Prospects for U.S. Agriculture in the Doha Round of WTO Trade Negotiations Robert L. Thompson Gardner 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 Demand to Double by 2050 with Larger Fraction Moving Through World Trade

Projected Population Growth (U.N. medium projections) Region 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

10 Largest Countries (millions) China1,300 India 1,087 United States 294 Indonesia 219 Brazil 179 Pakistan 159 Russia 144 Bangladesh 141 Nigeria 137 Japan 128 India1,628 China1,437 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 CountryPop’n (000)% < $1/day% < $2/day China India Indonesia Brazil Pakistan Russia Bangladesh Nigeria Mexico Source: 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)

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 Organization and the Doha Development Round of 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 Percent Rice 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 % 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?

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 Treatment of 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 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