Compatibility of National Policies and Trade Agreements: Concepts, Issues, and Approaches

1. Compatibility of National Policies and Trade Agreements:Concepts, Issues, and Approaches Julian M. Alston and Daniel A Sumner Department of Agricultural and Resource Economics University of California, Davis Silverado Symposium on Agricultural Policy Reform Napa, California January 19, 2004

2. Key Points • Policy compatibility requires policy reform • Political economy – influences on • Current policies • Possibilities for reform • Compensation as an element of reform • Feasibility • Efficiency and Equity • Policy reform complements • Transparency institutions • Adjustment assistance

3. Achieving Compatibility • EEC/EU Common Agricultural Policy • Common external tariff • Harmonized national policies • CUSTA and NAFTA • Some adjustments (e.g., ???) • Some exemptions (e.g., supply managed) • Some trade disputes (e.g., wheat)

4. Explaining Policies:Efficient Redistribution • Interest-group theory • Policy serves to redistribute income to relatively powerful interest groups • Efficient redistribution • Transfers involve net social costs • Policies chosen to minimize cost of given transfer • Implications for policy reform • Nature of feasible reforms • Prescriptive role for economists (and others)?

5. PS DWL A PSA ΔPSA E PSE 45o Line STC 0 CTSA CTSE CTS ΔCTS Efficient Redistribution through Commodity Programs PS 0

6. Extensions to the Model • More than two groups • Other elements of costs • Introduction and implementation of policies • Administration and enforcement of policies • Costs of change • Policy inertia • Dynamic version of efficient redistribution

7. PS A PSA IC ΔPSA E PSE A’ F STC 0 CTSA CTSE CTS ΔCTS Policy Choice PS 0

8. Implications of Free Trade • Change in STC • Feasible instruments • Economy-wide, general-equilibrium effects • Dynamic efficiency gains • Changes in political “preferences” • Change in equilibrium

9. PS E’ F’ E F STC STC’ 0 CTS Effects of Free Trade on STCs and Policy Equilibrium PS 0

10. Economics of Compensation • Actual versus potential compensation • Least-cost compensation – Quotas • R = [r + p + g(p)]V • R/V = 20-30 % (V = 3-5 times R, say) • p + g(p) = 15-20 %? • Other issues • Capitalization more generally • Efficiency and fairness • Implementation problems (compensation seeking) • Source and form of compensation

11. Other Policies • Transparency institutions • Australia’s Industries Assistance Commission • IAC versus other factors in Australia • ABARE • Adjustment assistance • Australia’s Rural Adjustment Scheme • RAS as a foil for ad hoc assistance

12. Conclusion • Redistributive commodity policies involve net social costs • Compensation should be feasible • Partial compensation may be sufficient • Policy reform may be facilitated by institutional innovations • Transparency institutions • Adjustment assistance