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9b.US Agricultural Trade Agreements &

Updates on Policy & Issues

Larry D. Sanders

Fall 2005Oklahoma State University

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GENERAL AGREEMENT ON TARIFFS & TRADE (GATT) & WORLD TRADE ORGANIZATION (WTO) HISTORY &

BACKGROUND 1947--GENEVA 1949--ANNECY 1951--TORQUAY 1956--GENEVA 1960-1--DILLON 1964-67--KENNEDY 1974-79--TOKYO 1986-1993--URUGUAY 1995--WTO 1999--SEATTLE MINESTERIAL ROUND 2001-present--DOHA ROUND

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GATT: URUGUAY ROUND KEY FOCUS: REDUCE TRADE BARRIERS 1st TIME FOR AG TRADE ISSUES CREATES WORLD TRADE ORGANIZATION

(WTO) IMPROVES IMPORT ACCESS CUTS EXPORT SUBSIDIES/TAXES CUTS “TRADE-DISTORTING” POLICIES HEALTH/SANITARY MEASURES

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GATT: AGRICULTURAL PROVISIONS

INCREASED US EXPORTS– WHEAT & FLOUR– FEED GRAINS & PRODUCTS– BEEF & PROCESSED MEAT, POULTRY,

PORK– SOYBEANS & PRODUCTS, MINOR

OILSEEDS INCREASED US IMPORTS

– COTTON, TEXTILES & APPAREL– PEANUTS– DAIRY PRODUCTS

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WTO: 1999-Present

• Era of generally failed attempts• Seattle 1999—Minesterial Round failed• Doha (Qatar) Round 2001—successful start• Cancun 2003—failed• Geneva 2004—framework okayed• Cotton case—US lost• Other cases—mixed• Hong Kong (Dec 2005)—unclear• More countries are joining—now 148

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WTO: late 90s-2002

• Problem areas as Doha began (see attached charts):– Restrictive tariffs

– Export subsidies

– Trade-distorting support

– Importance of foreign markets to US commodities/products

• Asian “Flu”, stalled Russian recovery, & South American economic downturn improving; Mexico market strong; Canadian “trade firefights” (wheat, cattle, timber) & European “trade wars” (growth hormones, banana wars, GMO/GE labeling)

• Trading partners angry over 2002 farm act in US• Many countries considering counter-policies, WTO cases

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NORTH AMERICAN FREE TRADE AGREEMENT(NAFTA): BACKGROUND

1992--CANADA, MEXICO & US NEGOTIATION COMPLETED

WORLD’S LARGEST FREE TRADE AREA– 360 MILLION CUSTOMERS– $6.5 TRILLION GDP– $1.2 TRILLION TRADE

MEXICO 3d LARGEST US AG EXPORT MARKET OR BETTER

US IS MEXICO’S MAJOR MARKET CANADA-MEXICO TRADE SMALL AGRICULTURAL PROVISIONS

– TARIFF-RATE QUOTAS– MOST TARIFFS ELIMINATED– IMPORT LICENCES ELIMINATED– HEALTH/SANITARY MEASURES

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NAFTA: NON-AGRICULTURAL PROVISIONS MEXICAN EXPORT-PERFORMANCE

REQUIREMENTS ELIMINATED MEXICAN “LOCAL CONTENT” RULES

ELIMINATED BARRIERS CUT FOR

– AUTOS

– TEXTILES & APPAREL

– LAND TRANSPORTATION

– TELECOMMUNICATIONS

– FINANCIAL SERVICES

– ADVERTISING

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NAFTA: OPPORTUNITIES INCREASE US EXPORTS TO MEXICO

– WHEAT, FEED GRAINS, OILSEEDS– WOOD PRODUCTS– COTTON, COTTONSEED, TEXTILES– BEEF, PROCESSED MEAT, PORK POULTRY– DAIRY PRODUCTS– FRESH APPLES, PEARS, PEACHES, NUTS– SEASONAL FRESH VEGETABLES

INCREASE MEXICAN EXPORTS– FRUITS– VEGETABLES– APPAREL

CANADA-US TRADE TRENDS UNCHANGED POSSIBLE EXPANSION OF NAFTA

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Other Agreements/Legislative Actions

FTAA--Free Trade Area of the Americas– Western hemispheric trade zone– early stages (initiated Dec. ‘94)– in effect expands NAFTA to include Central &

South America– Goal of Jan 2005 failed to materialize

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SUMMARY OF TRADE AGREEMENTS TREND:

– NEGOTIATED AGREEMENTS

– EXPAND AFFECTED REGIONS FOR AGREEMENTS

– With Bush2—shift to bilateral & regional trade agreements GATT/WTO

– REDUCES GOVERNMENT INTERVENTION

– Enhances opportunities NAFTA

– MIXED BENEFITS

– OPPORTUNITIES FTAA

– LONG TERM POTENTIAL

– Counters European bloc & China

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Trade Policy Update—WTO

• WTO Ministerial in Cancun, Mexico (Sep 03)• Intended to be half-way point of the Doha Round • Meeting stalled amid controversies & protests

within and without talks• fight over modalities, agriculture, and ‘Singapore

Issues’ [Investment (cross-border)]

• G22 (Group of 22 developing countries – lead by China, India, and Brazil) formed negotiating bloc to counter Western Developed country farm subsidies (US, Europe, Japan)

• ‘Singapore Issues’ brought on the collapse of the talks

• Planned completion 2006 in jeopardy

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Singapore Issues: ‘Rules for globalization’– Rules on foreign investment, competition

policy, and general ‘trade facilitation’– Ex: customs policies in various countries

Without promises on significant cuts in the farm programs of richer countries, developing countries would not even consider investment and other trade-enhancement measures

Trade Policy Update—WTO

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Trade Policy UpdatePost-Cancun Agenda for US

USTR Bob Zoellick promised to move aggressively forward with bilateral trade agreements

US negotiating bilateral free trade agreements – FTAs completed w/Morocco, Australia– CAFTA completed (Costa Rica, Dominican Rep, El

Salvador, Guatamala, Honduras, Nicaragua)– FTAs ongoing w/Thailand, Peru, Columbia, Ecuador,

Panama, SACU (Botswana, S. Africa, Lesotho, Swaziland, Namibia)

Increased bilateral agreements could help to renew WTO negotiations as developing countries scramble to access vast US markets

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Trade Policy Update—Other Issues

Cuba:– The Trade Sanctions Reform and Export Enhancement Act of

2000 enacting certain exceptions from U.S. sanctions legislation for

agricultural and medical exports ban on U.S. imports from Cuba was not changed legislation liberalizes U.S. sanctions on exports to Cuba of

agricultural commodities strict laws remain in place on using US dollars financing transactions,

traveling to Cuba, and limiting U.S. Government assistance

– Cuba imports $600 million worth annually, primarily grain, pulses, meat, soybeans, vegetable oil, and dairy products

– US export potential: consumer-ready foods for the hotel/ restaurant industry; wood products and cotton

– Cuban crackdown on dissidents has cooled moves to improve trade relations

– Bush continues to strongly oppose Cuban trade

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Trade Policy Update—Other Issues

Trade Promotion Authority (formerly Fast Track Authority)– Congress approved for Bush in 2002– Has failed to restore US leadership role in multilateral

trade talks– Some movement in bilateral trade talks

NAFTA– All ag provisions between US-Mexico implemented by

2008– US-Canada ag provisions now completed – Mexico wants to reconsider schedule; partly related to

2002 farm act

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Trade Policy Update—Other Issues

FTAA (34 democratic countries in Western Hemisphere)– November 2002 Quito meeting set negotiation schedule to

complete agreement by 1 Jan 05– US & Brazil will co-chair– Minister meetings: Miami—late 2003; Brazil—2004– Estimated market: $13 trillion, 800 million people– Leader Summit, Mar del Plata Nov 05 failed to get

negotiations back on track China

– Increasing frustration by US business that China is unfairly distorting trade

– April 2004: US-China agreement to establish mechanism on food safety, animal & plant health issues

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Trade Policy Update—Other Issues

CAFTA-DR: Central America Free Trade Agreement & Dominican Republic signed Aug 05

Comprehensive trade agreement between Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, Dominican Republic and the United States

30 million customers; $2.4 billion in total trade, of which $1 b. is US exports

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Trade Policy Update—Other Issues

CAFTA Duty-free and quota-free access– About half of farm trade moves to tariff-free trade immediately

U.S. high quality beef, apples, pears, grapes, raisins, cherries, peaches, cranberries and related products, frozen potato fries, frozen concentrated orange juice, sweet corn, almonds, pistachios, walnuts, wine, and whiskey.

– Rest is phased out over 20 years Duty-free tariff-rate quotas for U.S. pork, chicken leg quarters,

rice, corn, and dairy products. Duty free access locked in for U.S. wheat, soybeans, and cotton

Seen as necessary step toward FTAA

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Trade Policy Update—WTO Framework Agreement (Aug 04)

• Geneva meeting of General Council agreed on framework for final phase of Doha Round

• Reform of trade-distorting ag subsidies, elimination of ag export subsidies, improve market access for farm products

• Least-developed countries excluded from farm tariff cuts• Tiered (banded) formula for cuts; tariff cap considered• Developing countries subject to lesser cuts• Export credits & guarantee programs will be affected• State Trading Enterprises (STEs) will be subject to discipline

& greater transparency• Domestic supports will be cut; caps on support levels• Trade-distorting support cut 20% in first year• Food aid programs maintained• Cotton policy will be targeted

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Trade Policy Update—WTO Framework Agreement (Aug 04)

Reductions in overall ceilings– Reductions in Amber Box & de minimus

subsidies– Caps in Blue Box subsidies (5% of country’s ag

production)

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Trade Policy Update— WTO Panel Issues Verdict on Cotton Case (Sep 04)

– Brazil challenge to US cotton supports generally successful Export credit guarantees for “unscheduled commodities” (cotton,

soybeans) prohibited Some US support programs (marketing loan, countercyclical, market

loss assistance, Step 2 payments*) found harmful

– US decoupled payments upheld (flex contract payments, direct payments, crop insurance payments not harmful)

* Step 2: Allows US cotton to sell competitively when price too high relative to world market by using govt funds as a form of rebate. USDA issues marketing certificates or cash payments to domestic users of upland cotton for documented purchases, and to exporters of upland cotton for documented sales, when certain U.S. pricing exceeded. Payments provide a subsidy to U.S. cotton users and exporters so that U.S. rather than foreign cotton will be utilized, even when the former is higher-priced.

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WTO Cotton Case Appeal Update (Mar 05)

Dispute Resolution Board denied US appeal PFC & Direct Payments don’t fully conform to

WTO rules– So … Not Green/Decoupled– Planting Limits on Fruits/Vegetables

Cotton Payments exceeded spending limits (MY 1999-02)– All Programs, Including Crop Insurance

Marketing Loan, Step 2, Market Loss Assistance & CCP Caused Significantly Lower World Market Prices (MY 1999-02)

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WTO Cotton Case Appeal Update (Mar 05)--continued

Step 2 Payments to US Firms Favor US Cotton Over Imported Cotton (Import Substitution Policy)

Step 2 Payments to Exporters Are Export Subsidies Export Credit Guarantees Are Prohibited Subsidies

– Inadequate Risk Premiums, User Fees & Tenor

Changes in Step 2 and Export Credit by July 1, 2005 Other Programs (Marketing Loan, CCP, Planting

Restrictions? May Need to be Changed in 15 Months US Will Make Determinations on Extent of Changes

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WTO Panel on Cotton Case Summary (Sep 04) and Appeal (April 05)

Brazil challenge to US cotton program generally successful– Export credit guarantees for “unscheduled commodities”

(cotton, soybeans) prohibited– Some US support programs (marketing loan,

countercyclical, market loss assistance, Step 2 payments*) found harmful

– US decoupled payments upheld (flex contract payments, direct payments, crop insurance payments not harmful)

Expect challenges to other commodities.

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WTO Cotton Case Appeal—What’s Next?

Will Counter Cyclical Payments Be Allowed in Blue Box? Will There Be Future Challenges? Soybeans? Rice? Others? More Programs Comply with Green Box? Overhang on Doha Development Agenda? US options (Reconciliation bill includes termination of Step 2):

– Full Compliance? Program Changes & Or Elimination

– Partial Compliance? Some Programs Change, Others Do Not

– Arbitrate & Compensate? Brazil Could Impose Tariffs

– Do Nothing? (This is US option in Byrd Amendment Case) Brazil Could Impose More Tariffs

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US Export Subsidies & Cotton

US spending about $200-$300 mil. Per yr US exports about 30% of cotton production One study* suggests that domestic

programs will offset impacts of loss of Step 2 subsidy– Export price could fall as much as 9% within

next few years– US exports will fall slightly, but world

production and trade will be little changed

Monanty, S., et al., July 2005

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Three Pillars of Trade Reform (Agreed in Concept August 1, 2004)

Market Access: Reductions in Tariffs Export Competition: Elimination of Export

Subsidies Trade Distorting Domestic Support:

Reductions Over Time

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Market Access

Highest Tariffs Cut the Most U.S. Pushing for Deep Tariff Cuts by

Developing Countries (60-75%) Issue: Many Developing Countries

Want ‘Special’ Treatment & Some Reluctant to Agree to Large Cuts

Much Left ‘To Be Negotiated’ & A Potential ‘Deal Breaker’

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Export Competition

Reduce & Eliminate Export Subsidies by Date Certain (Agreed)– EU Export Subsidies, $2+ Billion/Year– U.S. Export Credit Guarantees > 180

Days Food Aid to Be Disciplined Strong Support for Export Competition

Reforms

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Trade Distorting Domestic Support

Targets Programs that Cause Production to Be Different than Would Be Without Program

Year 1 Cut of 20% Subsequent Phased Reductions

– 40-50% Range Reductions from Allowable Support Issue: Developing Countries Wanted Cuts Now,

Tariff Reductions Later If Big 3 Don’t Make Substantial Cuts, A ‘Deal

Breaker’

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De minimis Domestic Support

The following can be excluded from Aggregate Measures of Support (AMS) in Amber box:– Trade-distorting, product-specific support less

than 5% of the value of production of that product, and

– Trade-distorting, non-product-specific support less than 5% of the value of all ag production

Will be negotiated for all 148 WTO members (2.5% being discussed)

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New Blue Box—Domestic Support

New provisions to allow for counter-cyclical payments (CCP)

Members could shift support from the most trade-distorting forms to less trade-distorting forms

Payments decoupled from production but coupled to prices

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The Modified BoxesAmber New Blue Green

Payments coupled to production & prices

Payments decoupled from production but coupled to prices

Payments decoupled from production and prices

Policies that are trade distorting & targeted for reductions under the URA (price supports, marketing loans, payments based on ac or # of livestock, input subsidies, etc.)

Policies that are trade distorting but exempt from reductions under URA, including direct payments linked to certain production-limiting policies (US crop deficiency payments, EC compen-satory payments, etc.)

Policies that are non-trade distorting & are acceptable under URA, including tax-payer-funded and non-trans-fers from consumers (research, extension, pest/disease control, crop insurance, marketing/ promotion, natural disaster relief, conservation programs, public stockholding, decoupled income support, income safety nets, etc.)

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Agricultural Producer Support By Country1986-88 and 2001-03

-Percent of Total Farm Receipts from Government-

Source: OECD's database (see www.oecd.org)

12%

33%26%

40%

62%

71%

2%

20% 20%

39%

60% 65%

New Zealand Canada United States EU Japan Korea0%

20%

40%

60%

80% 1986-1988

2001-2003

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40

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US Domestic Support

0

5

10

15

20

25

30

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004e 2005e

billion $

Market Price Support Loan Programme Other Product SupportCounter-cyclical payments Insurance Subsidies Disaster PaymentsMarket Loss Assistance Other de minimis AMS ceiling

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Total Allowable Trade Distorting Domestic Support, 'The Big 3,‘ 2002

WTO, Trade Policy Review and calculations.

$128

$49 $48

European Union United States Japan$0

$20

$40

$60

$80

$100

$120

$140

Billion $

Includes Amber + Blue Boxes, Product Specific + Non-product Specific De Minimis, Each Based on 5% of Total Value of Agricultural Production

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Total Trade Distorting Domestic Support Remaining After Year 1 Down Payment (calculated)

$100.2

$39.2 $38.4

European Union United States Japan$0.0

$20.0

$40.0

$60.0

$80.0

$100.0

$120.0

Billion $

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Total Trade Distorting Domestic SupportAssuming 50 Percent Reduction

Calculated

$50.1

$19.6 $19.2

European Union United States Japan$0.0

$10.0

$20.0

$30.0

$40.0

$50.0

$60.0 -Billion Dollars-

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Impacts of Doha on Agricultural Output and Employment Growth, by Country, 2005-2015

-Annual Average Growth Rate (Percent)-

Source: Anderson, Martin and van Mensbrugghe (2005a, Tables 12.12 and 12.13)

4.3%

1.7%

-0.4%

-1.4%

1.6%

4.4% 4.4%

1%

-1.4%

-2.8%

-4.1%

-2.1%

2.2%

1.1%

CanadaUnited States

EU 25Japan

Korea and TaiwanBrazil

New Zealand

0%

2%

4%

6%

-2%

-4%

-6%

Output

Employment

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Trade Liberalization Impacts on Factor Prices, 2015

Anderson, Martin, and van der Mensbrugghe (2005a, Table 12.7).

Skilled WagesUnskilled

WagesLand Owner

RentInflation

EU 25 1.3 -0.1 -71 -1.2

United States 0.2 0 -24 -0.3

Japan 2.4 1.5 -67.2 -0.2

Korea and Taiwan 7.8 7.3 -45.8 -1.3

Brazil 1.4 2.8 35.9 2.8

Sub-Saharan Africa 5.7 8.4 6.4 -4.3

Thailand 6.3 13.4 12.5 -0.2

Vietnam 15.1 23.3 5.8 -0.2

New Zealand 1.1 3.5 20.9 1.5

Percent Change

Large Gains

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The View from the Developing (Low-income) Countries in WTO

Hi-income country ag subsidies depress world market prices– 33-50% for rice– 10-20% for cotton & peanuts

Low-income countries more dependent on agriculture Many developing countries refocused ag sectors to

export markets at urging of US & World Bank investors– Many economies would be harmed if agriculture adversely

effected– Poor countries do not make good customers

Low-income countries do not have comparable public or private funds to invest in research and development nor farm programs—export and domestic

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The View from US Agricultural Producers on WTO

Larger producers have the most to lose because they get most of the subsidies

Many do not think there should be special protections for developing countries ag sectors

US has a heavy stake in global markets– 1 in 3 acres go to export (45% for wheat; 34% for soybeans; 30%

for cotton)– 25% farm cash receipts from exports– Developing countries are the growth markets (73% exports to non-

Western countries; hunger/malnutrition focused in low-income countries)

US has proposed major reductions in some export programs (especially tariffs) among US, EU & Japan– EU shows limited willingness (France doesn’t want change)– Japan unwilling

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Summary of Possible WTO Trade Policy Reforms

US govt more willing than US producers Developing countries want hi-income countries to reduce

subsidies while they stay protected Developed countries mixed in what they want US, EU, Japan have more to lose in output, employment

than Canada, Brazil, Korea Korea, Taiwan, Africa, Vietnam will see more benefits

for skilled wages than other countries Thailand, Vietnam, Korea, Taiwan, Africa will see more

benefits for unskilled wages than other countries Land rents will fall in hi-income countries more than

developing countries US producers likely to be protected if domestic programs

are maintained

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Key Trade Issues Competitiveness vs. Protection Increasing importance of value-added Distributional equity Evolution of Farm Bill Programs Trade agreements & WTO Challenges to

Farm Bill Cuba China Hunger vs. trade development & surplus management Culture & sovereignty vs. trade development &

agreements Environment vs. trade development & agreements Ag trade relationship to non-ag trade

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Distributional Equity

Who does trade benefit?– Trading partners?

High income vs. low-income?

– Agribusiness? Developed economies vs. less developed vs.

multinational corporations?

– US producers? Large vs. small-moderate size

– US consumers?– US rural communities?

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Evolution of Farm Bill Programs

• Farm Bill programs change, in part, as a result of:– Respond to market changes– Concerns of trade partners– Concerns of producers, agribusiness & rural

communities– Budget concerns

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Trade Agreements Bilateral Multilateral

– WTO Current/next round

– Key ag issues

– Environment issues

– Labor issues Legal challenges to US ag supports

– NAFTA Nearing completion Mexican concerns

– FTAA Role of US Balance with less developed economies

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READING/SOURCES Barkema, A. et al. “Agriculture & the GATT: A Time for Change”, Economic

Review, Federal Reserve Bank of Kansas City, February 1989. Benson, G.A. et al. “U.S. Agriculture & International Trade”, draft to be released

as part of series in mid-1998. Catherwood, K. & D. Henneberry, “International Trade Agreements”, Current

Farm Economics, Dept. of Ag Econ, Oklahoma State University, Vol. 68, No. 2, June 1995.

Drabenstott, M. et al. “Agriculture & the GATT: The Link to U.S. Farm Policy”, Economic Review, Federal Reserve Bank of Kansas City, May 1989.

Driscoll, A. “Key Provisions of the North American Free Trade Agreement”, Business America, Vol. 113 No. 21 (1992), 3-11.

Economic Research Service, USDA, various references. http://www.ers.usda.gov/

Foreign Agricultural Service, USDA, various tables & news releases.http://www.fas.usda.gov/

Knutson, R. et al. Agricultural & Food Policy, Prentice Hall, 1995. Niles, K. et al. “Macroeconomic Policy Impacts on Exchange Rates & Trade”,

draft to be released in series mid-1998. Rosson, C.P. et al. “International Trade Agreements”, Ch. 11, Food, Agriculture,

& Rural Policy into the 21st Century, Hallberg, M. et al eds., Westview Press, 1994.

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READING/SOURCES (cont.) Rosson, C.P. et al. “The North American Free Trade Agreement”, U.S. Agriculture

In The 21ST Century World Economy--Series, Southern Extension Trade Task Force, 1995.

Rosson, C.P. et al. “North American Free Trade & U.S. Agriculture”, draft to be released in series mid-1998.

Sanders, L. “Trade Policy”, Ch. 3, International Marketing For Agribusiness, GEMS, C.P. Rosson,III, Ed., TAMU, 1994.

Sanders, L. et al. “The GATT Uruguay Round & The WTO: Opportunities & Impacts For U.S. Agriculture”, U.S. Agriculture In The 21st Century World Economy--Series, Southern Extension Trade Task Force, 1995.

Southern Extension International Task Force. Southern Agriculture in a World Economy. Department of Agricultural Economics, Oklahoma State University. 1996.

Trostle, R. “U.S. Agricultural Trade Policy”, Food, Agriculture, & Rural Policy into the 21st Century, Hallberg, M. et al eds., Westview Press, 1994.

USDA-FAS, FATUS, annual data. USDA-FAS. “GATT/Uruguay Round” Fact Sheet Series, June 1994. USDA Web Site; see FAS & ERS pages. USTR Fact Sheet on Framework Agreement at the WTO, August 6, 2004.

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Special Terms Amber box: policies that are trade distorting & targeted

for reductions under the URA (price supports, marketing loans, payments based on ac or # of livestock, input subsidies, etc.)

Blue box: policies that are trade distorting but exempt from reductions under URA, including direct payments linked to certain production-limiting policies (US crop deficiency payments, EC compensatory payments, etc.)

Green Box: policies that are non-trade distorting & are acceptable under URA, including taxpayer-funded and non-transfers from consumers (research, extension, pest/disease control, crop insurance, marketing/promotion, natural disaster relief, conservation programs, public stockholding, decoupled income support, income safety nets, etc.