Prospects for U.S. Agriculture in the Doha Round of WTO Trade Negotiations Robert L. Thompson...
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Transcript of Prospects for U.S. Agriculture in the Doha Round of WTO Trade Negotiations Robert L. Thompson...
Prospects for U.S. Agriculturein the Doha Round of
WTO Trade Negotiations
Robert L. ThompsonGardner Professor of Agricultural Policy
University of Illinois
July 25, 2005
Outline of Today’s Presentation
• Why Trade?
• Importance of Exports to U.S. Agriculture
• Huge Potential Growth in World Market
• The WTO – What Is It?
• Need to Level the Playing Field
• Prospects for The Doha Round of Ag Trade Negotiations
Why Trade?
• Increase standard of living by obtaining goods that others can produce at lower cost in exchange for things we can produce relatively cheaper– By lowering the cost of living, makes a
household’s purchasing power stretch further– Increases a country’s GNP by employing its
land, labor & capital where they are most productive
Exports Are Key to U.S. Agricultural Profitability
• American agriculture exports ¼ to 1/3 of its production of many commodities.
• Without these exports, U.S. agriculture would have to downsize significantly.
• Exports can grow by expanding the total size of the market or by increasing market share.
• The only large potential growth market is in presently low income countries
• The outcome of the WTO trade negotiations will determine how much of this “potential” is realized
A Country’s Exports Depend on:
• Total size of the market– Population– Purchasing Power
• Its market share– Physical environment– Research and technological improvements– Domestic public policies (e.g. agricultural, regulatory,
science; environmental)– Agricultural trade policies– Infrastructure – Exchange rates
World Food Demandto Double by 2050
with Larger Fraction Moving
Through World Trade
Projected Population Growth (U.N. medium projections)
• Region 2004 2050• World 6,378 8,919• High Income 1,206 1,220• Low Income 5,172 7,699• Africa 869 1,803• Asia 3,871 5,222• Latin America 551 767
10 Largest Countries (millions)2004 2050
• China 1,300• India 1,087• United States 294• Indonesia 219• Brazil 179• Pakistan 159• Russia 144• Bangladesh 141• Nigeria 137• Japan 128
• India 1,628• China 1,437• United States 420• Indonesia 308• Nigeria 307• Pakistan 295• Bangladesh 280• Brazil 221• Congo (Dem Rep) 181 • Ethiopia 173
Population Density, 2050
Dynamics of Food Demand
• 1.25 billion people live on less than $1 per day, of whom 840 million suffer under-nutrition or hunger
• 3 billion (almost half of the world’s population) live on less than $2 per day.
• By $2 per day, most hunger (calorie) problem is solved• Between $2 and $9 per day people eat more animal
protein, fruits, vegetables & edible oils, causing rapid growth in raw ag commodity demand
• After $10 per day, people buy more processing, services, packaging, variety, and luxury forms, but not more raw ag commodities
• How many presently low income consumers are lifted out of poverty will be the most important determinant of the future size of world food and ag product markets
Two Dollars Per Day Poverty
Huge Market Growth Potential from Poverty Reduction
Country Pop’n (000) % < $1/day % < $2/day
China 1299 16.6
46.7
India 1065 34.7 79.9
Indonesia 239 7.5 52.4
Brazil 184 8.2 22.4
Pakistan 159 13.4 65.6
Russia 144 6.1 23.8
Bangladesh 141 36.0 82.8
Nigeria 126 70.2 90.8
Mexico 105 9.9 26.3Source: World Bank. World Development Indicators database
Larger Fraction of World Food Production to Move Through Trade• The world’s arable land and fresh water are not
distributed around in the world in the same proportions as is population. – No way for Asia or Middle East to be self-sufficient in
food
• With population growth, urbanization and broad-based economic development, expect world food demand to double by 2050 and many LDCs’ food consumption to outstrip their production capacity.
The World’s Arable Land (left)Is Distributed Very Differently
than Its Population (right)
South Asia15%
Middle East and North Africa
4%
Latin America and Caribbean
10%
Europe and Central Asia
20%
East Asia and the Pacific14%
Africa11%
OECD Countries26%
OECD Countries14%
South Asia22%
Latin America and Caribbean
9%
Middle East and North Africa
5% Europe and Central Asia
8%
East Asia and the Pacific31%
Africa11%
But Global Trading Environment Impedes LDC Growth
• OECD protectionist barriers to LDC goods reduce their foreign exchange earning capacity & economic growth.
• OECD agricultural production and export subsidies depress world market prices below long term trend and increase variance around that trend.
• Food aid is most available in years of OECD surplus, not LDC deficit.
• Depressed world market prices reduce returns to poor farmers, increasing their poverty, and slowing agricultural and national economic growth.
• Widespread poverty in LDCs impedes growth in their food demand, preventing them from fulfilling their potential as growth markets.
Developing Countries’ Own Policies Also Impede Development
• Corruption and/or macroeconomic instability• Lack of definition or enforcement of property
rights and contract sanctity• Underinvestment in public goods, such as rural
infrastructure, education and R&D.• Cheap food policies to keep urban consumers
quiescent – often reinforced by food aid or subsidized exports from OECD
• Lack of technology adapted to local agro-ecological conditions (soils, climate; slope)
The World Trade Organizationand
the Doha Development Roundof Multilateral Trade Negotiations
Why U.S. Agriculture Should Support Developing Country Priority in WTO• Developing countries are the only potential
growth markets of the future -- but only if they enjoy broad-based economic growth -- which will come only if they are allowed to export what they produce relatively most efficiently.
• Developing countries now make up the majority of WTO members. There will be no agreement in the current trade negotiations until they feel there is something of value in it for them (unlike past trade agreements).
Key Outcomes Developing Countries Need from OECD Countries
• A more open trading environment that can stimulate faster economic growth
• Market access for goods in which developing countries have a comparative advantage
• Eliminate import barriers and domestic and export subsidies which depress world market prices and increase their variance
• Foreign aid and international lending for investment in necessary infrastructure, technology, know-how, etc. and to facilitate adjustment.
World Trade Organization• An informal association of 148 countries which
meets periodically (“rounds of negotiations”) to review/revise the rules of international trade
• Its Secretariat, in Geneva, organizes these negotiations and a dispute settlement process to resolve differences among members over whether these rules are being broken
• Dispute settlement panels & an appellate body interpret agreements and build up a body of case law (necessary when wording is fuzzy)
• WTO cannot force any country to change its policies, but it can authorize the victims of violations to collect compensation via import duties on the violator’s exports
Uruguay Round Agreement on Agriculture: Accomplishments
• Increased market access as % of consumption• Reduced export subsidies (value & volume)• Converted all non-tariff barriers to tariffs• Required scientific basis for all SPS barriers• Acknowledged that some domestic agricultural subsidies
can distort trade and categorized them by degree of trade distortion:– “Green box” = non trade distorting investments in public goods
and decoupled income transfers– “Amber box” = trade-distorting (bound and reduced)– “Blue box” = trade-distorting, but offset by production controls or
set-asides
World Agriculture Still in Disarray*• Most high income countries subsidize their
agriculture, distorting relative returns to producing various outputs and inducing larger total investment in agriculture relative to other sectors.
• Many LDCs’ food policies turn the terms of trade against agriculture to keep urban food prices low, reducing the incentive to invest; agriculture underperforms relative to its potential.
• Protectionist import policies and export subsidies further distort what is produced where.
*to paraphrase D. Gale Johnson’s book World Agriculture in Disarray
OECD Producer Support Estimates, 2004, in Percent
Switzerland 68
Japan 56
European Union 33
Canada 21
United States 18
Mexico 17
Australia 4
New Zealand 3
30 Countries Overall 30
Source: OECD Agriculture Directorate
Average Producer Support in OECD Countries, 2004, in PercentRice 75
Sugar 58
Milk 36
Beef & Veal 34
Wheat 33
Corn 31
Oilseeds 27
Pork 21
Eggs 9
Overall 30
Effects of Producer Support
• Distort what gets produced where and, in turn, ag trade flows
• Depress world market prices below long-term trend
• Reduce price and/or income risk to one country’s farmers while increasing price volatility in world market
• Largest producers and farm land owners get most of the benefits
World Market Prices Depressed Below Long Term Trend
Rice 33 - 50 %
Sugar 20 – 40 %
Dairy Products 20 – 40 %
Cotton 10 – 20 %
Peanuts 10 – 20 %
Source: World Bank. Global Economic Prospects 2002, Chap. 2.
Doha Round Must Do Better• Uruguay Round established a useful
framework• But, it did little to open markets, and OECD
countries are still spending over $750 million per day subsidizing their farmers (30% of farmers’ incomes)
• Doha Round needs to be more ambitious than the Uruguay Round by closing loopholes and tightening disciplines to prevent circumvention of the intent of the agreement.
Free Trade Agreements vs. Multilateral Trade Liberalization
• FTAs are second best – but often better than no liberalization (e.g. the huge success of free trade among the 50 United States!)
• Questionable tactic as practiced today– Generally leave out agricultural trade liberalization
(“leave it for the WTO multilateral negotiations”)– Risk addressing other sectors’ problems and losing
leverage from them in the WTO negotiations
• BUT, defeat of CAFTA-DR now would have a devastating impact on WTO trade negotiations!
Doha Round Agricultural Agreement: What Is Possible?
Doha Round Agricultural Agreement: What Is Possible?
• Eliminate all forms of ag export subsidies• Reduce trade-distorting domestic subsidies
(highest the most, but exceptions possible)• Reduce tariffs (highest the most, but exceptions
allowed if increase tariff-rate quota)• Tighten definition of what subsidies are “non-
trade distorting”• Allow developing countries smaller cuts over
longer period (definition? exempt LDCs completely? Special products?)
Domestic Support
• Present: Categorizes all support policies in one of three boxes, with only amber box total (“aggregate measure of support (AMS)”) capped.
• Proposed: – Impose product-specific caps– Cap sum of amber box + blue box + trade-distorting de minimus policies.
• This would significantly increase maximum allowed support in US and EU! Net effect depends on depth of cuts.)
Green Box
• Present: No cap.• Doha Round likely to encourage shifting as
much money as possible from amber to green box payments.
• Cotton case affirmed that direct payments are “green” only if there are no constraints whatsoever on what can be grown on land receiving payments.– U.S. must either delete fruit & vegetable exclusion or
include direct payments in amber box• Open issue: Tighten definition of “minimally
trade-distorting”
Amber Box
• “Substantial reduction in the overall level of its trade-distorting support from bound levels”
• Open issues:– Add product-specific caps?– Highest levels of support reduced the most?
• rice, cotton, sugar; dairy in the U.S.
Blue Box• Present: Trade-distorting policies that have
measures that offset their production-inducing effect, e.g. set-aside or quota on production or sales. No cap at present.
• Tentatively Agreed: – Broaden to include “direct payments that do not
require production,” e.g. counter-cyclical payments [no link to current production, but per unit payment is based on current market price; therefore, not green box].
– Cap at 5% of total value of all national ag production (including non-program crops).
Export Subsidies
• Present: Cap on volume and value of export subsidies on agricultural policies.
• Conditionally agreed: Eliminate all direct agricultural export subsidies by a (yet to be agreed) date certain
• WTO Cotton Case mandated that the U.S. must eliminate subsidy component in export credits and export credit guarantees
• Conditions yet to be agreed: – U.S. food aid should be on only a grant basis– Mode of operation of state-trading enterprises (STEs),
e.g. Canadian Wheat Board, must preclude possibility to subsidize exports.
Market Access
• The most difficult pillar on which the least has been agreed to date
• Framework Agreement says:– Substantial increase in market access though tariff
cuts or tariff rate quota (TRQ) expansion – Categorize all tariffs into “bands,” each with a different
reduction formula, with the highest tariffs to be reduced the most.
– Allow each country to designate an “appropriate number” of (politically) “sensitive products” on which smaller cuts can be made.
– Make cuts from bound rates.– Allow developing countries to use “special safeguard”
Market Access (cont’d.)
• Proposed:– Increase tariff-rate quotas (TRQs) on
“sensitive products” on which tariffs are cut less than formula would otherwise require.
• U.S. has TRQs on sugar, dairy, cotton, peanuts, and beef.
– Set a maximum allowable tariff rate.
Special & Differential Treatmentof Developing Countries
• Allow smaller cuts phased in over a longer period
• Allow each developing country to designate a (yet to be defined) number of “special products” that can be protected
• Exempt LDCs completely from adjustment• There remains politically divisive issue of
definition of “developing country” (as opposed to a least developed country (LDC)).
Minimalist Outcome Possible under July Framework
• Tariff cuts from bound, not applied, tariffs (& no cap)• No increase in minimum market access• Cuts in domestic ag supports smaller than presently
unused “capacity” (or increase the cap!)• Cuts to be made from product aggregates, not individual
products• Redefine blue box to include countercyclical payments• Everyone’s most-subsidized commodities avoid cuts by
being categorized as “special products”• Developing countries overuse new “sensitive products”• LDCs don’t have to do anything
Biggest Sticking Point:Who Goes First?
• U.S. proposal: cut our ag subsidies, but only if gain greater market access abroad.
• Developing countries won’t open their markets as long as world market prices are depressed by ag subsidies in OECD countries (and they have more than half of the votes)
• With this month’s G-8 Summit and Dalian Mini-Ministerial statements, may see additional progress by end of summer 2005 – but negotiators must be given more flexibility.
• 2007 farm bill could impede or facilitate progress
Timetable• 2005:
– Extend Trade Promotion Authority (“fast track”) & decide to stay in the WTO [done]
– WTO negotiations to put meat on the skeleton of the 7/31/04 Framework Agreement (Hong Kong Ministerial to assess progress in Dec. 2005)
– Modest farm policy changes to accommodate WTO cotton decision and budget deficit reduction
• 2006:– Serious offers & requests in WTO negotiations
• 2007:– Congressional approval of new WTO Trade
Agreement and signing before TPA expires (6/07)– 2007 Farm Bill
www.agritrade.org