ECON3315 International Economic Issues Instructor: Patrick M. Crowley Issue 8: Agriculture issues, the CAP and Doha

Overview Quote Quote History History 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 EU Forms of subsidy in agriculture: the US and the EU The developing country dimension The developing country dimension The Doha round: approach The Doha round: approach The Doha round: potential results The Doha round: potential results

Quote “Let me mention some of the matters that will be discussed in the Doha Development Round. One of these concerns the international trade in agricultural products. Critical in this regard is access of our products into the food markets of the developed countries, some of which continue to subsidise their own agriculture in a context that verges on intellectual, economic and social obscenity and brutal selfishness.” (Thabo Mbeki, President of South Africa, in reaction to the Doha Declaration 2001)

History 1930s: 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 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 US In the US, the Federal govt directly subsidizes agricultural incomes or guarantees certain prices In the US, the Federal govt directly subsidizes agricultural incomes or guarantees certain prices The sectors subsidized very biased The sectors subsidized very biased Over $25bn spent in 2006 – more than on foreign aid, more than on education, 50% more than on welfare for families Over $25bn spent in 2006 – more than on foreign aid, more than on education, 50% more than on welfare for families 10% of farmers get 72% of aid – and these are large industrial farms 10% of farmers get 72% of aid – and these are large industrial farms Only 25 out of 435 congressional districts receive subsidies Only 25 out of 435 congressional districts receive subsidies 60% of farmers get no cash at all 60% of farmers get no cash at all Brazil’s win against cotton subsidies and possible retaliation against US will lead to political rethink Brazil’s win against cotton subsidies and possible retaliation against US will lead to political rethink

US reform proposals 1996 Farm Bill ($97bn): effort to eliminate subsidies by giving “transitional cash handouts to farmers” for 5 years. Gave farmers freedom to grow what they wanted Farm Bill ($97bn): effort to eliminate subsidies by giving “transitional cash handouts to farmers” for 5 years. Gave farmers freedom to grow what they wanted Farm bill ($180bn) renewed as no appetite to cut support as prices low and political support needed in red states. Bush caved in and subsidies increased dramatically… 2001 Farm bill ($180bn) renewed as no appetite to cut support as prices low and political support needed in red states. Bush caved in and subsidies increased dramatically… Texas rice country: El Campo area particularly benefitted – but 1/3 rd production of rice compared with Texas rice country: El Campo area particularly benefitted – but 1/3 rd production of rice compared with Eliminating loopholes that allow people who do not farm to collect income support ($1.3bn paid in 2006). Eliminating loopholes that allow people who do not farm to collect income support ($1.3bn paid in 2006). Feb 7 th ’07: Bush proposes cutting subsidies by $17.5bn over 5 yrs Feb 7 th ’07: Bush proposes cutting subsidies by $17.5bn over 5 yrs After 3 yrs of deliberation Farm bill eventually passed in June 2008 After 3 yrs of deliberation Farm bill eventually passed in June 2008 Reduces income support to farmers slightly but most subsidies still in place. Reduces income support to farmers slightly but most subsidies still in place.

2008 US farm bill $288 billion 5 year “Food and Energy” bill passed over Bush’s veto, which kept most of the subsidies, particularly to large farms, but also includes sections on food stamps, biofuel development and research. $288 billion 5 year “Food and Energy” bill passed over Bush’s veto, which kept most of the subsidies, particularly to large farms, but also includes sections on food stamps, biofuel development and research.

Forms of subsidy in agriculture: the EU  EU spends roughly $65bn per year on CAP ( - opportunity cost)  Largest trade-distortion to agriculture in the world  Until reform in 2003, system guaranteed prices for farmers in certain industries (now mostly “decoupled” – subsidies not directly linked to output: The Single Farm Payment)  Surplus, with higher prices results  Output then sold for whatever it will get on world markets ( - acts as an “export subsidy”)

Export subsidies

EU tariffs

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 high For developing countries, exploiting their natural comparative advantage could give big returns For developing countries, exploiting their natural comparative advantage could give big returns Many of the trade restrictions are “non-tariff” barriers Many of the trade restrictions are “non-tariff” barriers

Doha round Although tariffs are not high on average, other support mechanisms exist Although tariffs are not high on average, other support mechanisms exist

Doha round: approach  In negotiations, trade protections put into “boxes” based on AMS (assessed measure of support) - red box: export subsidies - amber box: domestic support (income etc – significantly distortionary) - blue box: domestic support subsection (payments based on size of farms – not that distortionary) - development box - green box – payments for projects that protect the environment  “product-specific de minimis” vs “NPS de minimis”: usually 5% of ag production  Currently ceiling on amber box payments, but no ceiling on blue box payments

Doha round: current situation When the talks broke down in Cancun, following situation had been reached: When the talks broke down in Cancun, following situation had been reached: - red box to be scrapped by all by US proposed cutting amber box limit by 60% (to $7.6bn), capping blue box at $4.8bn pa, halving PS and NPS de minimis to 2.5% - EU would offer cuts of 54% of value of support if US cuts farm subsidies by similar amount, and PS and NPS de minimis by 80%. Individual EU member states (led by France) said EU trade negotiator had gone “too far”!  Developing countries expected to offer to cut tariffs on industrial goods, but they felt US and EU had not gone far enough  Result: impasse and Cancun “walkout”

Doha round: political constraints US objective is to avoid new challenges under WTO rules US objective is to avoid new challenges under WTO rules Also President’s “fast track” mandate on trade negotiations expires in July 07 – but now renewed Also President’s “fast track” mandate on trade negotiations expires in July 07 – but now renewed Bush has offered cuts to Farm Support Bill, capping total subsidies at $22.5bn pa Bush has offered cuts to Farm Support Bill, capping total subsidies at $22.5bn pa Developing countries say that this is not enough Developing countries say that this is not enough EU has to avoid re-negotiating the changes in the CAP agreed upon in 2003 EU has to avoid re-negotiating the changes in the CAP agreed upon in 2003 EU also has to convince all 27 members that it is in their interests to go along with the agreement EU also has to convince all 27 members that it is in their interests to go along with the agreement

Effects of a successful Doha round in agriculture World prices would rise –benefiting developing country producers most, but also benefiting consumers in developed countries World prices would rise –benefiting developing country producers most, but also benefiting consumers in developed countries Also opportunity costs of funds currently spent on agriculture Also opportunity costs of funds currently spent on agriculture

Economic effects of a successful Doha round Welfare gains possible over $50bn Welfare gains possible over $50bn

Economic effects of a successful Doha round