ECON3315ECON3315International Economic IssuesInternational Economic Issues

Instructor: Patrick M. CrowleyInstructor: Patrick M. Crowley

Issue 8: Agriculture issues, the CAP and Doha

OverviewOverview

QuoteQuote HistoryHistory Agriculture – why is it so controversial in trade?Agriculture – why is it so controversial in trade? Forms of subsidy in agriculture: the US and the EUForms of subsidy in agriculture: the US and the EU The developing country dimensionThe developing country dimension The Doha round: approachThe Doha round: approach The Doha round: potential resultsThe Doha round: potential results

QuoteQuote

““Let me mention some of the matters that will be Let me mention some of the matters that will be discussed in the Doha Development Round. One discussed in the Doha Development Round. One of these concerns the international trade in of these concerns the international trade in agricultural products. Critical in this regard is agricultural products. Critical in this regard is access of our products into the food markets of access of our products into the food markets of the developed countries, some of which continue the developed countries, some of which continue to subsidise their own agriculture in a context to subsidise their own agriculture in a context that verges on intellectual, economic and social that verges on intellectual, economic and social obscenity and brutal selfishness.”obscenity and brutal selfishness.”

(Thabo Mbeki, President of South Africa, in reaction (Thabo Mbeki, President of South Africa, in reaction to the Doha Declaration 2001)to the Doha Declaration 2001)

HistoryHistory1930s: Roosevelt’s administration begins programs to help farmers suffering during the Great Depression – mostly income support

Late 1940s: Japan erects agricultural trade barriers to protect its farmers and to allow rebuilding

1950s: US removes agriculture from GATT negotiations

1960: EU establishes Common Agricultural Policy – system that guarantees prices for farmers

1980s: EU “lakes” and “mountains” widely reported in press. Thatcher lobbies for CAP reform

1990s: Agriculture introduced into Uruguay round

1990s: CAP reformed by allowing for “set aside” rather than subsidy

1996: Uruguay round concludes with “agreement” on agriculture – “dirty tariffication”

2001: Doha round begun with agriculture centre stage

2006: Collapse of Doha round because of disagreement on agriculture

Feb 2007: WTO Talks are re-scheduled

Agriculture – why is it so controversial in Agriculture – why is it so controversial in trade?trade?

1. Because it is the sector most protected by governments

2. Because the farm lobby is very powerful politically both in the EU and in the US

3. Because the developing world has been suffering because of protectionist measures in agriculture

4. Because food and its quality is a particularly sensitive issue for consumers

5. Because food is also a “security” issue

Forms of subsidy in agriculture: the USForms of subsidy in agriculture: the US In the US, the Federal govt In the US, the Federal govt

directly subsidizes agricultural directly subsidizes agricultural incomes or guarantees certain incomes or guarantees certain pricesprices

The sectors subsidized very The sectors subsidized very biasedbiased

Over $25bn spent in 2006 – Over $25bn spent in 2006 – more than on foreign aid, more more than on foreign aid, more than on education, 50% more than on education, 50% more than on welfare for familiesthan on welfare for families

10% of farmers get 72% of aid – 10% of farmers get 72% of aid – and these are large industrial and these are large industrial farmsfarms

Only 25 out of 435 congressional Only 25 out of 435 congressional districts receive subsidiesdistricts receive subsidies

60% of farmers get no cash at all60% of farmers get no cash at all Brazil’s win against cotton Brazil’s win against cotton

subsidies and possible retaliation subsidies and possible retaliation against US will lead to political against US will lead to political rethinkrethink

US reform proposalsUS reform proposals 1996 Farm Bill ($97bn): effort to eliminate subsidies by giving 1996 Farm Bill ($97bn): effort to eliminate subsidies by giving

“transitional cash handouts to farmers” for 5 years. Gave “transitional cash handouts to farmers” for 5 years. Gave farmers freedom to grow what they wanted.farmers freedom to grow what they wanted.

2001 Farm bill ($180bn) renewed as no appetite to cut support 2001 Farm bill ($180bn) renewed as no appetite to cut support as prices low and political support needed in red states. Bush as prices low and political support needed in red states. Bush caved in and subsidies increased dramatically…caved in and subsidies increased dramatically…

Texas rice country: El Campo area particularly benefitted – but Texas rice country: El Campo area particularly benefitted – but 1/31/3rdrd production of rice compared with 1996. production of rice compared with 1996.

Eliminating loopholes that allow people who do not farm to Eliminating loopholes that allow people who do not farm to collect income support ($1.3bn paid in 2006).collect income support ($1.3bn paid in 2006).

Feb 7Feb 7thth ’07: Bush proposes cutting subsidies by $17.5bn over 5 ’07: Bush proposes cutting subsidies by $17.5bn over 5 yrsyrs

After 3 yrs of deliberation Farm bill eventually passed in June After 3 yrs of deliberation Farm bill eventually passed in June 20082008

Reduces income support to farmers slightly but most subsidies Reduces income support to farmers slightly but most subsidies still in place.still in place.

2008 US farm bill2008 US farm bill

$288 billion 5 year “Food and Energy” bill passed $288 billion 5 year “Food and Energy” bill passed over Bush’s veto, which kept most of the over Bush’s veto, which kept most of the subsidies, particularly to large farms, but also subsidies, particularly to large farms, but also includes sections on food stamps, biofuel includes sections on food stamps, biofuel development and research.development and research.

Forms of subsidy in agriculture: the EUForms of subsidy in agriculture: the EU

EU spends roughly $65bn per year on CAP ( - EU spends roughly $65bn per year on CAP ( - opportunity cost)opportunity cost)

Largest trade-distortion to agriculture in the worldLargest trade-distortion to agriculture in the world Until reform in 2003, system guaranteed prices Until reform in 2003, system guaranteed prices

for farmers in certain industries (now mostly for farmers in certain industries (now mostly “decoupled” – subsidies not directly linked to “decoupled” – subsidies not directly linked to output: The Single Farm Payment)output: The Single Farm Payment)

Surplus, with higher prices resultsSurplus, with higher prices results Output then sold for whatever it will get on world Output then sold for whatever it will get on world

markets ( - acts as an “export subsidy”)markets ( - acts as an “export subsidy”)

Export subsidiesExport subsidies

EU tariffsEU tariffs

For the developing countries…For the developing countries…

Many developing countries have a comparative advantage in agricultural products

But low international prices for agricultural products means most productive land often not used, as won’t be profitable

Many developing countries have reduced output of agricultural products and now import products from developed countries

……stakes are highstakes are high For developing countries, exploiting their natural For developing countries, exploiting their natural

comparative advantage could give big returnscomparative advantage could give big returns Many of the trade restrictions are “non-tariff” Many of the trade restrictions are “non-tariff”

barriersbarriers

Doha roundDoha round Although tariffs are not high on average, Although tariffs are not high on average,

other support mechanisms existother support mechanisms exist

Doha round: approachDoha round: approach

In negotiations, trade protections put into “boxes” based In negotiations, trade protections put into “boxes” based on AMS (assessed measure of support)on AMS (assessed measure of support)

- red box: export subsidies- red box: export subsidies- amber box: domestic support (income etc – - amber box: domestic support (income etc –

significantly distortionary)significantly distortionary)- blue box: domestic support subsection - blue box: domestic support subsection

(payments based on size of farms – not that (payments based on size of farms – not that distortionary)distortionary)

- development box- development box- green box – payments for projects that protect - green box – payments for projects that protect

the environmentthe environment ““product-specific product-specific de minimis” de minimis” vs “NPSvs “NPS de minimis de minimis”: ”:

usually 5% of ag productionusually 5% of ag production Currently ceiling on amber box payments, but no ceiling Currently ceiling on amber box payments, but no ceiling

on blue box paymentson blue box payments

Doha round: current situationDoha round: current situation

When the talks broke down in Cancun, following When the talks broke down in Cancun, following situation had been reached:situation had been reached:- red box to be scrapped by all by 2013- red box to be scrapped by all by 2013- US proposed cutting amber box limit by 60% (to - US proposed cutting amber box limit by 60% (to $7.6bn), capping blue box at $4.8bn pa, halving $7.6bn), capping blue box at $4.8bn pa, halving PS and NPS de minimis to 2.5%PS and NPS de minimis to 2.5%- EU would offer cuts of 54% of value of support if - EU would offer cuts of 54% of value of support if US cuts farm subsidies by similar amount, and PS US cuts farm subsidies by similar amount, and PS and NPS de minimis by 80%. Individual EU and NPS de minimis by 80%. Individual EU member states (led by France) said EU trade member states (led by France) said EU trade negotiator had gone “too far”!negotiator had gone “too far”!

Developing countries expected to offer to cut Developing countries expected to offer to cut tariffs on industrial goods, but they felt US and EU tariffs on industrial goods, but they felt US and EU had not gone far enoughhad not gone far enough

Result: impasse and Cancun “walkout”Result: impasse and Cancun “walkout”

Doha round: political constraintsDoha round: political constraints

US objective is to avoid new challenges under WTO US objective is to avoid new challenges under WTO rulesrules

Also President’s “fast track” mandate on trade Also President’s “fast track” mandate on trade negotiations expires in July 07 – but now renewednegotiations expires in July 07 – but now renewed

Bush has offered cuts to Farm Support Bill, capping Bush has offered cuts to Farm Support Bill, capping total subsidies at $22.5bn patotal subsidies at $22.5bn pa

Developing countries say that this is not enoughDeveloping countries say that this is not enough EU has to avoid re-negotiating the changes in the CAP EU has to avoid re-negotiating the changes in the CAP

agreed upon in 2003agreed upon in 2003 EU also has to convince all 27 members that it is in EU also has to convince all 27 members that it is in

their interests to go along with the agreementtheir interests to go along with the agreement

Effects of a successful Doha round in Effects of a successful Doha round in agricultureagriculture

World prices would rise –benefiting developing World prices would rise –benefiting developing country producers most, but also benefiting country producers most, but also benefiting consumers in developed countriesconsumers in developed countries

Also opportunity costs of funds currently spent on Also opportunity costs of funds currently spent on agricultureagriculture

Economic effects of a successful Economic effects of a successful Doha roundDoha round

Welfare gains possible over $50bnWelfare gains possible over $50bn

Economic effects of a successful Doha Economic effects of a successful Doha roundround