1. Agricultural Economics
Lecture 7: International Influences

2. Agricultural Trade Issues and Policies
Relationships
Trade Issues
Geopolitical Centers of Influence

3. International Policy Live in a global economy where:
Interdependence of policies
Global Agriculture Markets
Few commodities are isolated through barriers to trade (successful only in varying degrees)

4. Trade Policy does NOT exist in Isolation
A component of Foreign Policy
Intertwined in Domestic/Economic Policy
Intertwined in Ag & Food Policy

5. Trade Policy Issues Food Diplomacy Increased Market Access
Building Markets
Developing Market Economies
Increasing Food Security
Protectionist Policies

6. Market Access Why do we want market access?
Why would we refuse others access?
Access is gained by reducing barriers to trade
Bilateral & Multilateral Trade Agreements
Free-trade Agreements
Customs Unions
Common policy toward non-members
Common Markets
Free movement of factors of production
Alignment of major economic & agricultural policies
Economic Unions
Unified social/economic policies

7. Building Foreign Markets
Market Intelligence
Export Credit and Enhancement
Cash or Commodity Subsidies
Credit Guarantees

8. Building Market Economies
Typically Mingled with Multiple Objectives for Developing Economies
Partnerships with UN, World Bank, Voluntary Organizations
Institution Building
Technical Assistance
Infrastructure Development
Applied Research

9. Food Security Global Food Availability Individual Food Security
Food Safety

10. Protectionist Policies
Barriers to Trade
All Domestic Farm Policies
Trade Remedy Laws
Anti-Dumping Provisions
Countervailing Duty (Tariff)

11. Geopolitical Centers of Influence
Countries or groups (blocs) of countries that have (or could have a major impact on agriculture and agribusiness
Some individual countries are in this position now, have been, or will be
Mexico
Canada
Japan
China
Russia
Some are organized into blocs
NAFTA EU
MERCOSUR/FTAA
Cairns group
APEC

12. Geopolitical Centers of Influence
Then there are the developing countries
Largely ignored up to now
Want preferred access to developed country markets
There are interest groups outside the countries and blocs that try to influence the world agenda
Greenpeace
UN/FAO

13. NAFTA (North American Free Trade Agreement)
3 Separate Agreements
Canada – US Trade Agreement (CUSTA) effective in 1989
Canada – Mexico Trade Agreement effective in 1994
US – Mexico Trade Agreement effective in 1994

14. NAFTA Trade U.S Absolute (Comparative) Advantages
Corn, Soybeans, (Poultry, Fed beef, Hogs)
Canada Absolute (Comparative) Advantage
(Wheat, Oats, Barley, Canola, Flax, Fed Beef)
Mexico Absolute (Comparative) Advantage
Vegetables, (sugar)

15. NAFTA Issues Countries maintain separate domestic farm policies
U.S. – Price/Income Support to Farmers, Conservation
Canada – State Trading (CWB), Production Controls, Conservation, NISA
Mexico -- Direct Support, Price Supports
Dispute Settlement, 5 member panel of judges

16. MERCOSUR Argentina, Brazil, Paraguay, and Uruguay Established in 1991
Competitive in Corn, Soybean, Beef, and Orange Juice Production
U.S. has lost some beef markets because of the freer trade within MERCOSUR
Strong Advocate for Eliminating Subsidies
Opportunities
Expand to include Bolivia, Chile, Peru, Ecuador, Colombia, Venezuela
Potentially a part of FTAA
Problems
Political and Economic Instability

17. Cairns Group Established in 1986 in Cairns, Australia
18 southern hemisphere countries
Major members include Australia, New Zealand, Brazil, Argentina, Chili, Thailand, Canada
All export dependent
Wheat, rice, coffee, beef, dairy, soybeans
Ag policies
Works largely through WTO
Seeks removal of barriers to trade
Seeks elimination of ag subsidies (Critics of U.S. and EU)
Members not free of ag policies that impede trade

18. APEC Asian Pacific Economic Cooperation,
21 countries that border Pacific Ocean
Highly diverse membership including: U.S., Japan, China, Russia, Mexico, Chile, Australia, New Zealand, Vietnam, Thailand
Accounts for 60% of World GDP
Accounts for 60% of U.S. ag exports
Accounts for 50% U.S. of imports
Objectives
Free trade among developed country members by 2010
Free trade throughout by 2020

19. Japan 125 M people Ag Ag Policy 40% self-sufficient on food needs
Income increases encourages dietary change
Ag Policy
Conversion from rice to F&V
“Control” dietary change through Japan Food Agency purchases in international market.
3rd largest US customer but Australia and New Zealand has location advantage.
Strong Protectionist Stance

20. China 1.3 Billion people Ag Ag Policy Essentially self-sufficient
Undergoing substantial dietary change
Ag Policy
State dominated
Transition to market economy
Entry into WTO

21. Russia 145 M people Ag Ag Policy
Grain, sugar beets, rapeseed/canola, beef, milk
Net importer (major market for U.S. meat)
Ag Policy
Slow conversion to market economy
Privatization of land
State control of imports

22. Developing Countries 67 Countries (40% of world population)
Low-Income (< $2000 per capita)
Net-Importers (dependent on food aid)
Mostly trade with developed countries
Policies Center Around Increased Income
Expansion of Exports
Difficult to establish export markets
Reluctant to allow imports

23. EU Common Agricultural Policy (CAP)
EU History
1957 Treaty of Rome formed European Economic Community
Customs Union: No internal barrier to trade among members; common external tariff; Free movement of labor and capital
1992 Maastricht Treaty formed European Union to establish common currency
1999 European Monetary Union (Adoption of the Euro)

24. EU Common Agricultural Policy (CAP) cont.
25 Members
Original Treaty of Rome Included:
France
Germany
Italy
Belgium
Netherlands
Luxembourg

25. EU Common Agricultural Policy (CAP) cont.
Governance
Council of the European Union
Decision body with heads of state for each country (like Senate)
European Parliament
Legislature body with 626 members appointed by population (like House)
European Commission
Executive branch implements policy
Commission on Agriculture manages CAP
Court of Justice
Dispute settlement body

26. EU Value of Ag Production and Processing ($B)US
EU 15
Ag Production
222
526
Processed Products
364
784

27. Dimensions of the EU’s Common Agricultural Policy
Price Supports
Intervention price (EU purchase for storage)
Direct Payments
Related to historical yield and current acres
Payment per head for livestock
Production Controls
Set aside percent of cropland
Marketing/production quotas in dairy
Export subsidy to prevent stocks in storage from becoming excessive

28. Dimensions of the EU’s Common Agricultural Policy
Multifunctional Payments
Noncommodity outputs that are jointly produced by agriculture
Countryside benefits of farming
Notion that agriculture can become too intensive and farmers need to be compensated for making it less intensive
Organic Farming
Sanitary & Phytosanitary Standards
Import restrictions on hormone treated beef
Import restrictions on GMOs

29. Why Expand? EU
Political influence
Security
Globalization
Trade

30. Common Elements in CAP Reforms and Policy Change in Turkish Agriculture
a) Basic reasons;
External: WTO Reform Process
Internal : Efficiency, Taxpayer and Consumer Concerns
b) Overall Sectoral Change;
Market Orientation,
Higher Competitiveness
c) New Objectives; food safety, environment, rural development
d) Procedural; Registration and Control Mechanisms

31. AGRICULTURAL PAYMENTS UNDER THE BUDGET
￿ Agricultural payments covered under National Fiscal Budget are;
• Payments for General Services
• Operating Expenses
• Investments (related with annual investment program) and
• Agricultural Support Payments
￿ Agricultural payments, which are explained in detail in the
presentation for State Aids, are dispersed between the budgets of three
different institutions:
• Ministry of Agriculture and Rural Affairs (MARA)
• Ministry of Environment and Forestry (MEF)
• Undersecretariat of Treasury (Treasury)
￿ Main agricultural supports are placed under MARA and Treasury

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

33. Barriers to Trade Tariffs: Tax on imports Subsidies
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)

34. Origins of WTO Negotiations take place in “rounds”
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

35. 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

36. 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

37. 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

38. 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

39. 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)

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

41. 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

42. 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).

43. 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.

44. 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

45. 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

46. 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. 2003
Can’t challenge other members export and domestic subsidies on agriculture

47. Trade Tools
Import Quota
Import Tariff
Export Subsidy

48. An Import Quota by Importing Country
Exporting Country Trade Importing Country
Quota $ S
Excess
Supply S
World Price
Excess
Demand D D
Q/yr
Quantity Traded is reduced

49. An Import Quota by Importing Country
Exporting Country Trade Importing Country
Quota $ S
Excess
Supply S
World Price
Excess
Demand D D
Q/yr
Quantity Traded is reduced Price in the Importing Country is raised

50. An Import Quota by Importing Country
Exporting Country Trade Importing Country
Quota $ S
Excess
Supply S
World Price
Excess
Demand D D
Q/yr
Quantity Traded is reduced Price in the Importing Country is raised Price in the Exporting Country is reduced

51. A Tariff by Importing Country
Exporting Country Trade Importing Country $ S
Excess
Supply S
World Price
Excess
Demand D D
Q/yr
Excess Supply is raised by the amount of the tariff

52. A Tariff by Importing Country
Exporting Country Trade Importing Country $ S
Excess
Supply S
World Price
Excess
Demand D D
Q/yr
Excess Supply is raised by the amount of the tariff Quantity Traded is reduced

53. A Tariff by Importing Country
Exporting Country Trade Importing Country $ S
Excess
Supply S
World Price
Excess
Demand D D
Q/yr
Excess Supply is raised by the amount of the tariff Quantity Traded is reduced Price in the Importing Country is raised Price in the Exporting Country is reduced

54. An Export Subsidy by the Exporting Country
Exporting Country Trade Importing Country $ S
Excess
Supply S
World Price
Excess
Demand D D
Q/yr
Excess Demand is increased by the subsidy Quantity Traded is increased

55. An Export Subsidy by the Exporting Country
Exporting Country Trade Importing Country $ S
Excess
Supply S
World Price
Excess
Demand D D
Q/yr
Excess Demand is increased by the subsidy Quantity Traded is increased Price in the Importing Country is reduced

56. An Export Subsidy by the Exporting Country
Exporting Country Trade Importing Country $ S
Excess
Supply S
World Price
Excess
Demand D D
Q/yr
Excess Demand is increased by the subsidy Quantity Traded is increased Price in the Importing Country is reduced Price in the Exporting Country is raised

57. Impact of Exchange Rates
What does it mean when currency exchange rates rise & fall.
What happens to
Excess Supply
Excess Demand
Quantity Traded

58. Wrap up Can you draw each of the three trade tools? Then Identify
New Price in each country
New Quantity traded
New Quantity supplied and demanded in exporting country
New Quantity supplied and demanded in importing country
Can you explain the impact of exchange rates?