Download The role of subsidies in agricultural trade reform

Day 2:
Accession experiences during
WTO’s first decade;
and ‘non-trade’ concerns
4-day course on Agricultural Trade Policy and WTO
Tehran, Iran, 15-18 May 2005
Outline of this morning
Accession experiences to date, and lessons for new
applicants such as Iran
An examination of what the growth of ‘non-trade’
concerns in agriculture means for WTO members and
accedants
sometimes called ‘multifunctionality’ – is this the new
agricultural protectionism (along with food safety and SPS
measures) to replace traditional market price support
measures?
New members of WTO since 1995
1. Ecuador
2. Bulgaria
3. Mongolia
4. Panama
5. Kyrgyz R.
6. Latvia
7. Estonia
8. Jordan
9. Georgia
10. Albania
01/96
12/96
01/97
09/97
12/98
02/99
11/99
04/00
06/00
09/00
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
Oman
Croatia
Lithuania
Moldova
China
Taiwan
Armenia
11/00
11/00
05/01
07/01
12/01
01/02
02/03
Macedonia 04/03
Nepal
04/03
Cambodia 10/04
Number of months
Figure 1: A lengthening process
200
180
160
140
120
100
80
60
40
20
0
1
3
5
7
9
11
13
15
17
19
Accessions are taking ever-longer
Recent acceding countries have taken about
10 years to accede from date of establishing
a Working Party
Even ignoring China (number 15 in Figure 1),
the trend number of years is clearly rising
Due to more demands by WTO members, or
because late applicants have the most distorted
economies or are the most reluctant reformers?
Countries currently seeking accession
1. Algeria
06/87
16. Lebanon
01/99
2. Saudi Arabia
06/93
17. Bosnia & Herz.
05/99
3. Russia
06/93
18. Andorra
07/99
4. Belarus
09/93
19. Bhutan*
09/99
5. Sudan*
10/93
20. Cape Verde*
11/99
6. Ukraine
11/93
21. Yemen*
04/00
7. Uzbekistan
12/94
22. Bahamas
05/01
8. Vietnam
01/95
23. Tajikistan
05/01
9. Seychelles
05/95
24. Ethiopia*
01/03
10. Tonga
06/95
25. Libya
04/04
11. Vanuatu*
07/95
26. Afghanistan*
12/04
12. Kazakhstan
11/96
27. Iraq
12/04
13. Azerbaijan
06/97
28. Montenegro
02/05
14. Laos*
07/97
29. Serbia
02/05
15. Samoa*
04/98
*LDCs (9)
Of the 29 countries currently
seeking WTO accession …
Nine applied more than 10 years ago
Twelve applied 5-10 years ago
Average period so far for those 72% is 9 years
Nine are LDCs (applied >5 years ago on av.)
Ten are from Eastern Europe/CIS
Eight are from Middle East/N. & NE Africa
If all joined, WTO membership would rise from 148
now to 177 customs territories (or 178 with Iran)
Ones larger than Iran: Russia and Saudi Arabia
then Kazakhstan, Ukraine and Vietnam
The ‘price’ of accession
Involves market access commitments,
and other specific commitments
In terms of market access, the average
tariff binding is getting lower over time
see agric and non-agric in the following
two figures, ignoring the final two
applicants which are the first LDCs to join
(Nepal and Cambodia)
Figure 2: Tighter commitments on
agricultural products on DCs
Average tariff bindings
60
50
40
30
20
10
0
1
3
5
7
9
11
13 15 17
19
Average tariff bindings
Figure 3: Tighter commitments on nonagricultural products on DCs
45
40
35
30
25
20
15
10
5
0
1
3
5
7
9
11 13
15 17 19
Historical background: Why agriculture was
brought into the Uruguay Round (but not
previous GATT rounds)?
CAP-generated surpluses led to disposal
via EU export subsidies
US (& Canada) retaliated in kind
Pushed real food prices in int’l markets
to century’s lowest level by 1986
which more than doubled the welfare costs
of agricultural protection over the 1980s
(Tyers and Anderson 1992)
Who brought agriculture into the UR?
US farmers were hurt more by EU policies
than EU farmers were by US policies
Australia/NZ and food-exporting developing
country farmers were affected hugely
led to formation of Cairns Group in 1986, whose
sole aim was to keep agriculture high on the UR
agenda
• its agric. exports = Japan’s manufactures exports
Recent change to traditional
protection pattern
Unilateral reforms by developing countries
since the 1980s have reduced their export
taxes and other negative incentives for
farmers
But some developing countries have
‘overshot’ and become protectionist towards
farmers
or could do in the future, because of their much
higher bound than applied agricultural tariffs
Implications for countries
seeking WTO accession
Relatively wealthy and large acceding
countries, such as Iran (and China before
it), are going to be required to bind their
agricultural tariffs at low levels
Which presumably means little or no binding
overhang, and hence greater cuts to applied
tariffs in future multilateral trade rounds
(relative to members with still large tariff
binding overhangs)
Required services commitments
also are growing
Of the WTO’s 160 services sub-sectors, the
number of commitments made by founding
members were 44 for developing and 108 for
developed countries
But the twenty developing and transition
economies that have joined WTO since 1995
have on average committed in 104 subsectors
And specific (non-market access)
commitments are being added
An average of 20 per acceding country
Some are WTO+, going beyond commitments
agreed among members in Uruguay Round
Others are WTO-, or involve agreeing to
forego rights available for existing WTO
members
e.g., Ecuador’s commitment to eliminate all
domestic subsidies prior to joining and never to
introduce them in future; China’s acceptance of
product-specific transitional safeguard provisions
(likely to be used by importers of Chinese clothes)
How countries have made the
most of WTO accession process
Starting unilateral reform even before and
certainly during the Working Party stage
Being pro-active in targeting reforms to areas
identified as national priorities
e.g. Cambodia identified textiles, clothing and
tourism as sectors that could benefit from reform
Clearly identifying goals, analyzing options
(requires modelling), and formulating
negotiating strategies and fall-back options
Lessons from the past decade of
experience with accession negotiations
Expect the process to take at least 5 years, or
more if society is reluctant to reform
Establish a broad base of support within
government, civil society and especially the
private sector (and with key trading partners)
Expect to have to bind average tariffs at
<20% for agric and <10% for non-ag goods
And so anticipate the employment and other
adjustments needed and the domestic measures
(e.g. adjustment assistance) that could reduce
opposition to reform and facilitate growth
• And identify aid funds to finance adjustment assistance
Lessons from experiences with implementing
accession commitments: the case of China
Discussion questions:
How large were the adjustment shocks?
How much reform was still to be implemented at time of
WTO accession?
Were there significant losing groups/regions?
• How were they dealt with?
What complementary domestic reforms were introduced
to magnify gains/ ease adjustment burdens?
How did China’s trade change, and how did its trading
partners respond?
What is the consensus now within China about whether
WTO accession has been worthwhile?
Changes in applied tariffs (%) by China
post-WTO accession
Agric. &
food
Textiles &
clothing
Other
manuf.
2001
38
19
11
End of
2004
10
10
6
New topic: Are ‘non-trade’ concerns the
new agricultural protectionism?
Negotiations can be like squeezing a
balloon: while you may gain (lose) in one
battle you may lose (gain) in another
Example: agriculture’s ‘multifunctionality’
Consider some basic principles, and their
application to:
• food security
• rural environment
• viability of rural areas
Why has this ‘multifunctionality’
concept emerged recently?
Was agreed to in UR
see Art. 20(c) of URAA
The claim is that reduced support for
farming may damage the rural
environment, reduce food security,
make rural communities less viable, etc.
being thought of as public goods produced
jointly with farm goods
Basic principles
The debate is not over sovereign governments’
rights to determine national policy objectives
Rather, the debate is over the means by which
governments strive to achieve those goals
Need to bear in mind:
international rights and obligations
market failures, eg due to externalities
• in production and consumption
• in non-agric sectors as well as agriculture
government failures in intervention
Six lessons from theory and past
policy practice
1. Where there are several policy objectives,
an equal number of policy instruments is
required to deal with them efficiently
2. The lowest-cost measure will be that
which addresses the concern most directly
3. Hence trade measures are rarely the best
way of addressing non-trade concerns
Six lessons
(continued)
4. Trade lib’n will improve economic
welfare so long as optimal domestic
interventions are in place to deal with
non-trade (eg environmental) concerns,
and are adjusted as trade is freed
5. The extent of achievement of nontrade objectives may not be as great
with as without trade reform
• Part of the ‘price’ of gains from trade
Six lessons
(continued)
6. Whenever govt intervenes, even if it is
to overcome a market failure, there is a
risk of government failure
which could be more welfare-reducing than
the market failure being targeted
could occur at the bureaucratic and/or
political level
Why strive for the most efficient way
to achieve society’s non-trade
objectives?
Because achieving those objectives
requires resources
And the fewer resources required to
achieve each objective, the more there
will be for achieving others and/or for
preserving resources for future
generations
Do farmers make more of a nonmarketed contribution than other
producers?
All sectors generate both marketed and nonmarketed products
Some non-marketed products are more
desirable than others, and some are
undesirable
Since tastes and preferences change over
time and differ between countries, so too do
societies’ valuation of non-marketed products
(continued)
Does farming produce more non-marketed
+ve externalities/public goods than other
sectors?
net of -ve externalities/public bads?
If so and if they are under-supplied, what are
the most efficient ways to get their optimal
provision?
are those measures WTO-consistent?
Import barriers and other price-supports are
inefficient instruments for boosting their
supply
The policy task thus involves
several steps
Get a sense of society’s willingness to pay
for the non-marketed by-product
Determine the most efficient measure for
encouraging farmers or others to supply
that by-product for society
Then determine the optimal level of
encouragement
equate marginal social benefit with marginal
social cost of intervention
Examples of ‘non-trade’ concerns:
1. food security
Food security is not synonymous with food
self-sufficiency
Rather, it’s a consumer issue:
ensure that everyone always has access to a
threshold supply of basic food necessary for survival
Requires threshold income and savings (or
credit access) and a well-functioning market
for staple foods
Note: agricultural protectionexacerbates food
security, by raising consumer prices of food
Food security (continued)
What if the int’l market is thin, as with rice?
Or there is a risk of an export embargo (as
permitted under GATT Article XXI)?
Try long-term contracts with trading partners, or
subsidize stockholding of staples (allowed in
Annex 2 of URAA as a ‘green box’ item)
If greater domestic production is desired,
agric R&D (an allowable ‘green box’ item)
which lowers domestic costs of production is
better than price support
Example 2:
environmental protection
Local environment is generally helped by
lowering output price supports and taxing
pollutive farm inputs
But in the case of +ve externalities,
subsidize just their provision, to the
optimal degree, de-coupled from farming
(and even farmers?)
rural landscape? (vs golf courses?)
cows in alpine pasture? (pay directly)
biodiversity? (pay for hedgerows, eg)
What about negative externalities
from farming?
They (and food safety risks) tend to
increase with the intensity of input use,
which in turn is greater the more
product prices are raised or input prices
are subsidized
taxes would be more appropriate than
subsidies on pollutive inputs
Example 3:
viability of rural areas
Is agriculture the only (or even main)
economic activity in rural areas?
Wouldn’t targeted supports for essential
services in remote areas be a lower-cost
option?
Regional supports in one country harm
rural areas in other countries
What is optimal degree of support?
Conclusions on ‘non-trade’ concerns
Likely to become more contentious as regular
trade distortions are lowered
Need to be dealt with in WTO because they
can affect trade
Should be handled in the same way for all
sectors
Current WTO rules are adequate
Requires governments to target, with precise
interventions in each case, rather than use
blunt market price support (including trade)
measures
Reading for this topic
See K. Anderson’s “Agriculture’s
'Multifunctionality' and the WTO”, Australian
Journal of Agricultural and Resource Economics
44(3): 475-94, September 2000.
[Related concerns about new forms of agricultural
protectionism have to do with human, animal and
plant health claims leading to import restrictions
on food safety or environmental grounds]