Trade Negotiations and Trade Negotiations and AgreementsAgreements

Dr. George NortonAgricultural and

Applied EconomicsVirginia Tech

Copyright 2009

AAEC 3204AAEC 3204

Objectives Objectives

Discuss multi-lateral agreements as Discuss multi-lateral agreements as potential solutions to trade problems potential solutions to trade problems

• Discuss the GATT and WTODiscuss the GATT and WTO

• Regional agreements – for example Regional agreements – for example NAFTANAFTA

Developing country trade reform Developing country trade reform interests interests

With trade reform, many developing With trade reform, many developing countries would gain from lower barriers countries would gain from lower barriers for their exports; some would lose from for their exports; some would lose from the projected 10-20% higher prices for the projected 10-20% higher prices for grain imports. Most countries would gain. grain imports. Most countries would gain.

Europe and Japan have the highest trade Europe and Japan have the highest trade barriers, but U.S. and developing countries barriers, but U.S. and developing countries also restrict trade significantlyalso restrict trade significantly

OECD Producer Support Estimates, OECD Producer Support Estimates, 2004, in Percent2004, in Percent

SwitzerlandSwitzerland 6868

JapanJapan 5656

European UnionEuropean Union 3333

CanadaCanada 2121

United StatesUnited States 1818

MexicoMexico 1717

AustraliaAustralia 44

New ZealandNew Zealand 33

30 Countries Overall30 Countries Overall 3030

Source: OECD Agriculture Directorate

Average Producer Support in OECD Average Producer Support in OECD Countries, 2004, in PercentCountries, 2004, in PercentRiceRice 7575

SugarSugar 5858

MilkMilk 3636

Beef & VealBeef & Veal 3434

WheatWheat 3333

CornCorn 3131

OilseedsOilseeds 2727

PorkPork 2121

OverallOverall 3030

Source: OECD Agriculture Directorate

Domestic Effects of Subsidies to Domestic Effects of Subsidies to AgricultureAgriculture

• Increase total investment in agriculture Increase total investment in agriculture relative to other sectorsrelative to other sectors

• Distort what gets produced whereDistort what gets produced where• Affect price of land and other fixed assetsAffect price of land and other fixed assets• Holds people in agriculture that would Holds people in agriculture that would

normally move to other sectors as normally move to other sectors as development proceedsdevelopment proceeds

External Effects of Ag Protection External Effects of Ag Protection and Subsidiesand Subsidies

• Fewer imports by importer (examples: US Fewer imports by importer (examples: US sugar; Japan rice) can lower world price sugar; Japan rice) can lower world price

• For net exporter, larger production and For net exporter, larger production and exports can depress world price (example: exports can depress world price (example: US cotton)US cotton)

• Barriers to imports may reduce domestic Barriers to imports may reduce domestic price variability but increase variability on price variability but increase variability on the world marketthe world market

OECD Policies Depress Commodity OECD Policies Depress Commodity Prices Below Long Term TrendPrices Below Long Term Trend

RiceRice 33 - 50 %33 - 50 %

SugarSugar 20 – 40 %20 – 40 %

Dairy ProductsDairy Products 20 – 40 %20 – 40 %

CottonCotton 10 – 20 %10 – 20 %

PeanutsPeanuts 10 – 20 %10 – 20 %

Source: World Bank. Global Economic Prospects 2002, Chap. 2.

Why Is It Difficult to Reduce Ag Why Is It Difficult to Reduce Ag Subsidies & Liberalize Trade?Subsidies & Liberalize Trade?

Benefits are capitalized into land values, Benefits are capitalized into land values, so value of land would fallso value of land would fall

Labor adjustment difficultLabor adjustment difficult• Specialized skills become less valuableSpecialized skills become less valuable

Retraining may be costly (or impractical for older Retraining may be costly (or impractical for older people).people).

• Adjustment may require physical relocationAdjustment may require physical relocation May be both monetarily and emotionally costly May be both monetarily and emotionally costly

Those with benefits want to keep themThose with benefits want to keep them• Subsidy recipients don’t give up without a Subsidy recipients don’t give up without a

fight.fight.• Politicians likely to lose campaign contributions Politicians likely to lose campaign contributions

and/or bribes.and/or bribes.

Gainers and LosersGainers and Losers

• Gainers exceed losers, but there are Gainers exceed losers, but there are loserslosers

• The challenge is to define policies to The challenge is to define policies to compensate losers: compensate losers: • to facilitate their adjustment to facilitate their adjustment • to neutralize political oppositionto neutralize political opposition

Multilateral Trade AgreementsMultilateral Trade Agreements

General Agreement on Tariffs and General Agreement on Tariffs and Trade (GATT)Trade (GATT)

World Trade Organization (WTO)World Trade Organization (WTO)

GATTGATT

Temporary trade Temporary trade agreement set up agreement set up after WWII when after WWII when agreement to form agreement to form an International an International Trade Organization Trade Organization was not ratified was not ratified

4 basic principles of the GATT4 basic principles of the GATT

• Tariffs are the only “legitimate” form of Tariffs are the only “legitimate” form of trade restrainttrade restraint

• No discrimination in application of tariffs No discrimination in application of tariffs (most favored nation principle)(most favored nation principle)

• Consultation and negotiation to avoid and Consultation and negotiation to avoid and settle disputessettle disputes

• Agreement to periodic multilateral Agreement to periodic multilateral negotiations to lower trade barriers (with negotiations to lower trade barriers (with reciprocity)reciprocity)

Non-tariff barriers legitimate if:Non-tariff barriers legitimate if:

• Balance of payments problemBalance of payments problem

• Severe shortage in domestic economy Severe shortage in domestic economy (i.e. can put on export restriction)(i.e. can put on export restriction)

• Import quotas can be put on goods Import quotas can be put on goods under production controls at homeunder production controls at home

• Health, safety, copyright reasons, etc.Health, safety, copyright reasons, etc.

Periodic NegotiationsPeriodic Negotiations

19491949 1950 – 511950 – 51 19561956 1960 – 62 Dillon round1960 – 62 Dillon round 1964 – 67 Kennedy round1964 – 67 Kennedy round 1973 – 79 Tokyo round1973 – 79 Tokyo round 1981 – 83 Geneva round1981 – 83 Geneva round 1986 – 93 Uruguay round1986 – 93 Uruguay round 2001 – ? Doha round (under WTO) 2001 – ? Doha round (under WTO)

Uruguay Round Agreement on Uruguay Round Agreement on AgricultureAgriculture

• Increased market accessIncreased market access • Change non-tariff trade measures to tariffsChange non-tariff trade measures to tariffs• Establish tariff-rate quotasEstablish tariff-rate quotas• Bind all tariffsBind all tariffs

• Reduced export subsidies Reduced export subsidies • Defined limits on export subsidiesDefined limits on export subsidies• No new export subsidiesNo new export subsidies

• Required scientific basis for SPS barriersRequired scientific basis for SPS barriers• Acknowledged that some domestic agricultural Acknowledged that some domestic agricultural

subsidies distort trade and categorized them by subsidies distort trade and categorized them by degree of trade distortion into boxes: degree of trade distortion into boxes: GreenGreen, , AmberAmber, , BlueBlue

The WTO Colored BoxesThe WTO Colored Boxes

• ““Green box”Green box” = non trade distorting = non trade distorting investments in public goods and investments in public goods and decoupled income transfers (no cap)decoupled income transfers (no cap)

• ““Amber box”Amber box” = trade-distorting = trade-distorting (bound and reduced) (capped)(bound and reduced) (capped)

• ““Blue box”Blue box” = trade-distorting, but = trade-distorting, but offset by production controls or set-offset by production controls or set-asidesasides

Estimated benefits of Uruguay Estimated benefits of Uruguay RoundRound

• A few $billion to U.S. and world A few $billion to U.S. and world economies per year (after fully economies per year (after fully implemented)implemented)

• U.S. agricultural exports up a littleU.S. agricultural exports up a little

• U.S. net farm income up a littleU.S. net farm income up a little

• Some savings in domestic farm Some savings in domestic farm support programs initiallysupport programs initially

World Trade Organization (WTO)World Trade Organization (WTO)

• What is the WTO?What is the WTO?

• How does it affect U.S. How does it affect U.S. agriculture?agriculture?

• Is the WTO harmful or Is the WTO harmful or helpful to developing helpful to developing countries?countries?

Background on WTOBackground on WTO

• 153 member countries which negotiate to 153 member countries which negotiate to revise trade rules revise trade rules

• Secretariat, in Geneva, organizes negotiations Secretariat, in Geneva, organizes negotiations & follows a process to resolve differences & follows a process to resolve differences over whether rules are being brokenover whether rules are being broken

• Dispute settlement panels & an appellate Dispute settlement panels & an appellate body interpret agreements body interpret agreements

• WTO can not force a country to change WTO can not force a country to change policies, but it can authorize victims to collect policies, but it can authorize victims to collect compensation via import duties on the compensation via import duties on the violatorviolator

Key Players in Doha Round Key Players in Doha Round Agricultural NegotiationsAgricultural Negotiations

• United StatesUnited States• European UnionEuropean Union• G-20 (Brazil, India, China, S. Africa, +) G-20 (Brazil, India, China, S. Africa, +) • Cairns Group (Australia, New Zealand, +)Cairns Group (Australia, New Zealand, +)• G-10 (Japan, Korea, Norway, Switzerland,+)G-10 (Japan, Korea, Norway, Switzerland,+)• Other developing Countries (the majority of Other developing Countries (the majority of

members, butmembers, but heterogeneous interests)heterogeneous interests)

Focus on DevelopmentFocus on Developmentin the Doha Roundin the Doha Round

• Developing countries are potential growth Developing countries are potential growth markets -- but only if they enjoy broad-markets -- but only if they enjoy broad-based economic growth -- which will be based economic growth -- which will be facilitated if they can export what they facilitated if they can export what they produce relatively most efficiently.produce relatively most efficiently.

• Developing countries now are the majority Developing countries now are the majority of WTO members. There will be no new of WTO members. There will be no new trade agreement until they feel it will help trade agreement until they feel it will help them (unlike past trade agreements)them (unlike past trade agreements)

• Developing countries in need of Developing countries in need of development to improve living standardsdevelopment to improve living standards

Many U.S. Farmers:Many U.S. Farmers:• Losing confidence in their international Losing confidence in their international

competitivenesscompetitiveness• Don’t recognize potential for growth in Don’t recognize potential for growth in

developing country marketsdeveloping country markets• Think Uruguay Round Agreement on Think Uruguay Round Agreement on

Agriculture was unfair to U.S. farmersAgriculture was unfair to U.S. farmers• And therefore are unenthusiastic about And therefore are unenthusiastic about

the Doha roundthe Doha round

Doha Round of NegotiationsDoha Round of Negotiations• Was scheduled for completion in 2007Was scheduled for completion in 2007

• U.S. has proposed reducing ag subsidies U.S. has proposed reducing ag subsidies substantially, but only if other countries substantially, but only if other countries provide greater access to their markets.provide greater access to their markets.

• Developing countries won’t open their Developing countries won’t open their markets as long as world market prices are markets as long as world market prices are depressed by ag subsidies in developed depressed by ag subsidies in developed countries countries

• Progress at a standstill with talks suspended Progress at a standstill with talks suspended since July 2008since July 2008

Increase in Regional Agreements Increase in Regional Agreements and Country Groupings and Country Groupings

ExamplesExamples• North America – NAFTANorth America – NAFTA

• Europe – EUEurope – EU

• Asia – APEC, ASEAN, and othersAsia – APEC, ASEAN, and others

• Africa – SADC, ECOWAS, COMESA, and Africa – SADC, ECOWAS, COMESA, and othersothers

• Latin America – Andean Group, Latin America – Andean Group, Mercosur, ALADI, and othersMercosur, ALADI, and others

Motivations for Regional Motivations for Regional IntegrationIntegration

EconomicEconomic• Economies of scaleEconomies of scale

• SpecializationSpecialization

• Increased Increased competitioncompetition

• Market powerMarket power

• StabilizationStabilization

SocialSocial

CulturalCultural

PoliticalPolitical

MilitaryMilitary

Regional Economic GroupingsRegional Economic Groupings

Free Trade AreaFree Trade Area

Customs UnionCustoms Union

Common MarketCommon Market

Economic UnionEconomic Union

Loose tiesLoose ties

Close tiesClose ties

North American Free Trade North American Free Trade Agreement (NAFTA)Agreement (NAFTA)

ConclusionsConclusions

1.1. A more open trading environment A more open trading environment can stimulate faster economic can stimulate faster economic growth, helping developed and growth, helping developed and developing countriesdeveloping countries

2.2. Trade agreements and negotiations Trade agreements and negotiations are difficult but can facilitate trade are difficult but can facilitate trade liberalizationliberalization