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Agricultural Economics
Lecture 7: International Influences
Agricultural Trade Issues and Policies
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Relationships
Trade Issues
Geopolitical Centers of Influence
International Policy
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Live in a global economy where:
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Interdependence of policies
Global Agriculture Markets
Few commodities are isolated through barriers to trade
(successful only in varying degrees)
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Trade Policy does NOT exist in Isolation
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A component of Foreign Policy
Intertwined in Domestic/Economic Policy
Intertwined in Ag & Food Policy
Trade Policy Issues
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Food Diplomacy
Increased Market Access
Building Markets
Developing Market Economies
Increasing Food Security
Protectionist Policies
Market Access
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Why do we want market access?
Why would we refuse others access?
Access is gained by reducing barriers to trade
Bilateral & Multilateral Trade Agreements
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Free-trade Agreements
Customs Unions
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Common Markets
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Common policy toward non-members
Free movement of factors of production
Alignment of major economic & agricultural policies
Economic Unions
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Unified social/economic policies
Building Foreign Markets
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Market Intelligence
Export Credit and Enhancement
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Cash or Commodity Subsidies
Credit Guarantees
Building Market Economies
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Typically Mingled with Multiple Objectives for
Developing Economies
Partnerships with UN, World Bank, Voluntary
Organizations
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Institution Building
Technical Assistance
Infrastructure Development
Applied Research
Food Security
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Global Food Availability
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Individual Food Security
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Food Safety
Protectionist Policies
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Barriers to Trade
All Domestic Farm Policies
Trade Remedy Laws
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Anti-Dumping Provisions
Countervailing Duty (Tariff)
Geopolitical Centers of Influence
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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
Geopolitical Centers of Influence
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Then there are the developing countries
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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
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Greenpeace
UN/FAO
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
NAFTA Trade
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U.S Absolute (Comparative) Advantages
Corn, Soybeans, (Poultry, Fed beef, Hogs)
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Canada Absolute (Comparative) Advantage
(Wheat, Oats, Barley, Canola, Flax, Fed Beef)
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Mexico Absolute (Comparative) Advantage
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Vegetables, (sugar)
NAFTA Issues
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Countries maintain separate domestic farm policies
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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
MERCOSUR
Argentina, Brazil, Paraguay, and Uruguay
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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
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Expand to include Bolivia, Chile, Peru, Ecuador, Colombia, Venezuela
Potentially a part of FTAA
Problems
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Political and Economic Instability
Cairns Group
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Established in 1986 in Cairns, Australia
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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
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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
APEC
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Asian Pacific Economic Cooperation,
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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
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Accounts for 60% of U.S. ag exports
Accounts for 50% U.S. of imports
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Objectives
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Free trade among developed country members by 2010
Free trade throughout by 2020
Japan
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125 M people
Ag
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40% self-sufficient on food needs
Income increases encourages dietary change
Ag Policy
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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
China
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1.3 Billion people
Ag
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Essentially self-sufficient
Undergoing substantial dietary change
Ag Policy
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State dominated
Transition to market economy
Entry into WTO
Russia
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145 M people
Ag
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Grain, sugar beets, rapeseed/canola, beef, milk
Net importer (major market for U.S. meat)
Ag Policy
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Slow conversion to market economy
Privatization of land
State control of imports
Developing Countries
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67 Countries (40% of world population)
Low-Income (< $2000 per capita)
Net-Importers (dependent on food aid)
Mostly trade with developed countries
Policies Center Around Increased Income
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Expansion of Exports
Difficult to establish export markets
Reluctant to allow imports
EU Common Agricultural Policy
(CAP)
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EU History
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1957 Treaty of Rome formed European Economic
Community
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Customs Union: No internal barrier to trade among
members; common external tariff; Free movement of labor
and capital
1992 Maastricht Treaty formed European Union to
establish common currency
1999 European Monetary Union (Adoption of the
Euro)
EU Common Agricultural Policy
(CAP) cont.
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25 Members
Original Treaty of Rome Included:
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France
Germany
Italy
Belgium
Netherlands
Luxembourg
EU Common Agricultural Policy
(CAP) cont.
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Governance
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Council of the European Union
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European Parliament
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Legislature body with 626 members appointed by population
(like House)
European Commission
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Decision body with heads of state for each country (like
Senate)
Executive branch implements policy
Commission on Agriculture manages CAP
Court of Justice
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Dispute settlement body
EU Value of Ag Production and
Processing ($B)
US
EU 15
Ag Production
222
526
Processed Products
364
784
Dimensions of the EU’s
Common Agricultural Policy
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Price Supports
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Direct Payments
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Related to historical yield and current acres
Payment per head for livestock
Production Controls
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Intervention price (EU purchase for storage)
Set aside percent of cropland
Marketing/production quotas in dairy
Export subsidy to prevent stocks in storage from
becoming excessive
Dimensions of the EU’s
Common Agricultural Policy
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Multifunctional Payments
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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
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Import restrictions on hormone treated beef
Import restrictions on GMOs
Why Expand?
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EU
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Political influence
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Security
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Globalization
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Trade
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
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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
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Trade Issues
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Benefits of Trade:
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More efficient use of resources
Reduce world hunger
Problems:
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Interdependence among nations
Barriers to Trade
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Tariffs: Tax on imports
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Subsidies
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TRQ: Tariff varies in increments with quantity imported
Tariffs preferred because transparent
Export subsidies
Domestic production/price subsidies
Nontariff tariff trade barriers
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Restrictions on imports other than tariffs
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Quotas
Embargos
Sanitary and phytosanitary
Technical barriers (definitional)
Origins of WTO
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General Agreement on Tariffs and Trade (GATT)
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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”
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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
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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)
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Market access: Convert import
quotas to tariff or TRQ and
reduce over time
Domestic support: Reduce
domestic support by 20% from
1986-89 level
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AMS = Aggregate measure of
support = total of red and amber
box (trade distorting subsidies)
Limits on value and volume of
export subsidies from 1986-89
level
Loop Holes in URAA
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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
(Reflects broader US goals in trade policy)
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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
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Green box: Not trade distorting
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Blue box: Minimally distorting because production is controlled
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Amber box: Trade distorting, subsidies tied to price and/or
production
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Red Box: Subsidies that must be stopped (empty box)
Amber Box Limits for U.S. and E.U.
67,1
70
60
50
40
30
19,1
20
10
0
U.S. Bill $
E.U. Bill $
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 commodityspecific 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?
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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
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Can’t challenge other members export and domestic
subsidies on agriculture
Trade Tools
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Import Quota
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Import Tariff
•
Export Subsidy
An Import Quota by Importing Country
Exporting Country
$
S
Trade
Importing Country
Quota
Excess
Supply
S
World Price
D
Excess
Demand
D
Q/yr
Quantity Traded is reduced
An Import Quota by Importing Country
Exporting Country
$
S
Trade
Importing Country
Quota
Excess
Supply
S
World Price
D
Excess
Demand
D
Q/yr
Quantity Traded is reduced
Price in the Importing Country is raised
An Import Quota by Importing Country
Exporting Country
$
S
Trade
Importing Country
Quota
Excess
Supply
S
World Price
D
Excess
Demand
D
Q/yr
Quantity Traded is reduced
Price in the Importing Country is raised
Price in the Exporting Country is reduced
A Tariff by Importing Country
Exporting Country
$
Trade
S
Importing Country
Excess
Supply
S
World Price
D
Excess
Demand
D
Q/yr
Excess Supply is raised by the amount of the tariff
A Tariff by Importing Country
Exporting Country
$
Trade
S
Importing Country
Excess
Supply
S
World Price
D
Excess
Demand
D
Q/yr
Excess Supply is raised by the amount of the tariff
Quantity Traded is reduced
A Tariff by Importing Country
Exporting Country
$
Trade
S
Importing Country
Excess
Supply
S
World Price
D
Excess
Demand
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
An Export Subsidy by the Exporting Country
Exporting Country
$
Trade
S
Importing Country
Excess
Supply
S
World Price
D
Excess
Demand
D
Q/yr
Excess Demand is increased by the subsidy
Quantity Traded is increased
An Export Subsidy by the Exporting Country
Exporting Country
$
Trade
S
Importing Country
Excess
Supply
S
World Price
D
Excess
Demand
D
Q/yr
Excess Demand is increased by the subsidy
Quantity Traded is increased
Price in the Importing Country is reduced
An Export Subsidy by the Exporting Country
Exporting Country
$
Trade
S
Importing Country
Excess
Supply
S
World Price
D
Excess
Demand
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
Impact of Exchange Rates
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What does it mean when currency exchange
rates rise & fall.
What happens to
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Excess Supply
Excess Demand
Quantity Traded
Wrap up
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Can you draw each of the three trade tools?
Then Identify
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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?