Trade Negotiations and Agreements Dr. George Norton Agricultural and Applied Economics Virginia Tech Copyright 2009 AAEC 3204

Objectives Discuss multi-lateral agreements as potential solutions to trade problems Discuss multi-lateral agreements as potential solutions to trade problems Discuss the GATT and WTODiscuss the GATT and WTO Regional agreements – for example NAFTARegional agreements – for example NAFTA

Developing country trade reform interests With trade reform, many developing countries would gain from lower barriers for their exports; some would lose from the projected 10-20% higher prices for grain imports. Most countries would gain. With trade reform, many developing countries would gain from lower barriers for their exports; some would lose from the projected 10-20% higher prices for grain imports. Most countries would gain. Europe and Japan have the highest trade barriers, but U.S. and developing countries also restrict trade significantly Europe and Japan have the highest trade barriers, but U.S. and developing countries also restrict trade significantly

OECD Producer Support Estimates, 2004, in Percent Switzerland Japan European Union Canada United States Mexico Australia 4 New Zealand 3 30 Countries Overall Source: OECD Agriculture Directorate

Average Producer Support in OECD Countries, 2004, in Percent Rice Sugar Milk Beef & Veal Wheat Corn Oilseeds Pork Overall Source: OECD Agriculture Directorate

Domestic Effects of Subsidies to Agriculture Increase total investment in agriculture relative to other sectors Increase total investment in agriculture relative to other sectors Distort what gets produced where Distort what gets produced where Affect price of land and other fixed assets Affect price of land and other fixed assets Holds people in agriculture that would normally move to other sectors as development proceeds Holds people in agriculture that would normally move to other sectors as development proceeds

External Effects of Ag Protection and Subsidies Fewer imports by importer (examples: US sugar; Japan rice) can lower world price Fewer imports by importer (examples: US sugar; Japan rice) can lower world price For net exporter, larger production and exports can depress world price (example: US cotton) For net exporter, larger production and exports can depress world price (example: US cotton) Barriers to imports may reduce domestic price variability but increase variability on the world market Barriers to imports may reduce domestic price variability but increase variability on the world market

OECD Policies Depress Commodity Prices Below Long Term Trend Rice % % Sugar 20 – 40 % 20 – 40 % Dairy Products 20 – 40 % 20 – 40 % Cotton 10 – 20 % 10 – 20 % Peanuts Source: World Bank. Global Economic Prospects 2002, Chap. 2.

Why Is It Difficult to Reduce Ag Subsidies & Liberalize Trade? Benefits are capitalized into land values, so value of land would fall Benefits are capitalized into land values, so value of land would fall Labor adjustment difficult Labor adjustment difficult Specialized skills become less valuableSpecialized skills become less valuable Retraining may be costly (or impractical for older people). Retraining may be costly (or impractical for older people). Adjustment may require physical relocationAdjustment may require physical relocation May be both monetarily and emotionally costly May be both monetarily and emotionally costly Those with benefits want to keep them Those with benefits want to keep them Subsidy recipients don’t give up without a fight.Subsidy recipients don’t give up without a fight. Politicians likely to lose campaign contributions and/or bribes.Politicians likely to lose campaign contributions and/or bribes.

Gainers and Losers Gainers exceed losers, but there are losers Gainers exceed losers, but there are losers The challenge is to define policies to compensate losers: The challenge is to define policies to compensate losers: to facilitate their adjustmentto facilitate their adjustment to neutralize political oppositionto neutralize political opposition

Multilateral Trade Agreements General Agreement on Tariffs and Trade (GATT) General Agreement on Tariffs and Trade (GATT) World Trade Organization (WTO) World Trade Organization (WTO)

GATT Temporary trade agreement set up after WWII when agreement to form an International Trade Organization was not ratified Temporary trade agreement set up after WWII when agreement to form an International Trade Organization was not ratified

4 basic principles of the GATT Tariffs are the only “legitimate” form of trade restraint Tariffs are the only “legitimate” form of trade restraint No discrimination in application of tariffs (most favored nation principle) No discrimination in application of tariffs (most favored nation principle) Consultation and negotiation to avoid and settle disputes Consultation and negotiation to avoid and settle disputes Agreement to periodic multilateral negotiations to lower trade barriers (with reciprocity) Agreement to periodic multilateral negotiations to lower trade barriers (with reciprocity)

Non-tariff barriers legitimate if: Balance of payments problem Balance of payments problem Severe shortage in domestic economy (i.e. can put on export restriction) Severe shortage in domestic economy (i.e. can put on export restriction) Import quotas can be put on goods under production controls at home Import quotas can be put on goods under production controls at home Health, safety, copyright reasons, etc. Health, safety, copyright reasons, etc.

Periodic Negotiations – – – 62 Dillon round 1960 – 62 Dillon round 1964 – 67 Kennedy round 1964 – 67 Kennedy round 1973 – 79 Tokyo round 1973 – 79 Tokyo round 1981 – 83 Geneva round 1981 – 83 Geneva round 1986 – 93 Uruguay round 1986 – 93 Uruguay round 2001 – ? Doha round (under WTO) 2001 – ? Doha round (under WTO)

Uruguay Round Agreement on Agriculture Increased market access Increased market access Change non-tariff trade measures to tariffs Change non-tariff trade measures to tariffs Establish tariff-rate quotas Establish tariff-rate quotas Bind all tariffs Bind all tariffs Reduced export subsidies Reduced export subsidies Defined limits on export subsidies Defined limits on export subsidies No new export subsidies No new export subsidies Required scientific basis for SPS barriers Required scientific basis for SPS barriers Acknowledged that some domestic agricultural subsidies distort trade and categorized them by degree of trade distortion into boxes: Green, Amber, Blue Acknowledged that some domestic agricultural subsidies distort trade and categorized them by degree of trade distortion into boxes: Green, Amber, Blue

The WTO Colored Boxes “Green box” = non trade distorting investments in public goods and decoupled income transfers (no cap) “Green box” = non trade distorting investments in public goods and decoupled income transfers (no cap) “Amber box” = trade-distorting (bound and reduced) (capped) “Amber box” = trade-distorting (bound and reduced) (capped) “Blue box” = trade-distorting, but offset by production controls or set- asides “Blue box” = trade-distorting, but offset by production controls or set- asides

Estimated benefits of Uruguay Round A few $billion to U.S. and world economies per year (after fully implemented) A few $billion to U.S. and world economies per year (after fully implemented) U.S. agricultural exports up a little U.S. agricultural exports up a little U.S. net farm income up a little U.S. net farm income up a little Some savings in domestic farm support programs initially Some savings in domestic farm support programs initially

World Trade Organization (WTO) What is the WTO? What is the WTO? How does it affect U.S. agriculture? How does it affect U.S. agriculture? Is the WTO harmful or helpful to developing countries? Is the WTO harmful or helpful to developing countries?

Background on WTO 153 member countries which negotiate to revise trade rules 153 member countries which negotiate to revise trade rules Secretariat, in Geneva, organizes negotiations & follows a process to resolve differences over whether rules are being broken Secretariat, in Geneva, organizes negotiations & follows a process to resolve differences over whether rules are being broken Dispute settlement panels & an appellate body interpret agreements Dispute settlement panels & an appellate body interpret agreements WTO can not force a country to change policies, but it can authorize victims to collect compensation via import duties on the violator WTO can not force a country to change policies, but it can authorize victims to collect compensation via import duties on the violator

Key Players in Doha Round Agricultural Negotiations United States United States European Union European Union G-20 (Brazil, India, China, S. Africa, +) G-20 (Brazil, India, China, S. Africa, +) Cairns Group (Australia, New Zealand, +) Cairns Group (Australia, New Zealand, +) G-10 (Japan, Korea, Norway, Switzerland,+) G-10 (Japan, Korea, Norway, Switzerland,+) Other developing Countries (the majority of members, but heterogeneous interests) Other developing Countries (the majority of members, but heterogeneous interests)

Focus on Development in the Doha Round Developing countries are potential growth markets -- but only if they enjoy broad- based economic growth -- which will be facilitated if they can export what they produce relatively most efficiently. Developing countries are potential growth markets -- but only if they enjoy broad- based economic growth -- which will be facilitated if they can export what they produce relatively most efficiently. Developing countries now are the majority of WTO members. There will be no new trade agreement until they feel it will help them (unlike past trade agreements) Developing countries now are the majority of WTO members. There will be no new trade agreement until they feel it will help them (unlike past trade agreements) Developing countries in need of development to improve living standards Developing countries in need of development to improve living standards

Many U.S. Farmers: Many U.S. Farmers: Losing confidence in their international competitiveness Losing confidence in their international competitiveness Don’t recognize potential for growth in developing country markets Don’t recognize potential for growth in developing country markets Think Uruguay Round Agreement on Agriculture was unfair to U.S. farmers Think Uruguay Round Agreement on Agriculture was unfair to U.S. farmers And therefore are unenthusiastic about the Doha round And therefore are unenthusiastic about the Doha round

Doha Round of Negotiations Was scheduled for completion in 2007 Was scheduled for completion in 2007 U.S. has proposed reducing ag subsidies substantially, but only if other countries provide greater access to their markets. U.S. has proposed reducing ag subsidies substantially, but only if other countries provide greater access to their markets. Developing countries won’t open their markets as long as world market prices are depressed by ag subsidies in developed countries Developing countries won’t open their markets as long as world market prices are depressed by ag subsidies in developed countries Progress at a standstill with talks suspended since July 2008 Progress at a standstill with talks suspended since July 2008

Increase in Regional Agreements and Country Groupings Examples Examples North America – NAFTANorth America – NAFTA Europe – EUEurope – EU Asia – APEC, ASEAN, and othersAsia – APEC, ASEAN, and others Africa – SADC, ECOWAS, COMESA, and othersAfrica – SADC, ECOWAS, COMESA, and others Latin America – Andean Group, Mercosur, ALADI, and othersLatin America – Andean Group, Mercosur, ALADI, and others

Motivations for Regional Integration Economic Economic Economies of scaleEconomies of scale SpecializationSpecialization Increased competitionIncreased competition Market powerMarket power StabilizationStabilization Social Social Cultural Cultural Political Political Military Military

Regional Economic Groupings Free Trade Area Free Trade Area Customs Union Customs Union Common Market Common Market Economic Union Economic Union Loose ties Close ties

North American Free Trade Agreement (NAFTA)

Conclusions 1. A more open trading environment can stimulate faster economic growth, helping developed and developing countries 2. Trade agreements and negotiations are difficult but can facilitate trade liberalization