keep the

picture simple it has been assumed that the gap between producer

and user priees (at the farm gate) would be eUminated after 5

years1 • This Interpretation is in Une with the idea of tariffication

which is important in the proposaI.

- Import quotas

Import quotas are widespread in both EC and US farm

policies. According to the proposai ail non-tariff barriers would be

converted into tariff equivalents and follow the lO-year phasing-

out schedule. It is not implied however that. importing countries

will actually cash the corresponding tariff proceeds. As a

consequence. imported quantities under a quota regime have been

l with the exception of grain deiiciency payments in the US, of oilseed crushing subsidy inthe EC, and the aggregate 'rest of agriculture' in both countries where the support measuresare treated as producer subsidies.

increased so that the implicit nominal rate of protection is eut by

half after 5 years. The budget Implications of these adjustments

will therefore be neutral as one would expect. Beef. sugar and

dairy in the US and manioc in the EC are treated ln that way.

c - a 5-year projection

The time dimension of any policy adjustment agreed in the

GATT is an essential feature. Partial or total liberalization over 5

years and over 10 to 15 years are totally different in terms of the

pace of adjustment of the farm sector. In the present context the

time dimension is crucial since the speed of priee support

reduction depends on policy instruments, as export subsidies are

decreased faster than import tariffs and other measures.

The time dimension is also important because technical

progress keeps enhancing production, outpacing shifts in the

demand for farm products in industrial countries. The pattern of

evolution of the trade position is therefore a function of both

technical change and priee support cuts and this pattern

determines whether a given commodity programme is eligible for

the 5-year or the 10-year phasing-out schedule.

Technical progress is also important in the presence of

supply management policies. Technical change shifts the

opportunity cost down for dairy and sugar in the EC and supplies

of other products should be affected accordingly as resources can

move from one subsector to another.

17

Another aspect of the time dimension is that sorne trade-offs

between policy targets are modified when technicai change is

allowed for (Guyomard. Mahé. Tavéra. 1988). Productivity growth is

reflected in income growth and the trade-off between farm income

loss and budget savings wlll be less severe when pol1cy changes

are spread over time. A pure comparative-static approach is

therefore I1kely to exagerate the burden of adjustment of the farm

sector due to partial I1beralization.

For these reasons a 5-year projection was performed where

both policy changes and general economic trends were taken into

account. Technical change parameters were calibrated on the basis

of the 1979-1989 period. Actual trends of production and

disappearance volumes were corrected for priee changes in order

to get an estimate of pure technicai change effects. Demand trends

were aiso corrected for price effects. The annual shifters in

supply. derived and final demands are displayed in Annex 1.

Simulation results wlll not show the isolated impact of the

US proposaI as compared to an alternative no-policy change

scenario, but they will show the magnitude of changes ln economlc

indlcators after 5 years. as a result of both economic trends and

pol1cy changes in the EC and the US.

18

2.3 - Model used. base year

The model used is an updated and extended version of the

MISS model used ln the CEC disharmony study (CEC, 1988; Mahé,

Tavéra, Trochet, 1988). The agricultural sector is now

disaggregated into Il outputs (grains, vegetal protelns, vegetal

oi12, corn gluten feed, manioc, other grain substitutes, beef, pork

and poultry, milk, sugar, rest of agriculture) and 4 inputs not

produced by the farm sector (fish and meat meals, fertillzers,

other intermediate consumptions, capital consumption). The

parameters are calibrated on the basis of both empirical studies

and theoretlcal constraints and are designed to be valid for a 4 to

5-year tlme horizon.

The base period is 1988 for budget data, protection

estlmates and animal products. It is 1987-88 for crop quantities.

Animal feed use is represented by its Ingredients and the oil

included in supply corresponds to the oil content of oilseeds

whlch are domestlcaIly produced. The data were calibrated so as

to approxlmate budget, income and trade as weIl as possible.

Budget expendltures are smaller than total FEOGA outlays for

varlous reasons.

19

First, as imports and exports are supposed

subsitutes only net trade ls represented so that tariffs

proceeds are deduced from gross export subsidies,

budget expenditures are net.

1 except for olive oil included in the rest of agriculture.

perfect

or levy

50 that'

Second, only pollcles Important for trade are Included. The

nominal protection estimates are therefore significantly lower than

the OECD Producer Subsidy Equivalents (PSE) as the latter

Include various items like government subsidies to research or

regional aids which can be malntained according to the US

proposaI (OECD, 1989). Intervention outlays on storage are not

lncluded slnce they may be consldered as a result of an

inefficient way to delay exports. Howevert increases in stocks are

Included in exports, so that the assoclated restitution cost Is

included in the budget. Net exports therefore correspond to

exportable surplus rather than to actual exports.

The situation of quota-ridden products ln the base year is

Important since the level of the quasi rent will determlne the

priee eut which will trlgger a downward supply response. This

was not a problem ln the present case since, due to quota

reductions and other pollcy changes, the required producer priee

eut was lower than the decrease in the dalry and sugar shadow

priees, as a result of the effect of technical change and of the

cuts ln varlous priee supports on competing outputs or on inputs.

3 - RESULTS : THE IMPACT OF THE US PROPOSAL ON THE

EC AND THE US AFTER 5 YEARS

20

In this section we first dlscuss

implemented over the 5-year period.

implications on domestic and world priees

which enllghten the economlcs of the

actuaI pollcy changes

Then we revlew the

of various commodities

adjustments ln world

agriculture as a result of EC and US partial liberalizatlon. Flnally,

the global effects on Income, budget and trade are presented and

the dlfferentlal Impact on the EC and the US Is polnted out.

3.1 - Actual policy changes over the 5-year period

The discussion of Issues ralsed by the Interpretation of the

US proposaI showed that some policy changes were endogenous ln

the exerclse. because of possible trade reversaIs and the

consequent shlfts from the R5 to the TI0 schedule of priee

support eut. The drlvlng forces behlnd the results are best

understood by looklng jolntly at Table 1 where the changes ln the

Nominal Rates of Protection (NRP) are reported and Table 2 whlch

dlsplays net exports in volume.

Because of tarlfflcation, support pollcy Instruments are now

ad-valorem protection rates or equlvalent import quotas or

production quotas. Domestic priee changes come as a result of

both world priee and nominal protection changes.

As the EC Is a net exporter for most commodlties, and uses

export subsldles, nominal protection falls by more than 50 % for

some products. This Is the case for grains where It has to faU by

two thlrds from 106 % to 29 % ln order to brlng the EC back just

to self sufflclency. Pork and poultry follow the same pattern and

priee support Is nearly ellmlnated (NRP falls from 28 to 5 %). It

seems therefore most likely that the EC could become under free

trade a permanent exporter of pork and poultry if grains and

21

1r

feeds were further liberalized. For beef the situation is somewhat

different and - on the basls of the year 1988 - a 50 % eut of the

NRP is more than what Is requlred for the EC to eease belng li

permanent exporter. At domestie priees higher than world priees

by about 40 %, the EC would after 5 years import more than the

amount requlred under the beef import quota reglme, so that the

EC ean stay on the TI0 sehedule.

This is also the case for dalry, but wlth an aeeompanying

measure : a reduetion ln production quota maklng the EC just self

suffleient. The NRP would then fall only to 47 % for dalry under

the condition that quota rights are redueed by 14 %. Wlthout

maklng use of the quota the EC would be bound to reduee dalry

priees even further, If It were to rely only on restitutions to

maintain produeer priees. Wlth these polley changes and teehnieal

progress, the shadow priee of mllk would fall by a further 33 %

and be close to world market priee. This implies that a signlfleant

amount of rent would still be assoelated with the quota and th~t

the produeer priee eut implemented is not ln a position to impact

on mllk supply, henee the neeessity to restrlet further the level

of quantlties allowed in the referenee. A slmllar analysis applles to

sugar but redueing the NRP by half ls enough to bring the EC

baek to self suffleieney3 when the production quota Is kept just

at the same level. Beeause of the fall of the priees of other erops

and produetivity gains, the shadow priee of sugar falls by 28 %, a

1 the 1.3 million tonnes reported in Table 2 correspond to the ACP sugar quota which is to bereexported. In order to better approximate budget expenditures, the ACP sugar quota was addedto doaestic production, so that exports reported here are, as a exception, total exports andnot net exports.

22

drop which should take it close to world market prices if it was

not already before.

The other group of commoditles is el1gible to the TI0

schedule since the EC is a large importer of them. NRP's are

therefore cut by 50 % for oilseeds and protein crops, manioc,

other grain substitutes (millings and other byproductsJ, and the

rest of agriculture (fruits and vegetables, beverage, tropical

products, ovine meat...J. In the case of manioc the aUowed

quantities under the Voluntary Export Restraint Agreement (VERA)

with Thailand and other countries would have to increase from 7

to 8.4 million tonnes.

The first group of commodities clearly bears the largest

burden of adjustment, although the use of production quotas

gives the EC a sizeable margin of manoeuvre. The weighted

average NRP in the EC faUs from 66.3 to 28.1 % after 5 years.

The required changes in US protection rates follow the 10-

year el1minatlon pattern as the US is either an importer (animal

products', sugar, rest of agriculture) or an exporter without

signiflcant export subsidies (soybeans, corn gluten feed, other

grain substltutes). There is one exception, grains, which have a

signiflcant EEP to be eliminated after 5 years. But even in that

case sorne farmers, namely beef and pork and poultry producers,

would rather benefit than lose from the resultlng faU in user

prices.

, for dairy products there ia again room for Interpretation as ~e use milk equivaient and asthe aign of the US balance seems to de pend on ~ether it is expreas on the baaia of the fat orthe protein content of milk.

23

AIl other nominal protection rates are reduced to half their

value of the base year. This is obtained through an increase in

quotas for sugar and dairy products, while the US is likely to

become an exporter of beef due to a world priee risee.

OveraIl the US rate of adjustment can be closer to the 50 %

reduction schedule due to its policy instruments and its trade

position.

3-2 - Implications on world and domestic priees and the

economics of baning export subsidies

The world priee for cereals increases by 10 % as a result of

24

three factors the ellmination of EC exports following the

reduction of support which cuts production (6,5 %) and stimulates

feed demand (5 %) although beef and dairy production levels are

reduced. The pork and poultry sector in the EC expands by 12 %

in spite of a nearly complete elimination of support, because the

cost of concentrated feed in the EC falls markedly (from 14 % for

feed proteins to 31 % for other grain substitutes, cereals falling

by 30 % ; see Table 4).

World priees of protein feed and various grain substitutes

are falllng except for manioc. The priee of manioc increases for

two reasons : first, the EC imports more manioc by relaxing the

VERA ; second, manioc is an important food item 'in various parts

of the world and human demand increases. Corn gluten feed and

, the result is consistent ~ith the estimate of the tariff equivalent to the beei import quotamade by tbe USDA (Webb et aL, 19901. lt would be different if the higher DECD estimate of theUS heef PSE were used.

other grain substitutes prices faB due to a contraction of the beef

and dairy sectors in the EC and to substitution by grains in

animal feed.

World dairy product and sugar prices increase noticeably

(17 % and 7 % respectively) because EC and US pol1cy changes are

somewhat simllar and confort each other. The large cut in the EC

mllk quota is the main reason for world price lncrease. For· sugar,

the rise is more l1mlted as EC supply does not react to the price

cuts because of a large quasi rent that is perpetuated by the

package of policy changes.

Beef and pork and poultry prices do not change markedly

because the US tend to dampen the effects of the EC's

liberal1zation. US production of beef and pork and poultry

increases as a result of higher world prices and of technical

change since the US protection for these products is zero or close

to zero in the base year.

While nominal rates of protection in the EC are cut by 50 %

or more, the actual faB in domestic prices is dampened for many

products because of world price rise. This is the case for grains,

manioc, dairy and sugar.

Although NRP is cut by two thirds for grains and only one

half for oilseeds. producer prices of these commodities faB in

nearly the same proportion as the price ratio between feed

proteins and grains deteriorates sharply on world markets.

25

In the US. producer priees faH relatively less than in the

EC because nominal protection is less reduced. Because of

tariffication of priee support both EC and US domestic priees are

directly affected by world priee changes due to each other's

liberalization.

AlI feed input priees faH in both the EC and the US except

for grains in the US where they increase by 2.7 % because of EEP

abolition. These cheaper feed priees are the consequence of

protection reduction on these feed items and on the animal

product sector. They contribute to dampen the negative effect of

liberalization on farm incomes.

Large budget savings occur in both the EC and the US (see

Table 5). Moreover. they have a similar magnitude although their

economic rationale and the affected commodities differ

substantiaHy.

The main reduction in budget costs in the US takes place on

deflciency payments in the grain sector. Other substantial savings

occur on consumption subsidies in dairy and on various

subsidization programmes benefiting to the aggregate "rest of

agriculture" .

The EC budget savings are spread over most of the

commodlties : 2.7 billion ECU for grains. 1.8 for oilseeds. 1.6 for

beef. 4.0 on dalry. The main source of savlngs in the EC comes

from the ellmlnatlon of export restitutions in grains, dalry and

26

beef as a result of the return to self sufflciency (grains, dairy,

pork and poultry) or even to a net importing position (beef).

The agricultural trade balance (Table. 6) evolves quite

differently in the EC and in the US. The negative EC balance

deteriorates sharply ( by about 13 billion ECU) while the US

balance improves by 0.3 billion. In the EC it is clearly the

reduction in priee incentives and in protection which brings the

EC to a self sufflcient or an importing position in temperate-zone

products. In the US, the conjonction of lower priee cuts and

sharp increases in grain priees help improving the trade position

. by 0.5 billion ECU in grains. This is nearly offset however by the

loss in soybean and soybean product exports as the EC's imports

decrease and the world priees faIl work in the same downward

direction. The US trade also beneflts in the animal sector,

particularly in beef, taking advantage of the rise in the world

priee!.

The net effect of EC liberalization on US trade in crops

would be more or less neutral as the EC support reduction in

grains and animal sector tend to offset each other from a US

point of view. Altogether, the US proposaI appears to be quite

favorable to US trade balance and would force the EC to step off

the world market as a significant exporter.

1 see however the caveat in section 3 about the estimation oi the actual impact oi the presentbeef import quota on nominal protection in the US.

27

3.3 - The ditferential Impact of the US proposal on global

indicators

Table 7 and Figure 2 display the evidence of the differential

impact of the US proposaI on major global policy indicators. Total

savings in budget expenditures are far apart (12.2 billion ECU in

the EC. 7.1 in the US) and other indicators exhibit even larger

differences between the two countries.

As expected from the magnitude of producer and user priee

changes. net farm incomes in the EC faHdramatically over the 5­

year period (21.7 billion ECU or about one fourth). In the US net

farm incornes are reduced by only 7.0 %. If the US change in

income is within reach. given the rate of outmigration of labour,

the faH in the EC does not seem feasible over 5 years without

sorne compensation whlch would use up ail budget savings and

need even more.

The US seems to be in a position to compensate producer

losses by using the taxpayer money saved. lt is not the case in

the EC because a significant amount of the transfer cornes from

consumers who would gain 20.9 billion ECU from EC's partial

liberalization. So if the EC would have to compensate producers.

most of consumer gains would have to be recaptured by sorne

fiscal measures.

Another conspieuous differential impact is on trade. The US

manage to improve its position by benefiting from world priee

rises and because of limited production cuts (the trade balance

28

improves by + 0.3 biU10n ECU). whlle the EC agricuitural trade

position deteriorates sharpiy (- 13.0 billion).

Overall. the magnitude of the impacts is strikingly different

as 1l1ustrated on Figure 2.

4 - CONCLUDING COMMENTS

The quantitative assessment of the US proposaI shows

distinctive impacts on the EC and the US. The adjustment burden

put on the EC is considerabiy larger than on the US. particularly

in terms of farm income and trade. whlle savings on budget are

not quite 50 far apart.

Although the US proposaI seems based on principles of

adjustment rather than on country specifie changes, it amounts to

a differential treatment of the EC and the US. due to the

contrasted initial positions and the types of policy instruments

implemented. As the EC exports with the heip of restitutions and

as the CAP relies on high user priees to support farm incomes the

budget-saving-farm-income trade-off is much more severe in the

EC.

By rullng out export restitutions after 5 years the US

proposaI amounts to wipe the EC out of the world export market.

The best the EC can do is to return to self sufficiency in most

highly protected commodities which are now in excess supply. The

EC agricultural sector is considerably reduced under the scenario.

29

The US should also realise however that a smaller animal sector in

the EC means a smaller outlet for feed items and lower world

priees for soybeans.

It may be pointed that the US proposaI, aithough phrased in

terms of general rules of policy adjustment. amounts to put a

specifie pressure on the CAP. Eventually it is not different from a

plain reconsideration of the CAP principles· in the new context of a

generalized exporting position of the EC. It reveals that the

spreading surpluses and their budget implications have increased

the pressure on the CAP. hence the implementation of budget

stabilizers and supply control policies.

30

REFERENCES

CEC (1988) Disharmonies in EC and US AgriculturalPolicies. Report to the Commission of theEuropean Communi ties by EC/U. S. StudyGroup, Brussels.

31

GATT (1989) Submission ofcomprehensivereform.

the Unitedlong-term

States onagricultural

GUYOMARD H. ; MAHE L.P. ; TAVERA C. ; TROCHET T. (1988)Sorne problems of modelling agriculturaltrade policy interactions between the ECand US. International Agricultural TradeConsortium, San Antonio, USA, déc.

MAHE L.P. ; TAVERA C. (1988) Bilateral harmonization ofEC and US agricultural policies. Eur. Rev.Agri. Econ., déc.

MAHE L.P. ; TAVERA C. ; TROCHET T. (1988) An analysisof interaction between EC and USAgricultural Policies with a simplifiedworld trade model : MISS ; Background paperfor the report to the Commission of theEuropean Communi ties on Disharmonies in ECand US Agricultural Policies. INRA, Rennes,France.

OECD (1989) Tableau des ESP et ESC 1979-1988. Paris.

WEBB A.J. LOPEZ M. PENN R.Producer and ConsumerUSDA, ERS, Stat. Bull.

(1990)SubsidynO 803.

Estimates ofEquivalents.

32.

Flgure 1. Tlme proflle of level of support and trade position

panel 1 : Importer S'tays importerIeveJ ofsupport

panel 2 : exporter stays exporterlevel of support

o

5 o 5

panel 3 : exporter returns to self suf­f1ciency

leve! of support

panel 4 : exporter using productionquotas

lave! of support

B'

5 10netexport

o

3 5.

l 5TlBteicport

,,

le F

o

o

• •••..., . path of level support

path of net exportrn=o zone of Indeterminacy

33.

Figure 2. The differentiai impact of the US proposai on EC and US policy targets(billion ECU)

Budget Savings

+ 12.2

1

-13 .0

Loss inTrade Balance

\1

Il1 \,1 \

1 \l .. 1

1 ,

1 ,

1 1,1,1

- 21.7

Loss in NetFarm Incarne

+ 20.9

ConsumerGain

impact on the USimpact on the EC

Table o. LIst of abbreviatlons

GRA ; graInsVPR ; vegetable proteInsOIL ; vegetable oil ;CGF ; corn gluten feed ;MAN ; manioc ;OGS : other graIn substltutesBEE; beef ;P&P ; pork and poultry ;MIK ; milk ;SUG ; sugar ;ROA : rest of agricultureOTF : other feed IngredientsOIC ; other lntermedlate consumptionFER fertllizers;CAP ; capital services.

34.

35.

Table 1. Actual policy changes ln the EC and in the US over 5 years nominal rateof protection (in % of border priee)

l.Supply side

GRA

VPR

aIL

CGF

MAN

OGS

BEE

P&P

MIK

SUG

ROA

AVERAGE

initial

105

75

75

o100

25

75

28

94

210

25

66.3

ECfinal

29

37.5

37.5

o50 cv

12.5

37.5

5

47 (2)

105

12.5

28.1

initial

70

ooooo2

o85

156

29

36.0

usfinal

35

ooooo1

o42.5

78 (3)

14.5

18.4

2. Demand side

GRA

VPR

OIL

CGF

MAN

OGS

BEE

P&P

MIK

SUG

ROA

105

o10

o100

25

75

28

85

233

10

+

35

o5

o50

12.5

37.5

5

47

105

5

7

ooooo2

o68

156

10

·0

oooo

o1

o42

78

5

•

III : import quota increased from 7.0 to 8.4 million tons.121 : production quota decreased by 14 %.131 : import quota increased from 0.97 to 1.89 million tons.t nominal protection is 43 %for skim milk podwer fed to veal, Tbe gap between producer and user priee Isubsidy/taxl is supposed to be eliminated after 5 years, except in the case ofoilseeds in the EC, grains in the US, and of RDA in both countries.

Table 2. Changes in trade net exports (million tonnes)

EC USInitial Final Initial Final

GRA 25.1 0.0 +48.5 +50.1

VPR -25.0 -21.8 +21.0 +21.3

OIL -3.2 -4.0 +7.4 +7.3

CGF -4.5 -5.7 +4.3 +5.5

MAN -7.0 -8.3 0.0 0.0

OGS -7.0 -5.7 +2.6 +3.6

BEE +0.7 -0.7 -0.8 +0.2

P&P +0.7 0.0 -0.1 +1.4

MIK +16.9 0.0 -1.8 -3.5

SUG +3.5 +1.3 -1.0 -1.9

RDA • -21.9 -28.5 -1.8 -4.7

. 11'1 billion ECU

36.

Table 3. Changes in worid market priees

Initial(ECU/t)

1:Agricultural products

Final(ECU/t)

37.

% change

GRA 102

VPR 227

aIL 400

CGF 135

MAN 70

OGS 120

BEE 2 000

P&P 1 089

MIK 138

SUG 163

ROA 813

113 +10.8

195 -14.1

389 -2.8

105 -22.2

75 +7.1

69 -42.5

2 063 +3.2

1 077 -1.1

162 +17.4

175 +7.4

814 +0.0

• Priee index base 1 000 in the EC in the base year

2. Agricultural inputs

OTF

OIC

FER

CAP

-1.8

-0.2

-0.1

-0.2

Tablé 4. Domestic producer priees

EC us

38.

Initial(ECU/t)

Final(ECU/t)

% change Initial(ECU/t)

Final(ECU/t)

% change

1.Agricultural products

GRA 209 145 -30.6 118 104 -11.9

VPR 397 270 -32.0 227 195 -14.0

OIL 700 538 -23.1 400 390 -2.5

CGF 135 105 -22.2

MAN 75 +7.3

OGS 112 77 -31.3 90 69 -23.3

BEE 3 500 2 852 -18.5 2 040 2 083 +2.1

P&P 1 394 1 126 -19.2 1 089 1 077 -1.1

MIK • 268 238 -11.1 (-33.0) 255 230 -9.8

SUG • 505 357 -29.3 (-28.4) 471 351 -25.5

ROA + 1 000 910 -9.0 1 049 934 -10.9

AVERAGE -15.0 -8.5

* in parentheses shadow priee changes+ priee index based on 1988 ROA aggregate in the EC.

2. Agrlcultural inputs

GRA 209 145 -30.6 74 76 +2.7

VPR 227 195 -14.0 227 195 -14.0

CGF 135 105 -22.2 135 105 -22.2

MAN 140 113 -19.2 70

OGS 112 77 -31.3 90 69 -23.3

OTF -1.8 -1.8

orc -1.3 -0.1

FER -1.9 -0.1

CAP 1.4 -0.2

Tàble 6. Budget expenditures (million ECU)

EC US

39.

Initial Final Initial Final

GRA 2 690 0 12 175 7 895

VPR 2 276 1 113 0 0

OIL 1 186 666 0 0

CGF 0 0 0 0

MAN -30 -9 0 0

OGS -158 -50 0 0

BEE 1 050 -556 0 0

P&P 201 0 0 0

MIK 4 018 0 1 345 -260

SUG 727 221 0 0

RDA 4 127 2 572 2 504 1 239

TOTAL 16 087 3 957 16 024 8 874

.' Restitutions (including ACP reexports) net of sugar levy.

Table 6. Changes in agricultural trade balance net exports (billion ECU)

40.

InitiaiEC

Final change InitialUS

Final change

GRA 2.6 0 -2.6 +3.3 +3.8 +0.5

VPR -5.7 -4.3 +1.4 +4.8 +4.2 -0.6

OIL -1.3 -1.5 -0.2 +2.9 +2.8 -0.1

CGF -0.6 -0.6 -0.0 +0.6 +0.6 0.0

MAN -0.5 -0.6 -0.1 0.0 0.0 0.0

OGS -0.6 -0.4 +0.2 +0.2 +0.2 0.0

BEE +1.4 -1.4 -2.8 -1.5 +0.5 +2.0

P&P +0.7 0.0 -0.7 -0.0 +1.5 +1.5

MIK +2.3 0.0 -2.3 -0.2 -0.6 -0.4

SUG +0.6 +0.2 -0.4 -0.2 -0.4 -0.2

ROA -17.8 -23.3 -5.5 -1.4 -3.8 -2.4

TOTAL -18.9 -31.9 -13.0 +8.5 +8.8 +0.3

• The reported figure is gross export in this case (see footnote 3)

Table 7. Changes in major poiicy targets (biliion ECU)

41.

EC USInitiai Finai change Initial Finai change

Net Farm Income 82.5 60.8 -21.7 67.0 62.3 -4.6

Budget costs 16.1 3.9 -12.2 16.0 8.9 -7.1

Consumer surpius +20.9 +1.6

Trade baiance -18.9 -31.9 -13.0 +8.5 +8.8 +0.3

42.

Annex J. Annual shlf'ters used ln projection (1) for sgriculturaJ supply (8), derlveddemsnd (D) snd final demsnd (F), in " per yeu

EC USA Rest of Wor IdMarket Economies

S 0 F S 0 F S 0 F

GRA 2,1 1.32 1,45 2.l 2.29 0,98 1,70 2.38 1. 92

VPR 4.56 2,65 l,29 1,17 2.8J 2.8J

OIL 4, 56 2.8J 2.29 2.83 2.83 1,92

CGF 6.96 6,16 0,69 0.19

MAN 5,70 1.45 2.20 2.20

OGS 1.92 1.70 5,70 1.11 1,J6 0.98

BEE 0,98 0.98 1,92 1.45 0.29 0.39

P&P 1.92 1,45 2,38 1.40 3.36 3,36

MIK 1.45 0,59 0.98 0,59 2.56 2.83

SUG 2. 83 0.59 J,71 0,98 2,38 2,65

ROA 0,69 1.92 0,49 1,92 2.38 1.92

OTP 0.98 0,98 0.49

OIC 2.61 2.61 2.38

CAP o.98 0,80 0.49

III Shifters are technieal change biases in supply and derived demand. They represent income and population growtheffeets in final demand.