The implications of trade-distorting and decoupled farm support in OECD for developing countries

1. The implications of trade-distorting and decoupled farm support in OECD for developing countries Ekaterina KrivonosTrade and Markets DivisionFood and Agriculture Organization of the United Nations

2. Measuring support to agriculture • There are different types of farm support, not all are distorting. Tariffs and price support are generally most distorting • WTO: The Aggregate Measure of Support (AMS) measures trade-distorting subsidies • OECD: Producer Support Estimate (PSE) measures all farm support: Monetary transfers to producers • Only part of border protection is included in the AMS (not tariffs) • AMS excludes de minimissupport and the “blue” and “green” boxes. • Fixed baseline reference prices are used to measure AMS (not so for the PSE). The AMS can be greater than the PSE if world prices are above the AMS world reference price

3. What is considered distorting? • WTO established “Green” box: non-distorting measures (Direct payments to farmers and Government service programs) • The others are • “Amber” box: Most distorting, largest effect on production and trade, should be phased-out (measured by AMS) • “Blue” box = “amber box with conditions” - production limiting programs. Temporary, supposed to be negotiated. • Developing countries - special treatment is provided for food security purposes

4. Issues with AMS • AMS can be reduced without actually cutting support by changing the mix of policy • For example, can lower administered prices but increase border protection • If prices fall, farm support can be scaled up, but AMS will be unchanged • Concerns about some policies classified as “green“ box

5. OECD Producer Price Support (PSE) PSE: Annual monetary value of gross transfers from consumers and taxpayers to support agricultural producers, measured at farm gate level, arising from policy measures Dimensions: • the transfer basis for support: output, input, Area/Animal numbers/Receipts/Income, non-commodity criteria; • whether the support is based on a current or historical indicators; • Whether production is required or not

6. In the OECD PSE estimates, Market Price Support (MPS) and payments based on output and input use are most distortive. • Market Price Support (MPS) is the value of gross transfers arising from policy measures that create a gap between domestic market prices and border prices (highly distortive). • MPS comprises border measures (trade barriers) as well as subsidies

7. The outcomes of international negotiations • The Uruguay Round: • Reduction in distorting domestic support since 1980’s, and especially the use of market price support Source: WTO

8. Since the Uruguay Round • Tendency to replace by direct payments to producers or “decoupled” support: Limited or zero effect on production. • At 2001 Doha Ministerial Conference, the agriculture negotiations became part of the single undertaking • The WTO Agreement on Agriculture covers market access, export subsidies and domestic support • The progress towards greater cuts in support in multilateral negotiations has been very slow • High hopes for the Doha Round not fulfilled

9. PSE in the OECD area, million EUR Source: OECD

10. The decline in PSE does not necessarily reflects policy changes, but could be the result of higher world prices that reduce subsidy due to smaller gap between minimum prices and world market prices • The use of MPS, both in value terms and as a share of total, has been declining in OECD • However MPS still constitutes almost half of total PSE in OECD

11. Distribution of PSE by payment category, OECD total (2010) *Area/Animal numbers/Receipts/Income **Based on long-term resource retirement Based on a specific non-commodity output Based on other non-commodity criteria Source: OECD

12. In the EU, CAP is much less distortive than in the past

13. CAP reform proposal under discussion The 2011 Commission’s proposal • Financial aspects: • a significant reduction (-12.5% in real terms) of the financial resources allocated to the CAP • A redistribution (‘convergence’) of support among member states (to reduce current disparities) • In both cases the changes proposed are probably less marked than many expected Source: Giovanni Anania (2012)

15. Trade-distorting vs decoupled support • Decouples subsidies, in principle, should not distort production and trade. • EU CAP is undergoing reform, price support is minimal. The focus of CAP have shifted from providing income support and stimulate production to greening and other forms of direct support. • US Farm Bill is going the other direction

16. Support to agriculture in Norway • Border measures and budgetary payments are the main policy instruments • Market price support, in the form of wholesale target prices, is provided for the main commodities • Target prices and budgetary support are negotiated annually between the government and producer representatives.

17. Norway’s trade policy and domestic support • Open trade policies for most industrial goods Agriculture: • Tariff protection is relatively low for agricultural products not produced domestically • But domestic production highly regulated by a combination of tariffs and support payments. • Average applied tariff on agricultural products was 38.5% in 2008 varying from 0 to 555% (WTO) • Changeable tariff depending on the target price for a number of products (depending on the outcomes of the annual Agricultural Agreement): Tariff reduction takes place if market prices exceed target prices by 10%. • Tariff quota regime for some 24 tariff lines: most tariff quotas are auctioned • Export subsidies on few products, particularly cheese (but also butter, swine and bovine meat)

18. Norway has high level of producer support and a large share of MPS Producer support estimate (PSE) in Norway million NOK While the share of potentially most distorting support policies in the PSE has decreased (from 78% in 1986-88 to 52% in 2009-11), it nevertheless continues to account for more than half of total support. OECD (2012) Source: OECD

19. Producer support as a share of all farm receipts is very high in Norway compared to the rest of OECD % PSE* in Norway and OECD total * PSE to the value of total gross farm receipts, measured by the value of total farm production (at farm gate prices), plus budgetary support. Source: OECD

20. Farm support by product • Market price support is the most important type of subsidy in Norway. • Payments under the “blue box” of WTO are significant, and much higher than green box payments. • Dairy is Norway's most heavily regulated subsector Distribution of Norway’s market price support by commodity, 2010 Source: OECD

21. Product-specific farm support policies in Norway Source: WTO

22. The dairy sector policy in Norway • A combination of structural income support and price support (regional deficiency payments) • Dairy products are subject to an average ad valorem equivalent applied tariff of 60.3% in 2008 (rates range from 24.8% to 148.7%) (WTO) • In 2012 the specific tariffs are: • Butter: 25.19 NOK per kg • Milk and cream in solid forms: 23.99 NOK per kg • Processed cheese: 28.04 NOK per kg

23. 2011 agreements • An increase in target prices with a total budgetary effect of NOK 580 million (USD 103 million) from 1 July 2011, and NOK 280 million (USD 50 million) from 1 January 2012. • An increase in budgetary support of NOK 365 million (USD 65 million) from 2011 to 2012. • At the same time world prices continue to be high

24. What is the problem with trade-distorting agricultural support? • High fiscal cost • Disproportionately benefit wealthier households that own large areas of land • Increase food prices to domestic consumers, disproportionally affecting poor households • Distort international trade by boosting production in rich countries, suppressing world prices at which the poor countries are not able to compete.

25. The implications for developing countries • The distortive effects are different for each commodity, each case needs to be studied separately. Examples: • Cotton protection has clear negative effects on cotton producers in developing countries. • Food crops: Many countries are net importers and would lose from higher prices. Some products, like dairy, are mostly consumed domestically with low international trade volumes

26. Some estimates of the effects of trade liberalization Source: Huff, Krivonos, and van der Mensbrugghe (2006)

27. Source: Huff, Krivonos, and van der Mensbrugghe (2006)

28. Border measures vs domestic support • “The reduction of border support (import tariffs and export subsidies) has a higher impact on agricultural production than the reduction of domestic income support” (Nowicki 2010) • Welfare effects are also substantially higher (see distribution): Source: Skully (2009) based on Anderson, Martin and Valenzuela (2006)

29. Key findings of global trade models • Significant gains: reform generates global annual gains in excess of a hundred billion dollars • High costs of a Doha failure: anything that does not get close to the 100 percent liberalization scenario will not deliver real gains • All will gain: the gains will be roughly equally shared between developed and developing countries, but higher in developing countries when viewed as a proportion of their GDP

30. Key findings of global trade models • You liberalize, you gain: developing countries gain more from reform of their own policies than from increased market access to developed countries • Agriculture sector liberalization is important: gains from agricultural reforms are disproportionately high given its low share of global GDP. • Market access is key: the gains from increased market access far outweigh those from reductions in the use of domestic support Source: Trade Policy Technical Note No. 13 (FAO)

31. But the results vary substantially • Different scenarios • Different parameters • Different levels of product disaggregation • Different ways of quantifying policy changes • Different benchmarks • Assumptions that may not be satisfied in many developing countries: • Full employment, perfect competition, perfect capital and risk markets etc. • The total impact depends on the policy mix

32. Supply response to subsidy removal • Supply response to higher world prices is not automatic, especially in countries that face multiple constraints (infrastructure, information, climate etc.) • Modeling the effects of subsidy removal on world prices is pretty straight forward, but from prices to supply by developing countries the connection is more complex. • To dismantle domestic support in OECD countries would first and foremost benefit themselves.

33. Are agricultural subsidies still a problem given that food prices are high? • Yes, because historically low and highly distorted prices create uncertainty and underinvestment • Short-term versus long term effects of subsidies on global supplies (We do not want agriculture to disappear in countries with food insecurity) • Russia, China policies are potentially more distorting than EU and US in the future

34. How decoupled is “decoupled”? • Decoupled support does not, in principal, affect production decisions. What about investment and technology adoption? • Anything that ensures stable income affects farming decisions and has the potential to increase production • In new EU member countries with poorer farmers, producers may be encouraged to stay on farm land and produce • Political economy issues: Transfer from one group (consumers) to another (producers).

35. Lower prices could actually imply higher farm incomes Source: FAO Trade Technical Note No. 5. “Domestic support: trade related issues and the empirical Evidence”

36. Should reduction in agricultural support be encouraged in developing countries? Agricultural subsidies in developing countries (even “coupled” such as input subsidies) are important tools for stimulating production and investments in agriculture since many countries with serious supply concerns have not yet realized the full potential of agricultural development

37. Hunger and malnutrition could persist despite sufficient food supplies • Food availability at global level is so far not an issue, but access to food is • For local prices, domestic policy can matter more than border measures • For example, there are serious competition issues in domestic markets • Domestic conditions are also very important: Climate, infrastructure etc (example: Mexico drought 2011 produced a spike in maize prices)

38. Benefits from increased trade • The benefits from increased production and trade in developing countries are likely to be distributed unevenly. • The results depend on the market structure in each country and the general competitiveness level of farms. • Trade policy changes should be accompanied by domestic policy with focus on credit, rural infrastructure, market information. • Potential for increased production in Africa:  Yes, there is some potential, especially in Zambia and Congo. But most farmers are smallholders that produce mostly for own consumption, not for the market. The aggregate volumes are still low.

39. What should be the focus of negotiations on agriculture in order to benefit developing countries? • Focus on market access, i.e. removal of tariffs and non-tariff barriers • Domestic support in OECD should be switched from trade-distorting to payments not linked to inputs or output • Not all domestic support should necessarily be eliminated, especially in developing countries Moreover: • We need greater focus on research and development, resilience in agriculture, sustainability, developing local markets, encouraging consumption of nutritious, traditional and locally grown foods

40. The future of international negotiations? • Life after DDA? • Should “single undertaking” be abandoned in favor of piecemeal approach to reach feasible agreements? • The environment for further trade talks is not great: Zero trade growth in 2012 and protectionism is on the rise, including in the agricultural sector. • The negotiations on agriculture will concern market access and domestic support, possibly a revaluation of the “green” box • Both Norway and the EU gave been pushing for non-trade concerns to be taken into account in the negotiations • Stated priorities for Norway are food security; the continued viability of rural communities, including the maintenance of human settlement in sparsely populated areas; and environmental issues, including those relating to the agricultural landscape and biodiversity.

41. Concluding remarks • Regardless the approach to negotiations, greater efforts are required to reduce distorting support in OECD and increase market access for goods from developing countries. • Agriculture in Norway remains among the most protected in OECD • Although it is a small player, Norway could send an important message to other OECD countries by decoupling its support • Norway is highly committed to the development cause as witnessed by its ODA. Why not go one step further? • Rather than trade vs aid, it should be trade and aid.

42. Concluding remarks • Although a small country, Norway is a notable participant in international development given its independent and progressive stance on many issues, solid economy, top ranking in human development and democracy and highest level of development aid • Norway could lead by example and push for further reduction in agricultural protection among OECD countries in WTO negotiations.