MARCH - APRIL 1999

In This Issue:

Agriculture in the Upcoming World Trade Talks  by Randy Green
Agriculture Trade Protection Can Be Costly  by Richard Pasco
 
 

AGRICULTURE IN THE UPCOMING WORLD TRADE TALKS


From November 30 through December 3, Cabinet-level officials from all the member nations of the World Trade Organization will gather in Seattle.  Among the ministerial meeting's central purposes will be to commence negotiations on agriculture and other topics.  These negotiations are intended to further the progress on trade liberalization made in the last series of international trade negotiations, the Uruguay Round that ended in 1994.

Mandate for the New Negotiations

The real but limited reforms in agricultural trade that emerged from the Uruguay Round left many nations convinced that further multilateral negotiations would eventually be necessary.  Accordingly, the new talks were effectively mandated by Article 20 of the Uruguay Round Agreement on Agriculture (URAA), which reads as follows.

Recognizing that the long-term objective of substantial progressive reductions in support and protection resulting in fundamental reform is an ongoing process, Members agree that negotiations for continuing the process will be initiated one year before the end of the implementation period, taking into account:
 


Agriculture will not be the only topic subject to negotiations (trade in services and other topics will probably also be discussed).  Indeed, the agricultural community in the United States has generally preferred that agriculture not be the subject of stand-alone talks, believing that American agriculture will benefit from the cross-sectoral tradeoffs that are possible in a multi-industry negotiation.

Neither the schedule nor the format of talks is certain.  However, a number of groups in the United States have argued for a "single undertaking," meaning an overall agreement encompassing the results of all subsidiary negotiations.  Under such a procedure, in trade parlance, nothing is agreed until everything is agreed.  Many interested parties also have urged that the new talks – already being called the Seattle Round – not last as long as did the Uruguay Round, which stretched from 1986 to 1994.  A statement of principles signed by nearly 70 U.S. agricultural groups and companies, for example, called for the round to last no more than three years.

Negotiating Topics: The Past as Prologue

It is impossible to specify with certainty the agenda of the Seattle Round agricultural negotiations before the WTO ministerial meeting occurs.  Still, the structure of the Uruguay Round Agreement on Agriculture and the catalog of current high-profile trade disputes can be combined to yield a list of likely topics.  These would include –
 


Of course, discussing a topic and agreeing on it are two different things.  Nearly all major agricultural organizations in the United States appear to believe that assuring market access for genetically modified organisms is an important Seattle Round goal.  A substantial number of groups and firms also favor further discussions on trade-distorting domestic supports.  Each of these topics may prove difficult if not intractable.  One of the questions with which both legislators and the private sector must grapple is: If no agreement can be reached on a major subject, but agreements are possible on other agricultural topics, is the deadlocked subject so important that the whole round should be abandoned?  Some topics might fall into this category, while others might not.  The history of previous trade rounds suggests that U.S. negotiators may sooner or later have to face such questions.  Sometimes the scope of one's ambition bears an inverse relationship to the time that has elapsed since negotiations began.

Still, similar skepticism preceded the Uruguay Round, which nevertheless produced concrete results.  In the late 1980s, many observers of agricultural policy argued that the European Union would never, under any circumstances, reduce its protectionist trade barriers or internal supports.  (This thesis was often followed by the corollary proposition that neither should the United States.)  Events proved, however, that the EU did make some changes – inadequate from the U.S. standpoint, no doubt, but the Common Agricultural Policy today is not the same as it was in 1986.  Progress in public policy does occur from time to time, although its pace can be glacial.

As the Discussions Unfold ...

In this section, we list several likely subjects of negotiation in agriculture, along with some commentary on events and forces that may shape the debate on each.

Export Subsidies and Other Export Issues: Article 9 of the Uruguay Round Agreement on Agriculture (URAA) required a 21% cut in volumes of, and a 36% cut in budgetary outlays for, subsidized exports (starting from a 1986/90 base period).  Several nations, including the U.S., have already publicly stated their hope for a complete abolition of export subsidies in the Seattle Round.

European resistance to abolition can be expected; the attitude of other countries may depend in part on how broadly subsidies are defined.  For example, U.S. export credit guarantees are not export subsidies under the URAA, but some U.S. competitors have them in their sights and may argue that credit guarantees should be considered subsidies.  Similarly, the URAA does not define state trading enterprises (STEs) as an export subsidy per se, but no doubt many U.S. farm groups would like to do so.  Either of these developments could affect the negotiating strategy of both the United States and the Cairns Group of self-described non-subsidizing exporters.

STEs can be considered as part of the export subsidy debate, and the U.S. may find it to its tactical advantage to have them treated in that way.  They involve broader questions as well, though: There are numerous importing STEs, for example.  Moreover, it is not clear that STEs can be separated from larger, cross-sectoral debates about competition policy and the appropriate role, if any, of the WTO in setting its terms.

Advocates of placing additional disciplines on STEs are not always specific about what disciplines they have in mind.  Often, however, U.S. farm groups argue for requirements of greater transparency in the operations of STEs, particularly in their pricing practices.  The Canadian Wheat Board's wheat marketing is the example most often cited in such discussions.  It would not be surprising if U.S. producers – and conceivably Europeans as well – saw improvements in STEs' transparency as an appropriate price to be paid for U.S. and European elimination of their respective export subsidies.

Recent WTO case law, especially the U.S.-New Zealand complaint against Canadian dairy policies, takes an expansive view of what constitutes an export subsidy.  That case did not find that a policy was an export subsidy just because it was carried out by an STE.  However, the fact that a policy was undertaken by a governmental or quasi-governmental entity did turn out to be a key element in the WTO panel's reasoning.  This case will probably have a significant influence on the debate over export subsidies, perhaps in ways the U.S. did not foresee in bringing the case – for example, it is possible to read the panel ruling in a way that raises serious questions about the WTO-consistency of the U.S. peanut program.  (Click here for a more in-depth analysis of the Canadian dairy case.)

Market Access, Tariffs and Tariff Rate Quotas: The URAA required agricultural tariffs to be bound and then reduced over six years by a simple average of 36%, with no individual tariff to be reduced less than 15%.  Non-tariff barriers were to be turned into tariffs that would have the equivalent protective effect ("tariffication" was the rather clumsy argot for this process).  The resulting tariff rate quotas (TRQs) were considered more transparent than quotas and less susceptible to arbitrary manipulation.  In addition, countries had to continue current access where import penetration for goods subject to tariffication exceeded 5% of the domestic market.  Where it did not, countries had to provide "minimum access" beginning at 3% and reaching 5% by the end of the period.

As things have turned out, the actual administration of TRQs has been controversial, and is expected to be a topic of negotiation – with what result, it is difficult to say.  Some countries will press for the abolition or phaseout of TRQs altogether.  Others may try to steer the discussion toward the establishment of more specific principles governing how TRQs are to be implemented and administered.  If China's bid for WTO membership is successful while the Seattle Round negotiations continue, TRQs could become a still hotter topic: China will enter the WTO with significant amounts of agricultural trade subject to TRQs, and its participation in the debate could substantially alter the dynamics of the discussion.

Tariffs on agricultural goods remain higher than industrial tariffs.  The U.S. and other countries will likely urge the elimination or further reduction of many tariffs, especially the highest "tariff peaks."  A recent United Nations report pointed out that developing country exports are held back by the tariff peaks they face in many developed country markets.  These peaks, the UN reported, are prominent in agriculture as well as a few other sectors.

In some product areas, such as oilseeds, industries in several countries have discussed the kind of "zero-for-zero" approach that was used successfully in the Uruguay Round to bring about complete elimination of tariffs on a variety of industrial goods.

The question of over-quota tariffs may create discomfort for some countries.  Supposing for the moment that the new round does not immediately eliminate TRQs, it would still be possible to liberalize trade in TRQ commodities by reducing the tariffs assessed on imports above the quota, from prohibitive levels to something less.

This is hardly a theoretical question, as a look at the current world and U.S. sugar markets will show.  As this is written, world sugar prices are so low that USDA officially forecasts 260,000 short tons of sugar imports outside the TRQ, something unthinkable not long ago.  This means that the gap between U.S. sugar prices at over 22 cents per pound and world prices at less than 5 cents per pound is now wide enough that it may be more economical to pay the approximately 15-cent duty than to use U.S. sugar.  Thus, a reduction in over-quota tariffs could at times have a significant economic impact even if TRQs themselves are retained.

The new round could also focus on non-tariff barriers other than quotas.  Here a discussion of market access rules becomes inseparable from a discussion of SPS standards.  For instance, the U.S. egg processing industry has charged that the European Union has changed its requirements for denaturing inedible eggs (used in pet food and other products) in such a way as to impair tariff concessions the EU granted decades ago.

Domestic Support: The URAA's provisions on domestic support were more important for the principles they established than for any real changes they forced.  It is fair to say that neither the U.S. nor the European Union made major domestic support changes as a result of the URAA that it would not have made for other reasons anyway.  Nevertheless, the URAA enshrined the principle that supports which distorted trade were subject to international discipline.  It also established categories for various kinds of supports.

Countries with low levels of domestic support, like most of the Cairns Group nations, may argue for further domestic support cuts, but they may also want to discuss what is in and out of the so-called "green box" that, as detailed in Annex 2 of the URAA, specifies domestic policies that do not distort trade and therefore are not subject to requirements for reduction under the URAA.  Again, this is hardly an academic question: A U.S. Department of Agriculture study found that 1995 "green box" spending by WTO members was 54% higher than in the 1986/88 base period.

U.S. farm groups will probably be especially attentive to the treatment of marketing loans.  Last year's unexpectedly low grain and oilseed prices caused federal spending on these loans to grow substantially, and the higher spending will almost certainly continue this year.  Unlike decoupled income supports under the Agricultural Market Transition Act, marketing loans are crop-specific and may influence planting decisions under some circumstances.  U.S. producer groups, sensitive to their members' economic plight at a time when commodity prices are low, will probably argue against accepting any change in a program which they have come to regard as a safety net.

Biotechnology and SPS Issues: The U.S. and some other countries will probably take an aggressive stance in support of biotechnology and genetically modified organisms (GMOs), and against restrictions on their commerce and use.  No one who follows the headlines will be surprised that the subject will be highly controversial.  One focus of debate could be European labeling requirements, which the U.S. sees as prejudicial and unjustified by science.

It is unclear how much progress will be made toward a consensus on biotechnology, as important as the subject may be.  It appears that public opinion about GMOs in Europe and some other countries is significantly at variance with opinion in the U.S.  How far against public opinion European bureaucrats and politicians will be prepared to go is doubtful.  At the same time, however, the U.S. agricultural production system and marketing infrastructure have made a sizeable and perhaps irrevocable commitment to producing bioengineered plant varieties in large volume.  Accommodating the U.S. transportation, handling and storage system to the kind of labeling regime now contemplated by the EU would be highly costly at best and impossible at worst.  The situation, then, has the makings of a train wreck.

One factor that complicates prospects here is the ultimate motivation of the EU.  In the past, U.S. negotiators often assumed (with considerable evidence) that EU negotiating positions were driven by a desire to protect European farmers, whatever the stated rationale of the moment might be.  That motive should not be ruled out in the biotechnology debate, but it is by no means the only factor at work here. European public opinion is, for the moment at least, opposed to the acceptance of biotechnology, for reasons that go considerably beyond helping farmers.  A number of European businesses in the food sector have taken actions intended to respond to these public views. The fact that the issue involves more than protectionism may make it more difficult for the EU to reach lasting accommodations with the U.S.

SPS issues and biotechnology are not identical, and a variety of issues allegedly involving health or safety but having nothing to do with GMOs could occupy the Seattle Round negotiators.  Some U.S. industries, however,  are reluctant to see the SPS agreement (formally the Agreement on the Application of Sanitary and Phytosanitary Measures) opened up, fearing mischief from other countries.

Dispute Settlement: The Uruguay Round improved previous GATT dispute settlement procedures, notably by ending the ability of a losing party to block, or veto, the acceptance of a ruling which disfavored it.  As basic a principle as this would seem to be, the GATT was almost 50 years old before it was adopted.

However, the last few years have illustrated another problem, likely to occupy the minds of the Seattle Round negotiators.  Once a WTO panel rules in a complaint, its decision has to be implemented by the losing party.  Frequently this means that the party will have to change its domestic laws or take other actions that are the province of a sovereign nation.  Execution of panel decisions, therefore, is not automatic and depends on the actions of the losing party.  So far, the WTO lacks a satisfactory way of ensuring that decisions are implemented promptly and in good faith.  The delays in European acceptance of its losses in U.S. complaints involving bananas and beef are the best-known examples.  The beef case in particular has aroused the fury of U.S. producer groups, who charge (as does the U.S. government) that the EU has delayed, created diversions and misrepresented scientific results in order to avoid complying with an unambiguous panel ruling.

 *


Conclusion: Fast Track and Beyond

So far, little can be said with certainty about the new agricultural negotiations.   At a minimum, two to three years are likely to elapse before we know the concrete results, if any, of the talks.  The Administration, in launching the negotiations, will count on its successors having fast track legislative authority by the time any agreement is final.  In that way, the next Administration will be able to submit any agreements that may result for a single vote in Congress without the prospect of debilitating amendments.

The fact remains that the Administration does not have this authority today.  It lapsed in 1994 and has not been renewed.  It is possible but now appears unlikely that Congress will pass a bill granting fast track authority this year.  If that is the case, the next question will be how other WTO members react.  Will they assume, with historic precedent on their side, that Congress will eventually come through?  Or will they use the absence of fast track as a convenient excuse to delay or obfuscate negotiations?

These are questions of considerable importance to the commercial future of U.S. agriculture, whose dependence on foreign markets has grown over time and which misses these markets more acutely in times of depressed commodity prices.  One is struck by the degree to which the optimistic long-term forecasts that held sway until recently assumed at least some further progress in liberalizing trade.  If the march of global trade liberalization halts or even reverses course, the implications for the U.S. farm sector would be dire, in both the short and the long term.  The questions before the ministers in Seattle may begin with the arcane diplomacy of trade negotiations, but they end in the dollars and cents of farm exports.

AGRICULTURE TRADE PROTECTION CAN BE COSTLY

Everyone knows how rice is protected in Japan, and that the European Union has special rules for banana imports.  Other countries also protect certain commodities through unusually high tariffs.  The list of agricultural commodities singled out for special treatment is surprising if not perplexing.  According to a 1997 United Nations Conference on Trade and Development (UNCTAD) and World Trade Organization (WTO) joint study, the following food products faced imports tariffs as a percent of the world price in 1995:
 
 
Product Description
USA
EU
Japan
Korea
Canada
 
Cheese
133%
120%
30%
364%
246%
Peanuts, shelled
132%
0
550%
40%
0
Peanuts, roasted
132%
11%
21%
50%
0
Peanut Butter
132
13%
12%
50%
0
Butter
79%
68%
105%
40%
300%
Milk (more than 3% fat)
66%
113%
280%
36%
241%
Sugar, raw cane
43%
73%
100%
5%%
70%
White Sugar
41%
71%
59%
8%
70%
Orange Juice
31%
52%
30%
50%
2%
Beef, frozen boneless
26%
215%
46%
30%
26%
Oranges, fresh
4%
16%
32%
50%
0
Wheat
2%
65%
39%
5%
77%
Corn
2%
84%
60%
5%
1%
Pork, frozen
0
38%
66%
25%
0
Bananas, fresh
0
180%
23%
30%
0
Apples, fresh
0
11%
17%
45%
0
Rice, milled
0
71%
550%
5%
1%

Although the import tariff rates as a percent of the world price are somewhat different today, this chart is instructional in illustrating how certain commodities receive special protection.  Clearly, special treatment for particular commodities can hurt the trade opportunities of other commodities seeking new market access.

The UNCTAD/WTO joint "study shows that problems of high tariffs are still widespread."  These high tariffs which provide high levels of protection of certain commodities, clearly "affect international trade," including exports of agricultural commodities that rely on fair and open trade.  Just like Japan paid dearly for its insistence on maintaining very high tariffs on rice imports (550%) during the Uruguay Round negotiations, the European Union pays for it very high tariffs on above quota banana imports (180%), and the U.S. pays for the very high tariff on in-shell peanut imports (164%).  The UNCTAD/WTO study concludes that "[p]eak tariffs affect both agricultural and industrial products significantly."

Any country seeking to remove excessive trade barriers, needs to have its own house in order and allow reasonable access on all commodities if it is to have any real success in opening up new export markets.  Canada, for example, is a member of the free-trade Cairns Group, but continues to maintain very high tariffs on a number of agricultural commodity imports.

U.S. corn farmers have a lot to gain by reducing tariffs into the European Union as do American pork producers, who have much to gain in reducing tariffs into Japan, and U.S. apple growers, who seek to expand their markets into Korea.  This means that producers of some U.S. agricultural commodities that are overly protected will need to make concessions for the greater good of the rest of American agriculture that is reliant on exports and/or seeking new international markets.

Excessive tariff rates are particularly significant when viewed in the context of the value of U.S. agriculture commodity production.  U.S. agriculture has a production value of about $200 billion annually.  Listed below are the top 20 commodities in terms of production value in 1996 (note that U.S. peanut production, which is protected by the highest import tariffs of any food commodity, does not make the top 20 commodity value list):
 
 
U.S. Agriculture Commodity
Value of Production in 1996
 
Corn
$25.3 billion
Milk
$23.1 billion
Cattle & Calves
$22.3 billion
Soybeans
$17.5 billion
Chickens
$14.2 billion
Hay
$12.7 billion
Hogs
$12 billion
Wheat
$9.8 billion
Cotton
$6.4 billion
Eggs
$4.8 billion
Turkeys
$3.1 billion
Potatoes
$2.4 billion
Grapes
$2.4 billion
Sorghum
$2 billion
Oranges
$1.8 billion
Rice
$1.7 billion
Tomatoes
$1.7 billion
Apples
$1.6 billion
Sugarbeets
$1.2 billion
Barley
$1.1 billion

With this much at stake for U.S. agriculture, high tariffs need to be significantly reduced or tariff peaks need to be capped at some rational level (such as agricultural import tariffs capped at no more than 10%) for the United States to have any serious opportunity to expand its exports.