Current status of farm policy reform, compatibility with the WTO, and the role of trade disputes

1. Current status of farm policy reform, compatibility with the WTO, and the role of trade disputes Tim Josling Stanford Institute for International Economics Silverado Workshop, January, 2004

2. Objectives • Set the scene for the discussions that will follow on detailed issues of domestic policy reform and the current WTO trade round • Provide some controversy in an area where conventional wisdom is rife but has not always been an infallible guide to policy developments

3. Questions Address five questions on policy reform: • Has the domestic policy reform process stalled? If so, is it likely to start up again soon? • Has the WTO reform process stalled? What caused it to falter? How can this process be revived?

4. Questions • Is domestic policy change compatible with the trade reform process? Or is the trade process likely to be a constraint on domestic policies? • Do trade negotiations at the bilateral or regional level stimulate policy reform? • What about trade disputes in the WTO? Is this an alternative approach to reform?

5. Has the domestic policy reform process stalled? • Reform is alive and well and living in Brussels • US farm policy is moribund and drifting into incoherence • Other countries (Japan and Switzerland) are doing somewhat better: others are backsliding • Issues have largely changed, making many farm policies of dubious relevance: new aspects of reform are coming into focus • So answer is an unequivocal “yes” and “no”

6. Is domestic reform likely to accelerate soon? • Budget pressures are looming to force changes, in US and in EU • However, such changes may be in wrong direction: reform (cash-out) costs money • Trade agreements are taking over as a main constraint on policy and driver of reform • Other pressures are coming from retail sector and consumer and environmental groups • Long run outlook encouraging but no short run prospects for accelerated reform

7. Has the WTO reform process stalled? • Agricultural negotiations are temporarily stalled as a result of Cancun fiasco • Ministerial inadequately prepared: all the missed deadlines came home to roost • EU-US joint proposal on August 13, 2003 failed in objective of forging consensus • G-20 formed as a reaction and created new and unpredictable dynamic for Cancun • In the end, the debate on agriculture was never joined

8. What caused it to falter? • Brazil decided to side with China and India rather than Australia and New Zealand: developing country CG members joined Brazil • G-20 “single issue” group with agenda focused on OECD subsidies had difficulty negotiating • African Cotton initiative posed additional problems for US, EU: response inadequate • US and EU could not go beyond their mandates • Singapore issues used as an excuse for breakdown of negotiations on agriculture

9. How can this process be revived? • Agreement on framework very close if major players want it: Derbez text is useful basis • Signal from EU on export subsidies and US on restraining “new” blue box (countercyclicals) will be necessary conditions • Indication of willingness to reduce tariffs by developing countries would clinch deal • Main problem is timing: can one do this in early 2004? In time for a Hong Kong ministerial in late 2004? • Looks implausible but stranger things have happened

10. Is domestic policy change compatible with the process of trade reform? • Domestic policy change in the US is deviating from the UR framework of decoupled policies and direct payments • US finds “pure” green box policies unacceptable to farm groups: need for policies linked to market conditions (“new” blue box) • EU attempting to move toward UR framework but having difficulty giving up market management • CAP Reform with Poland as a member more difficult, though southern crops are likely to be brought under reform plan

11. Is the trade process likely to have a significant impact on domestic reform? • Yes, in both obvious and subtle ways • WTO constraints on domestic support will continue to tighten as nominal payments ceilings are reached • Farm policy is now top of the agenda for developing countries and for NGOs • Other parts of the trade agenda are being held back: pressure will increase for farm deal • Connection between trade and security and trade and economic growth could raise stakes

12. Can bilateral and regional trade talks contribute to domestic reform? • Conventional wisdom concludes that cannot deal with agriculture at a bilateral, regional or plurilateral level • Singapore as bilateral hub has little impact on agricultural trade • But NAFTA (US-Mexico part) shows that regionals can address agriculture effectively • EBA (plurilateral) having major impact on EU policy on sugar, rice and bananas

13. Can bilateral and regional trade talks contribute to domestic reform? • EU-MERCOSUR deal has always got stuck on agriculture, but some movement likely soon • US-Chile includes some agricultural provisions, including safeguards • CAFTA also has some lessons for agricultural trade, and for FTAA: likely to be extended to DR • US-Australia could also have some impact on US policy • FTAA has stumbled over issue of domestic support, but not insuperable (pace Bhagwati)

14. Can bilateral and regional trade talks contribute to domestic reform? • If China goes regional (ASEAN+3, or China-India) then agricultural issues will have to be addressed • India may find it easier to liberalize agriculture on a regional basis • Japan and Korea will resist but may also yield in trade-off for preferred manufactured access • Australia, New Zealand and Chile may decide that Asian market can be opened up easier that that of the US and the EU

15. Do trade disputes have any impact on farm policy reform? • Legal approach can be an alternative way of opening up markets to political approach • Negotiations have helped resolve controversial legal conflicts (e.g. oilseeds) in the past • Panels can interpret rules in a way that forces policy change: e.g. “what is a subsidy?” • So far few challenges to farm programs since 1995 • Assumption has been that Peace Clause is effective shelter, along with schedules

16. Can trade disputes stimulate reform now? • Peace Clause has ended, though it could be revived (at a high negotiating cost to EU, Japan, US) • Few challenges expected this year, in particular while WTO talks continue • But talks will continue “in the shadow of the law” • Canadian Dairy case gives another avenue not dependent on Peace Clause: EU sugar case could be the key to this approach • US Cotton case could also change the presumption that panels can’t influence farm policy in US

17. Conclusions • Interesting year for farm policy! • WTO will make some progress on framework but numbers will not be put in until Spring 2005 • Bilaterals will go ahead and add to the constraints on farm policy • Safeguard, contingency arrangements in bilaterals could impinge on domestic policy • Panels will declare at least two major farm programs in violation of WTO obligations • Several potential cases will reach the consultation stage