food & agricultural trade liberalisation: can a balance be found? allan n rae director centre...
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Food & Agricultural Trade Liberalisation: Can a balance be
found?
Allan N Rae
Director
Centre for Applied Economics and Policy Studies
Supported by PGSF and C Alma Baker Trust
Negotiations Timetable• URAA required new negotiations to begin by end
of 1999 - these commenced early 2000.• In Doha (end-2001) these incorporated into a
wider negotiations agenda: The Doha Development Agenda
• Timetabled for completion 1 January 2005.• Modalities to be established by 31 March 2003• Chair of Agric. Committee submitted draft of
above in Feb. Widespread criticism• Updated draft in mid-March, but little changed.• Deadline now extended to September• Round to be completed by 1 Jan., 2005
Doha Ministerial Statement
• For agriculture, to pursue “substantial improvements in market access; reductions of, with a view to phasing out, all forms of export subsidies; and substantial reductions in trade-distorting domestic support”
Market Access
Background: Agricultural tariffs
• Despite URAA cuts, all ‘bound’ tariffs for agricultural & food items average 62%. Highest are those on tobacco products, dairy, and meats
• Considerable ‘water’ in tariffs, especially developing countries
• NTBs: ‘Dirty’ tariffication in URAA exaggerated base levels of protection
• Large dispersion across countries & commodities• Ad valorem & specific tariffs
Averages of Global MFN Bound Tariffs (from ERS)(average = 62%)
0
10
20
30
40
50
60
70
80
90
% a
d va
lore
m
Background: Quotas
• URAA required NTBs to be replaced by equivalent tariffs.
• But in order to provide minimum market access where little or none had existed, TRQs were invented
• Out-quota tariffs often so high that these act like quotas
• In some cases, quotas are under-filled, even when in-quota tariffs are very low
P
Q
Pw(1+To)
Pw(1+T1)
q1 q2
Pw=import priceTo = within-quota tariffT1 = out-of-quota tariffD = import demand curve
q1 = the quota quantityq2 = total imported quantityHigher tariff paid on q2-q1What is the quota rent?
D0
D1
D2
q0
Export Competition
Background: Export Subsidies
• URAA’s twin reduction commitment
• Most effective component of URAA?
• Of total expenditure 1995-98, EU accounted for 89% (USA, 1.5%)
• EU subsidised nearly all its exports of coarse grains, dairy products and beef
Other export competition issues – in contrast to export subsidies, these have a Nth American focus
• Export credits: US programmes a focus. – But US subsidy value only 7% of the commodity value.
– Likely induce only small distortions
• Exporting STEs: Canadian Wheat Board– Are export subsidies provided?
• Food Aid: US programmes again a focus– Donations have tended to increase in times of surplus:
surplus disposal?
– In grant form only?
Domestic Support
Background: Domestic Support
• Boxes and categories of instruments
• What is ‘decoupled’?
• The AMS
• Trend from distorting to less-distorting instruments – US U-turn?
OECD trend is to less output-distorting assistance measures
0
50000
100000
150000
200000
250000
86/88 1999-2001
US
$ m
illi
on
s
Distorting Less-distorting
D o m e s t ic s u p p o r t h a s in c re a s e d s u b s ta n t ia l ly in th e U S
• T ra d e -d is to r t in g d o m e s t ic s u p p o r t c a n b e in c re a s e d i f c u r r e n t s p e n d in g is b e lo w th e c o u n try ’ s le v e l o f c o m m itm e n t
0
5
10
15
20
25
95 96 97 98 99 2000 2001
US
$ b
illi
on
Com m itm ent
ac tual
Domestic support: examples of exempted policies
• Research• Training and extension• Inspection/quarantine• Market information/promotion• Stockholding• Decoupled income support• Natural disaster relief• Structural adjustment assistance• Payments under environmental programmes
Category shares in total domestic support: 1999
0%10%20%30%40%50%60%70%80%90%
100%
EU Japan USA
%
de minimus
Green
Blue
AMS
Bound vs Applied AMS - 1999EU major user, but US close to limit
0
10000
20000
30000
40000
50000
60000
70000
80000
EU Japan USA
US
$ m
illi
on
AMS Bound
AMS Applied
Non-trade concerns• EU, Japan, Norway etc argue for
“multifunctionality”• Argue that agricultural has multiple objectives: eg
– Rural development and rural viability
– Environmental protection
– Food security
– Retain farming practices for tourism
• Seen as public goods – a market system will not produce them at optimal levels
• Therefore public support is justified• They are often joint products with food
Can farm payments be fully decoupled from production &
trade?• Even ‘decoupled’ payments may impact
production:– May reduce income variance, and farmers tend to be
risk-averse
– Increase wealth and move farmers to a less risk-aversion state
– May relax debt constraints
– May increase on-farm investment
– ..and base periods may be updated
Is there any empirical evidence?
• Limited evidence suggests degree of ‘coupling’ not strong– Nth American studies have looked at US and Canadian
programmes, and reached above conclusion.– A World Bank econometric study found elasticity of
net import demand wrt ‘non-exempt support’ = -0.10, and that for ‘exempt support’ was <0 but not significant
– The GTAP model provides rather similar elasticities
• How much negotiating effort to devote to reducing such spending, or limiting the green box?
Summary of Selected Proposals: Tariffs
• Cairns Group– Swiss formula (a=25) from bound rates, over 5 years
– Special treatment for developing countries
• USA– Swiss formula (a=25) from applied rates, over 5 years
– Tariffs simplified to either ad valorem or specific
• EU– ‘flexibility’ of the URAA formula, over 6 years
– Special treatment for developing countries
The Swiss Formula
• Proposed by Cairns Group and USA
• Swiss formula:• t1 = a.t0/(a + t0)• Maximum tariff
becomes 25%• Implies very large
tariff reductions in many cases
Swiss formula: a=25
0.0
5.0
10.0
15.0
20.0
25.0
0 50 100 150 200 250 300 350
t0
t1
TRQs• US
– Cut in-quota tariff to zero, and expand quota by 4% per year, over 5 years
– Quota expansion on MFN basis
• Cairns Group– Cut in-quota tariff to zero, and expand quota by 20% of
domestic consumption, over 5 years– Quota expansion on MFN basis– As for US, special consideration for developing
countries
• EU– No specific targets, but wants administration enhanced
Export Subsidies• EU
– Cut spending by average of 45%
– On condition all forms of export subdisation treated ‘on equal footing’
– Greater reduction for commodities important to developing countries
• US– Elimination over 5 years
• Cairns Group– Eliminate all forms of export subsidisation
– At least 50% cuts in export subsidies in first year
Domestic Support: Amber/Blue Boxes• EU
– Reduce ‘amber’ box by 55% using the URAA method– Retain current definitions of domestic support– Eliminate de minimus exemption for developed
countries
• Cairns Group– Eliminate on product-specific basis over 5/9 years– 50% downpayment in first year– Reduce de minimus exemption for developed countries– Applies to ‘blue’ box
• US– Reduce total AMS to 5% of 96-98 value of agr.
Production, over 5 years– Applies to ‘blue’ box
The Harbinson Draft
• Attempt to seek compromise among the proposals, released February 2003.
• Too ambitious for some, not ambitious enough for others!
• EU, Japan & others: ‘unbalanced’ between trade & non-trade concerns
• Revised in March• What were some of the major features?
Harbinson: Market Access
• Tariffs – reduce by 40%, 50% or 60%, depending on height of base tariff for developed countries
• For developing countries, reductions are 25%, 30%, 35% and 40%
• Additional flexibilities exist• Flat 10% cut for developing countries ‘strategic
products’• Cut made to bound rates• Special safeguard to be eliminated for developed
countries
Comparison of Tariff Reduction Modalities
0
50
100
150
200
250
0 100 200 300 400
base tariff (%)
new
tari
ff (5
) URAA
Harbinson
swiss
Harbinson: Export Subsidies
• Developed countries: for at least half of base outlay, eliminate over 5 years. Rest eliminated over 9 years. (10/12 years for developing countries)
Harbinson: Domestic Support
• Amber:– Reduce by 60% over 5 years– Reduced by 40% over 10 years for developing– de minimus to be halved over 5 years (maintain
for developing regions)
• Blue: reduce by 50% over 5 years
• Green: maintain, with possible amendments to provisions for exemption–
Some Modeling Results @ CAPS
• Global Trade Analysis Project applied general equilbrium model
• 1997 database has 66 regions & 57 sectors• Aggregated up to 11 regions & 15 sectors
– These include 8 farm and 4 food processing sectors
• Tariffs from AMAD database• Export subsidy data from WTO notifications• Domestic support from OECD/PSE data
Scenarios
• Reflect some major elements of various proposals• #1 (based on EU proposal)
– Tariff cuts: 36% ~ 24%– Export subsidy cuts: 45%– Amber box cuts: 55% ~ zero
• #2 (based on Harbinson draft)– Tariff cuts: as in Harbinson– Export subsidy cuts: 100% ~ 50%– Amber box cuts: 60% ~20%
• #3 (based on US & Cairns proposals)– Tariff cuts: Swiss (a=25) for developed– Cairns proposal for developing countries– Export subsidy cuts: 100% – Amber box cuts: 100% ~ 50%
Simulated changes in global export volumes
-10
-5
0
5
10
15
sim#1 sim#2 sim#3% c
han
ge
wheat
coarse grains
beef/sheepmeat
dairy
Simulated changes in global export prices
0
1
2
3
4
5
6
7
8
9
sim#1 sim#2 sim#3
% c
hang
e
wheat
coarse grains
beef/sheepmeat
dairy
Changes in NZ merchandise trade balance
-2500
-2000
-1500
-1000
-500
0
500
1000
1500
2000
2500
sim#1 sim#2 sim#3US
$m
dairy
beef_sheepmeat
other agr/food
non-agr/food
total merchandise
How might NZ farm production change?
-20
-10
0
10
20
30
40
sim#1 sim#2 sim#3% c
han
ge i
n o
utp
ut
wheat
coarse grains
vege_fruit
sheep_cattle
other animal prods
milk
WHAT IS A “SOUND BALANCE”?
TRADE CONCERNS:Changes to tariffs & export subsidies
NON-TRADE CONCERNS:
Changes to domestic subsidies
Cutting tariffs in developed vs developing regions: impacts on global welfare
0
5000
10000
15000
20000
25000
30000
#1 #2 #3
US
$m
Developed
Developing
Cutting tariffs & export subsidies:impacts on global welfare
-5000
0
5000
10000
15000
20000
25000
30000
35000
40000
#1 #2 #3
US
$m tariffs
export subsidies
Cutting trade barriers & domestic support: impacts on global welfare
0
5000
10000
15000
20000
25000
30000
35000
40000
#1 #2 #3
US
$m
trade barriers
amber box support
Impacts of cuts to tariffs, export subsidies & amber box support on global export prices in
(scenario #2)
0
1
2
3
4
5
6
7
% c
han
ge
in p
rice
tariffs
export subsidies
amber box
Impacts of cuts to tariffs, export subsidies & amber box support on global export volumes
(scenario #2)
-10
-5
0
5
10
15
% c
han
ge
in v
olu
me
tariffs
export subsidies
amber box
Impacts of cuts in tariffs, export subsidies & amber box on NZ welfare: #2
0
100
200
300
400
500
600
US$m
Developed tariff cuts
Developing : tariff cuts
Export subsidies
Amber box
Impacts of policy reforms on NZ's agr_food net exports: scenario #2
-200
-100
0
100
200
300
400
500
600
700
800
900
US
$m
tariffs
export subsidies
amber box
Summary• Tariff cuts in developed and developing
regions account for nearly all global welfare gains – impact of former>>latter
• Tariff cuts the most important contributor to NZ’s welfare gain, especially by developed regions – both have more impact that cuts to export subsidies.
• Appropriate to give market access the highest priority, especially developed country reforms
• Harbinson does this thru larger cuts to higher tariffs
• Cuts to the amber box made very little impact on global welfare, and negligible contribution to NZ welfare gains.
• But they did contribute to higher international grains prices
• Tightening domestic support constraints may make tariff cuts difficult
• Loosening those constraints could ‘buy’ increased access to developed region markets & lead to significant gains: reinstrumentation
• Smaller cuts in the AMS & blue box could appease EU, and also moderate ToT impacts on food net importers
• Once progress made on trade policies, turn attention to the (less distorting) domestic support policies