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9b. US Agricultural Trade Agreements & Updates on Policy & Issues

9b. US Agricultural Trade Agreements & Updates on Policy & Issues. Larry D. Sanders Fall 2005. Oklahoma State University. GENERAL AGREEMENT ON TARIFFS & TRADE (GATT) & WORLD TRADE ORGANIZATION (WTO) HISTORY & BACKGROUND. 1947--GENEVA 1949--ANNECY 1951--TORQUAY 1956--GENEVA 1960-1--DILLON

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9b. US Agricultural Trade Agreements & Updates on Policy & Issues

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  1. 9b.US Agricultural Trade Agreements & Updates on Policy & Issues Larry D. Sanders Fall 2005 Oklahoma State University

  2. 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

  3. 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

  4. 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

  5. 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

  6. 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

  7. 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

  8. 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

  9. 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

  10. 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

  11. 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

  12. 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

  13. Trade Policy Update—WTO • 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

  14. 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

  15. 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

  16. 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

  17. 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

  18. 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

  19. 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

  20. 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

  21. 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)

  22. 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.

  23. 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)

  24. 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

  25. 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.

  26. 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

  27. 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

  28. 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

  29. 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’

  30. 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

  31. 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’

  32. 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)

  33. 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

  34. The Modified Boxes Green Amber New Blue Payments decoupled from production but coupled to prices Payments decoupled from production and prices Payments coupled to production & prices 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.) 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 trade distorting & targeted for reductions under the URA (price supports, marketing loans, payments based on ac or # of livestock, input subsidies, etc.)

  35. Agricultural Producer Support By Country 1986-88 and 2001-03 -Percent of Total Farm Receipts from Government- 1986-1988 80% 71% 2001-2003 65% 62% 60% 60% 40% 39% 33% 40% 26% 20% 20% 12% 20% 2% 0% New Zealand Canada United States EU Japan Korea Source: OECD's database (see www.oecd.org)

  36. US Domestic Support

  37. Total Allowable Trade Distorting Domestic Support, 'The Big 3,‘ 2002 Billion $ $128 $140 Includes Amber + Blue Boxes, Product Specific + Non-product Specific De Minimis, Each Based on 5% of Total Value of Agricultural Production $120 $100 $80 $49 $48 $60 $40 $20 $0 European Union United States Japan WTO, Trade Policy Review and calculations.

  38. Total Trade Distorting Domestic Support Remaining After Year 1 Down Payment (calculated) Billion $ $120.0 $100.2 $100.0 $80.0 $60.0 $39.2 $38.4 $40.0 $20.0 $0.0 European Union United States Japan

  39. Total Trade Distorting Domestic Support Assuming 50 Percent Reduction -Billion Dollars- $60.0 $50.1 $50.0 $40.0 $30.0 $19.6 $19.2 $20.0 $10.0 $0.0 European Union United States Japan Calculated

  40. Impacts of Doha on Agricultural Output and Employment Growth, by Country, 2005-2015 -Annual Average Growth Rate (Percent)- 6% Output 4.4% 4.4% 4.3% Employment 4% 2.2% 1.7% 1.6% 1.1% 1% 2% 0% -0.4% -1.4% -1.4% -2% -2.1% -2.8% -4% -4.1% -6% Canada EU 25 Korea and Taiwan New Zealand United States Japan Brazil Source: Anderson, Martin and van Mensbrugghe (2005a, Tables 12.12 and 12.13)

  41. Percent Change Large Gains

  42. 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

  43. 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

  44. 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

  45. 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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