Day 2: Accession experiences during WTO’s first decade; and ‘non-trade’ concerns

1. Day 2: Accession experiences during WTO’s first decade; and ‘non-trade’ concerns 4-day course on Agricultural Trade Policy and WTO Tehran, Iran, 15-18 May 2005

2. Outline of this morning • Accession experiences to date, and lessons for new applicants such as Iran • An examination of what the growth of ‘non-trade’ concerns in agriculture means for WTO members and accedants • sometimes called ‘multifunctionality’– is this the new agricultural protectionism (along with food safety and SPS measures) to replace traditional market price support measures?

3. New members of WTO since 1995

5. Accessions are taking ever-longer • Recent acceding countries have taken about 10 years to accede from date of establishing a Working Party • Even ignoring China (number 15 in Figure 1), the trend number of years is clearly rising • Due to more demands by WTO members, or because late applicants have the most distorted economies or are the most reluctant reformers?

6. Countries currently seeking accession

7. Of the 29 countries currently seeking WTO accession … • Nine applied more than 10 years ago • Twelve applied 5-10 years ago • Average period so far for those 72% is 9 years • Nine are LDCs (applied >5 years ago on av.) • Ten are from Eastern Europe/CIS • Eight are from Middle East/N. & NE Africa • If all joined, WTO membership would rise from 148 now to 177 customs territories (or 178 with Iran) • Ones larger than Iran: Russia and Saudi Arabia • then Kazakhstan, Ukraine and Vietnam

8. The ‘price’ of accession • Involves market access commitments, and other specific commitments • In terms of market access, the average tariff binding is getting lower over time • see agric and non-agric in the following two figures, ignoring the final two applicants which are the first LDCs to join (Nepal and Cambodia)

11. Historical background: Why agriculture was brought into the Uruguay Round (but not previous GATT rounds)? • 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 • which more than doubled the welfare costs of agricultural protection over the 1980s (Tyers and Anderson 1992)

12. Who brought agriculture into the UR? • US farmers were hurt more by EU policies than EU farmers were by US policies • Australia/NZ and food-exporting developing country farmers were affected hugely • led to formation of Cairns Group in 1986, whose sole aim was to keep agriculture high on the UR agenda • its agric. exports = Japan’s manufactures exports

13. Recent change to traditional protection pattern • Unilateral reforms by developing countries since the 1980s have reduced their export taxes and other negative incentives for farmers • But some developing countries have ‘overshot’ and become protectionist towards farmers • or could do in the future, because of their much higher bound than applied agricultural tariffs

14. Implications for countries seeking WTO accession • Relatively wealthy and large acceding countries, such as Iran (and China before it), are going to be required to bind their agricultural tariffs at low levels • Which presumably means little or no binding overhang, and hence greater cuts to applied tariffs in future multilateral trade rounds (relative to members with still large tariff binding overhangs)

15. Required services commitments also are growing • Of the WTO’s 160 services sub-sectors, the number of commitments made by founding members were 44 for developing and 108 for developed countries • But the twenty developing and transition economies that have joined WTO since 1995 have on average committed in 104 sub-sectors

16. And specific (non-market access) commitments are being added • An average of 20 per acceding country • Some are WTO+, going beyond commitments agreed among members in Uruguay Round • Others are WTO-, or involve agreeing to forego rights available for existing WTO members • e.g., Ecuador’s commitment to eliminate all domestic subsidies prior to joining and never to introduce them in future; China’s acceptance of product-specific transitional safeguard provisions (likely to be used by importers of Chinese clothes)

17. How countries have made the most of WTO accession process • Starting unilateral reform even before and certainly during the Working Party stage • Being pro-active in targeting reforms to areas identified as national priorities • e.g. Cambodia identified textiles, clothing and tourism as sectors that could benefit from reform • Clearly identifying goals, analyzing options (requires modelling), and formulating negotiating strategies and fall-back options

18. Lessons from the past decade of experience with accession negotiations • Expect the process to take at least 5 years, or more if society is reluctant to reform • Establish a broad base of support within government, civil society and especially the private sector (and with key trading partners) • Expect to have to bind average tariffs at <20% for agric and <10% for non-ag goods • And so anticipate the employment and other adjustments needed and the domestic measures (e.g. adjustment assistance) that could reduce opposition to reform and facilitate growth • And identify aid funds to finance adjustment assistance

19. Lessons from experiences with implementing accession commitments: the case of China • Discussion questions: • How large were the adjustment shocks? • How much reform was still to be implemented at time of WTO accession? • Were there significant losing groups/regions? • How were they dealt with? • What complementary domestic reforms were introduced to magnify gains/ ease adjustment burdens? • How did China’s trade change, and how did its trading partners respond? • What is the consensus now within China about whether WTO accession has been worthwhile?

20. Changes in applied tariffs (%) by China post-WTO accession

21. New topic: Are ‘non-trade’ concerns the new agricultural protectionism? • Negotiations can be like squeezing a balloon: while you may gain (lose) in one battle you may lose (gain) in another • Example: agriculture’s ‘multifunctionality’ • Consider some basic principles, and their application to: • food security • rural environment • viability of rural areas

22. Why has this ‘multifunctionality’ concept emerged recently? • Was agreed to in UR • see Art. 20(c) of URAA • The claim is that reduced support for farming may damage the rural environment, reduce food security, make rural communities less viable, etc. • being thought of as public goods produced jointly with farm goods

23. Basic principles • The debate is not over sovereign governments’ rights to determine national policy objectives • Rather, the debate is over the means by which governments strive to achieve those goals • Need to bear in mind: • international rights and obligations • market failures, eg due to externalities • in production and consumption • in non-agric sectors as well as agriculture • government failures in intervention

24. Six lessons from theory and past policy practice 1. Where there are several policy objectives, an equal number of policy instruments is required to deal with them efficiently 2. The lowest-cost measure will be that which addresses the concern most directly 3. Hence trade measures are rarely the best way of addressing non-trade concerns

25. Six lessons(continued) 4. Trade lib’n will improve economic welfare so long as optimal domestic interventions are in place to deal with non-trade (eg environmental) concerns, and are adjusted as trade is freed 5. The extent of achievement of non-trade objectives may not be as great with as without trade reform • Part of the ‘price’ of gains from trade

26. Six lessons(continued) 6. Whenever govt intervenes, even if it is to overcome a market failure, there is a risk of government failure • which could be more welfare-reducing than the market failure being targeted • could occur at the bureaucratic and/or political level

27. Why strive for the most efficient way to achieve society’s non-trade objectives? • Because achieving those objectives requires resources • And the fewer resources required to achieve each objective, the more there will be for achieving others and/or for preserving resources for future generations

28. Do farmers make more of a non-marketed contribution than other producers? • All sectors generate both marketed and non-marketed products • Some non-marketed products are more desirable than others, and some are undesirable • Since tastes and preferences change over time and differ between countries, so too do societies’ valuation of non-marketed products

29. (continued) • Does farming produce more non-marketed +ve externalities/public goods than other sectors? • net of -ve externalities/public bads? • If so and if they are under-supplied, what are the most efficient ways to get their optimal provision? • are those measures WTO-consistent? • Import barriers and other price-supports are inefficient instruments for boosting their supply

30. The policy task thus involves several steps • Get a sense of society’s willingness to pay for the non-marketed by-product • Determine the most efficient measure for encouraging farmers or others to supply that by-product for society • Then determine the optimal level of encouragement • equate marginal social benefit with marginal social cost of intervention

31. Examples of ‘non-trade’ concerns: 1. food security • Food security is not synonymous with food self-sufficiency • Rather, it’s a consumer issue: • ensure that everyone always has access to a threshold supply of basic food necessary for survival • Requires threshold income and savings (or credit access) and a well-functioning market for staple foods • Note: agricultural protectionexacerbates food security, by raising consumer prices of food

32. Food security (continued) • What if the int’l market is thin, as with rice? Or there is a risk of an export embargo (as permitted under GATT Article XXI)? • Try long-term contracts with trading partners, or subsidize stockholding of staples (allowed in Annex 2 of URAA as a ‘green box’ item) • If greater domestic production is desired, agric R&D (an allowable ‘green box’ item) which lowers domestic costs of production is better than price support

33. Example 2: environmental protection • Local environment is generally helped by lowering output price supports and taxing pollutive farm inputs • But in the case of +ve externalities, subsidize just their provision, to the optimal degree, de-coupled from farming (and even farmers?) • rural landscape? (vs golf courses?) • cows in alpine pasture? (pay directly) • biodiversity? (pay for hedgerows, eg)

34. What about negative externalities from farming? • They (and food safety risks) tend to increase with the intensity of input use, which in turn is greater the more product prices are raised or input prices are subsidized • taxes would be more appropriate than subsidies on pollutive inputs

35. Example 3: viability of rural areas • Is agriculture the only (or even main) economic activity in rural areas? • Wouldn’t targeted supports for essential services in remote areas be a lower-cost option? • Regional supports in one country harm rural areas in other countries • What is optimal degree of support?

36. Conclusions on ‘non-trade’ concerns • Likely to become more contentious as regular trade distortions are lowered • Need to be dealt with in WTO because they can affect trade • Should be handled in the same way for all sectors • Current WTO rules are adequate • Requires governments to target, with precise interventions in each case, rather than use blunt market price support (including trade) measures

37. Reading for this topic • See K. Anderson’s “Agriculture’s 'Multifunctionality' and the WTO”, Australian Journal of Agricultural and Resource Economics 44(3): 475-94, September 2000. [Related concerns about new forms of agricultural protectionism have to do with human, animal and plant health claims leading to import restrictions on food safety or environmental grounds]