The WTO Agreement on Agriculture

1. The WTO Agreement on Agriculture Kym Anderson University of Adelaide, Australia Centre for International Economic Studies

2. Outline: past, present, & future • Why the Uruguay Round (but not earlier GATT rounds) addressed agriculture • Extent of pre-WTO growth in agricultural protectionism • How URAA addressed agriculture, and its economic effects • Challenges ahead Centre for International Economic Studies

3. Why the UR (but not earlier GATT rounds) addressed agriculture • The long history of government interventions that distort agricultural markets • Distinctive features of distortions across countries and over time • Reasons for those features, & for agriculture being neglected by GATT prior to 1986 • Why agric. was included in the UR Centre for International Economic Studies

4. History of govt interventions in agricultural markets • Been going on for millennia • see Old Testament, e.g. • Sometimes to raise tax revenue • Sometimes to boost food self-sufficiency/food security • Sometimes to reduce domestic price fluctuations • consumers concerned with peaks • producers concerned with troughs Centre for International Economic Studies

5. Three distinctive features of agricultural distortion patterns • 1. The agricultural domestic-to-border price ratio is greater, the higher a country’s per capita income, cet. par. • i.e. poor (rich) countries tend to depress (raise) incentives for farmers relative to manufacturers vis-a-vis int’l market price ratios Centre for International Economic Studies

6. Three distinctive features of agricultural distortion patterns (continued) • 2. The domestic-to-border price ratio is greater, the higher a country’s comparative disadvantage in agric, cet. par. • i.e. countries that would be net food exporters (importers) under free trade tend to depress (raise) incentives for farmers relative to manufacturers Centre for International Economic Studies

7. Three distinctive features of agricultural distortion patterns (continued) • 3. All countries tend to use trade policy measures to reduce fluctuations in domestic food prices and quantities • with agric-protective countries reducing troughs in farmer prices • and agric-taxing countries reducing peaks in consumer prices of food Centre for International Economic Studies

8. Implications for agricultural protectionism • As economies grow and their agric. comparative advantage declines, they tend to gradually reduce their discouragement of farmers (and support for food consumers), and then replace it with increasing support for farmers (at the expense of consumers and/or taxpayers) Centre for International Economic Studies

9. Implications for food prices in int’l markets • Over time, the decline in agric taxation and growth in agric protectionism that accompanies economic growth puts downward pressure on int’l agric prices • And the use of trade policy to stabilize domestic food markets exacerbates fluctuations in int’l food prices [see graph] Centre for International Economic Studies

10. Political economy of agricultural protection • Why is this pattern is observed across countries and over time? • Since each country’s policy choice exacerbates the long-run downward trend and fluctuations in int’l food prices, it encourages other countries to follow suit • So why did countries not agree multilaterally to desist before 1990s? Centre for International Economic Studies

11. What was different about the 1980s that brought agric to the Uruguay Round? • CAP-generated surpluses led to disposal via EU export subsidies • US (& Canada) retaliated in kind • Pushed real food prices in int’l markets to century’s lowest level by 1986 [see graph] • which more than doubled the welfare costs of agric protection over the 1980s [see table] Centre for International Economic Studies

12. Who brought ag to UR? • US farmers were hurt more by EU policies that EU farmers were by US policies • ANZ and food-exporting DC farmers were affected hugely [see table] • led to formation of Cairns Group in 1986, whose sole aim was to keep agriculture high on UR agenda • its ag. exports = Japan’s man. exports Centre for International Economic Studies

13. How URAA addressed agriculture • Sought commitments to reduce protectionist interventions in 3 areas: • cut agricultural export subsidies • cut barriers to imports • with SPS Agreement to reduce the likelihood of re-instrumentalization • cut domestic subsidies to farmers Centre for International Economic Studies

14. How URAA addressed agriculture (continued) • Explicit cuts were agreed to on all three types of measures • but in each case there was lots of ‘wriggle room’, such that in practice very little reform has occurred • 1. Agric export subsidies to be cut: • 36% by value, 21% by volume over six years to 2000 (or, for DCs, by 2/3rds those rates by 2006) Centre for International Economic Studies

15. How URAA addressed agriculture (continued) • 2. Amber box domestic subsidies to farmers to be cut by 20% in aggregate by 2000 (or 13.3% for DCs by 2006) • but blue box and green box and de minimis exceptions ensure almost no cuts have taken place Centre for International Economic Studies

16. How URAA addressed agriculture (continued) • 3. Import market access: • tariffication of NTBs • tariffs bound and reduced by 36% (unweighted average) and by 15+% on each item • minimum access of 3-5% of domestic market to be guaranteed by tariff rate quotas (TRQs) Centre for International Economic Studies

17. How URAA addressed agriculture (continued) • ‘Dirty tariffication’ meant very little increased market access in practice [see tables & graph] • It also left most countries with the opportunity to vary their applied tariffs upward if desired (eg to keep domestic price from falling) • so the hoped-for reduction in international price fluctuations has not yet materialized Centre for International Economic Studies

18. How URAA addressed agriculture (continued) • Tariff rate quotas (TRQs) have several undesirable features: • they legitimize a role for STEs • they generate quota rents • they can discriminate between import-supplying countries • they reduce welfare more than similarly protective tariffs (especially as int’l prices fall) Centre for International Economic Studies

19. Challenges ahead • The UR brought agric into the GATT mainstream, but: • export subsidies are still allowed • a form of QR still restricts imports • few countries have reduced their assistance to farmers since 1995 • Hence agriculture remains by far the most protected goods sector post-UR Centre for International Economic Studies

20. How to measure the potential welfare gains from further trade policy reform • Traditional tariff cuts on goods post-UR still can deliver large welfare gains • Agric reform has more to offer than manuf globally, despite ag’s much smaller GDP and trade shares • DCs could gain much from OECD reform • mostly from agric, with OECD textile reform offering DCs less than half as much, assuming ATC is fully implemented. Centre for International Economic Studies

21. Estimating potential welfare gains from further reform • Use is made of GTAP Model and database, which is projected to 2005 assuming UR fully implemented • That base for 2005 is then compared with a world in which all applied tariffs (and agric production and export subsidies) are removed • Welfare gains are then apportioned by sector and region Centre for International Economic Studies

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23. Challenges ahead (continued) • Phase out export subsidies • to bring agriculture into line with other goods • Reduce AMS and strengthen disciplines on domestic supports • eg, remove blue box? • Drain the ‘water’ out of bound tariffs (and DCs’ ceiling bindings) • reduce from 50-250% to 0-15% to come into line with manufacturing tariffs • But what reduction formula to use? Centre for International Economic Studies

24. Challenges ahead (continued) • If tariff rate quotas in agric prove as difficult to remove as QRs on textile trade, they may be still with us in 2050! • 43 WTO members have TRQs, and more than half use them • The gap between the in-quota and out-of-quota tariffs provides huge gains to license holders Centre for International Economic Studies

25. Challenges ahead (continued) • TRQs add great complexity to the trade negotiator’s task of securing greater market access • In a tariff-only regime, lowering the bound rate has between 0 and 100% of the impact of an equally large cut in the applied tariff rate • But with TRQs in place, there are additional margins to watch ... Centre for International Economic Studies

26. Challenges ahead (continued -- see figure) • Margins to watch to improve own national economic welfare: • Cut out-of-quota bound tariff to below applied out-of-quota tariff • If quota not allocated to lowest-cost suppliers, lower out-of-quota tariff to below their MC • Raise the size of the quota (until redundant) Centre for International Economic Studies

27. Challenges ahead (continued) • Margins a trade negotiator abroad (with some TRQ) will look for: • a lower in-quota tariff • a larger quota for his/her country (but not necessarily overall) • not necessarily any increase in out-of-quota imports (because it lowers quota rent) Centre for International Economic Studies