Ag Policy, Lecture 6 Knutson, Penn, & Flinchbaugh, Chapter 5 World Trade Organization Review

Trade Issues Benefits of Trade: –More efficient use of resources –Reduce world hunger Problems: –Interdependence among nations

Barriers to Trade Tariffs: Tax on imports –TRQ: Tariff varies in increments with quantity imported –Tariffs preferred because transparent Subsidies –Export subsidies –Domestic production/price subsidies Nontariff tariff trade barriers –Restrictions on imports other than tariffs Quotas Embargos Sanitary and phytosanitary Technical barriers (definitional) State Trading Enterprises (Canadian Wheat Board) Exchange Rate Manipulation

Origins of WTO General Agreement on Tariffs and Trade (GATT) –Established in 1947 as a forum to reduce trade barriers WTO replaced GATT in 1995 as legal and institutional foundation of multilateral trade relations –Designed to strengthen the trade rules by providing a stronger set of institutions for resolving disputes and enforcing agreements Negotiations take place in “rounds” –There have been 9 to date –Begins with an agreement among members on agenda –Most recent completed round was Uruguay Round –Currently on Doha Round

Three Basic Principles Once a tariff concession is agreed to, it cannot be raised MFN, any advantage given to one country must be given to all Imported goods treated the same as domestic goods in terms of regulation and taxes

Three Pillars of URAA (Uruguay Round Agreement on Agriculture) Market access: Convert import quotas to tariff or TRQ and reduce over time Domestic support: Reduce domestic support by 20% from level –AMS = Aggregate measure of support = total of red and amber box (trade distorting subsidies) Limits on value and volume of export subsidies from level

Loop Holes in URAA Precautionary principle: WTO requires that S&PS decisions be based on science. This principle allows restrictions when scientific evidence is deemed to be insufficient. Requires seeking evidence over reasonable time period. Safeguards permit imposition of higher tariffs if there is a surge in imports above specified levels Multi functionality: Green box justification for subsidies based on contributions to the environment Programs are classified by “box” by the reporting country, but is subject to challenge by WTO or a complaining country

4 Pillars of Doha Round 4 Pillars of Doha Round (Reflects broader US goals in trade policy) Market access: Substantially reduce tariffs and increase quantities in TRQs Export competition: Eliminate export subsidies, variable export taxes, and exclusive import rights by state trading importers Domestic support: Substantially reduce amber box subsidies and simplify into exempt and nonexempt Developing countries: Enhance input into WTO and their benefits from international trading

Boxes of WTO Green box: Not trade distorting Blue box: Minimally distorting because production is controlled Amber box: Trade distorting, subsidies tied to price and/or production Red Box: Subsidies that must be stopped (empty box)

Amber Box Limits for U.S. and E.U.

WTO Classification These classifications are based on recent US notifications to the WTO The fixed payments and conservation programs have been classified as green box −Direct payments on a fixed payment base are considered as income support −Conservation program payments are considered exempt as long as the payments do not exceed the actual cost of conservation efforts or the opportunity cost from idling land or producing under conservation production practices

WTO Classification The marketing loan benefits, dairy programs, and sugar price support have been classified as commodity-specific amber box. −All of these programs require production of the commodity to receive a payment and the size of the payment is contingent on the amount of production. −Price support programs (such as dairy) are also placed here. Even though no payments flow out because of the program, the amount of price protection is charged against the WTO limit (calculated as the product of production eligible for price support and the price gap between the price support level and a reference price).

WTO Classification The countercyclical and crop insurance programs have been classified as non-commodity-specific amber box. −The countercyclical program falls into the amber box because payments depend on current prices and into the non-commodity-specific box because production is not required to receive payments. −Crop insurance has been placed here and reported in aggregate (net indemnities across all crops). Given the nature of crop insurance, it probably should be classified as commodity-specific. Insurance at or under 70% coverage could be reported as green box, while higher coverage could be reported as commodity- specific amber.

De Minimis Rule The de minimis rule exempts “small” domestic support payments Whether payments are “small” or not is defined by the product covered by the payment For the U.S., a five percent rule is applied for de minimis For commodity-specific support, payments are compared to 5% of the value of production for the commodity For non-commodity-specific support, payments are compared to 5% of the total value of U.S. agricultural production

Why Classification Matters The classification of the new countercyclical program in the non-commodity-specific amber box helps the U.S. in meeting the domestic support limits Expenditures from programs in the non-commodity-specific category are compared against the value of all agricultural production in the country (as opposed to crop value for commodity-specific programs) Given U.S. agricultural production values of $200 billion, the non-commodity-specific amber box can hold up to $10 billion in support before reaching the de minimis mark and counting against the domestic support limit

Where We Are in Doha Round? Most recent Ministerial in Cancun – failed Open rift between developed and developing countries Meetings came to abrupt end in Sept ‘03 when four African countries submitted a proposal to eliminate the U.S. cotton program G-22 (coalition of 22 developing countries) unwilling to open their markets in return Peace clause expired in Dec –Can’t challenge other members export and domestic subsidies on agriculture

Trade Issues (Benefits, Problems, Barriers) WTO –Principles –Uruguay Round Agreement on Agriculture –Box Classifications –De Minimis –Doha Round Next Class –Exam 1 Lecture 6, Wrap up