Wheat Disputes under NAFTA

1. Wheat Disputes under NAFTA Julian M. Alston, Richard Gray and Daniel A. Sumner

2. Objective • describes the history of the wheat trade and trade disputes between the United States and Canada during the past 10 years under first CUSTA and then NAFTA • For much of what is reported here, we draw heavily on our previous work, including Alston, Gray, and Sumner (1994, 1999), Alston, Carter, Gray, and Sumner (1997), and Sumner, Alston, and Gray (1994).

3. Outline • The previous disputes • the1994 ITC case • more recent events and summarize • the overall experience and the effectiveness of the dispute resolution processes.

5. previous trade disputes (1) • 1989durum wheat producers in North Dakota argued that Canadian freight subsidies constituted an export subsidy, in violation of CUSTA Article 701.2. • United States Trade Representative determined that Canada had not violated this article

6. previous trade disputes (2) • Congress instructed the ITC to examine the “conditions of competition” between the U.S. and Canadian durum industries. • The ITC rejected the argument that the CWB had been “dumping” durum into the United States (i.e., selling into the U.S. below acquisition price)

7. previous trade disputes (3) • In 1992, the case of Canadian durum wheat sales was heard before the binational panel, under Chapter 18 of the CUSTA. The binational panel made its final ruling in January 1993, finding no compelling evidence that the CWB was selling below its acquisition cost

8. Section 22 • US domestic law • substantial harm to the operation of commodity programs • USDA position/estimates of harm • $228M in program payments from excessive imports • no formal model • clearly ignored imports of pasta • third country effects?

9. Section 22 • SAG analysis (Sumner, Alston and Gray) • modeled Canada US and ROW • 3 classes of wheat • Armington assumptions re alternate import sources • $9.9 M in costs versus USDA $228M • model and sensitivity analysis was fully documented • even with extreme assumptions could only get to 1/3 of USDA effects

10. Section 22 • ITC staff analysis • Vector Autoregression model • response in price to supply shocks • ignored third country effects • A diversion of Canadian shipments to the US modeled same as a increase in US production • estimate of cost in between SAG and USDA

11. Section 22 • split decision • negotiated TRQ • only binding ex ante for durum • agreement expired after 1 year exemption for section 22 under the WTO removed

12. Post 1995 • continued growth in shipments • no trade disputes • in part higher prices until this year • can’t argue cause and effect • run out of a legal options

14. Post 1995 • impact on domestic policies • US no EPP, storage or ARP used • Canada no direct subsidies - access to Canadian market

15. Future issues/ disputes • CWB - STE • currently allowed under WTO • new WTO unlikely soon • some domestic pressure for reform • growing awareness in the US that exports could increase

16. Green box and trade neutrality • huge disparity in support • 1998 PSE $2.40 versus $.40 $CDN/bu. • very low prices increase the distortion effect • little adjustment in the US wheat sector • the distortion prolongs the low prices

17. Potential dumping action • dumping occurs with price discrimination or through selling below cost of production • it is actionable under the WTO if the dumping causes significant harm • Canadian production of all grains below the cost of production

18. Potential dumping action • this is often used as a basis for antidumping e.g.. RCALF case • CWB versus farmer exporting? CWB is not dumping even by this definition • clearly these dumping rules could restrict trade if damage are high enough

19. ironies: • low prices maintained by US force Canadian producers into negative margins • the presence of the CWB export monopoly might prevent the use of this clause

20. Other issues?