Agricultural Economics

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Agricultural Economics

• Lecture 7 International Influences

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• Agricultural Trade Issues and Policies
• Relationships
• Trade Issues
• Geopolitical Centers of Influence

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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)

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

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Trade Policy Issues

• Food Diplomacy
• Increased Market Access
• Building Markets
• Developing Market Economies
• Increasing Food Security
• Protectionist Policies

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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

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Building Foreign Markets

• Market Intelligence
• Export Credit and Enhancement
• Cash or Commodity Subsidies
• Credit Guarantees

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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

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Food Security

• Global Food Availability
• Individual Food Security
• Food Safety

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Protectionist Policies

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

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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

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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

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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

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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)

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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

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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

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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

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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

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Japan

• 125 M people
• Ag
• 40 self-sufficient on food needs
• Income increases encourages dietary change
• Ag Policy
• Conversion from rice to FV
• 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

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China

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

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Russia

• 145 M people
• Ag
• 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

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Developing Countries

• 67 Countries (40 of world population)
• Low-Income (lt 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

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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)

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EU Common Agricultural Policy (CAP) cont.

• 25 Members
• Original Treaty of Rome Included
• France
• Germany
• Italy
• Belgium
• Netherlands
• Luxembourg

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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

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EU Value of Ag Production and Processing (B)
US EU 15
Ag Production 222 526
Processed Products 364 784
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Dimensions of the EUs 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

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Dimensions of the EUs 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

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Why Expand?

• EU
• Political influence
• Security
• Globalization
• Trade

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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

• Benefits of Trade
• More efficient use of resources
• Reduce world hunger
• Problems
• Interdependence among nations

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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)

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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

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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

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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 1986-89 level
• 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

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Loop Holes in URAA

• Precautionary principle WTO requires that SPS
  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

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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

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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)

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

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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).

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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.

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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

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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

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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
• Cant challenge other members export and domestic
  subsidies on agriculture

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• Trade Tools
• Import Quota
• Import Tariff
• Export Subsidy

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An Import Quota by Importing Country
Exporting Country
Trade Importing Country
Quota

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

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

S
S
Excess Supply
World Price
Excess Demand
D
D
Q/yr
Quantity Traded is reducedPrice in the
Importing Country is raisedPrice in the
Exporting Country is reduced
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A Tariff by Importing Country
Exporting Country
Trade Importing Country

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

S
S
Excess Supply
World Price
Excess Demand
D
D
Q/yr
Excess Supply is raised by the amount of the
tariffQuantity Traded is reducedPrice in the
Importing Country is raisedPrice in the
Exporting Country is reduced
54
An Export Subsidy by the Exporting Country
Exporting Country
Trade Importing Country

S
S
Excess Supply
World Price
Excess Demand
D
D
Q/yr
Excess Demand is increased by the
subsidyQuantity Traded is increased
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An Export Subsidy by the Exporting Country
Exporting Country
Trade Importing Country

S
S
Excess Supply
World Price
Excess Demand
D
D
Q/yr
Excess Demand is increased by the
subsidyQuantity Traded is increasedPrice in
the Importing Country is reduced
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An Export Subsidy by the Exporting Country
Exporting Country
Trade Importing Country

S
S
Excess Supply
World Price
Excess Demand
D
D
Q/yr
Excess Demand is increased by the
subsidyQuantity Traded is increasedPrice in
the Importing Country is reducedPrice in the
Exporting Country is raised
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Impact of Exchange Rates

• What does it mean when currency exchange rates
  rise fall.
• What happens to
• Excess Supply
• Excess Demand
• Quantity Traded

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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?