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

2. Overview Quote History
Agriculture – why is it so controversial in trade?
Forms of subsidy in agriculture: the US and the EU
The developing country dimension
The Doha round: approach
The Doha round: potential results

3. 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)

4. 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

5. Agriculture – why is it so controversial in trade?
Because it is the sector most protected by governments
Because the farm lobby is very powerful politically both in the EU and in the US
Because the developing world has been suffering because of protectionist measures in agriculture
Because food and its quality is a particularly sensitive issue for consumers
Because food is also a “security” issue

6. Forms of subsidy in agriculture: the US
In the US, the Federal govt directly subsidizes agricultural incomes or guarantees certain prices
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
10% of farmers get 72% of aid – and these are large industrial farms
Only 25 out of 435 congressional districts receive subsidies
60% of farmers get no cash at all
Brazil’s win against cotton subsidies and possible retaliation against US will lead to political rethink

7. 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.
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 1/3rd production of rice compared with 1996.
Eliminating loopholes that allow people who do not farm to collect income support ($1.3bn paid in 2006).
Feb 7th ’07: Bush proposes cutting subsidies by $17.5bn over 5 yrs
After 3 yrs of deliberation Farm bill eventually passed in June 2008
Reduces income support to farmers slightly but most subsidies still in place.

8. 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.

9. US Farm Bill 2014 Changes: Initial estimated cost = $25bn
Actual cost likely to be much, much higher
Changes:
Subsidized insurance protects against various business risks, such as adverse weather, low production, and low revenues. It covers more than 100 crops, but corn, cotton, soybeans, and wheat are the main ones. ($8bn in 2016)
Agricultural Risk Coverage (ARC). This program pays subsidies to farmers if their revenue per acre, or alternately their county's revenue per acre, falls below a benchmark or guaranteed level. Wheat, corn, chickpeas, mustard and roughly 15 others ($7bn in 2016)
Price Loss Coverage (PLC). About 20 crops ($2bn)
Conservation programs. About $5bn in 2016 to pay for “set asides”
Marketing and exporting activities – about $1.2bn per year
Disaster aid - $1-2bn
Research and other support. $3bn
TOTAL in 2016 alone = $28.7bn – if same over 5 years = $143.5bn
Projected cost with other elements (food stamps) is $490bn

10. 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”)

11. Export subsidies

12. EU tariffs

13. 2014 CAP reforms
Expenditure to be frozen in nominal terms – and “new direct payments” used

14. 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

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

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

17. 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

18. Doha round: current situation
When the talks broke down in Cancun, following situation had been reached:
- red box to be scrapped by all by 2013
- 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”

19. Doha round: political constraints
US objective is to avoid new challenges under WTO rules
Also President’s “fast track” mandate on trade negotiations expired in July 07 – but now renewed
Bush offered cuts to Farm Support Bill, capping total subsidies at $22.5bn pa
Developing countries say that this is not enough
EU also 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

20. Effects of a successful Doha round in agriculture
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

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

22. Economic effects of a successful Doha round