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Agriculture in World Trade: 

Agriculture in World Trade

Think about: 

Think about the position of developing countries developed countries Korea for each country the government farmers consumers

Background: 

Background The original GATT did apply to agricultural trade, but it contained loopholes. For example, it allowed countries to use some non-tariff measures such as import quotas, and to subsidize. Agricultural trade became highly distorted, especially with the use of export subsidies which would not normally have been allowed for industrial products.

Cont.: 

Cont. The absence of an agricultural agreement was the primary reason that the UR was not concluded at the Brussels ministerial meeting in Dec 1990.

Welfare gains from liberalization: 

Welfare gains from liberalization Sectoral and regional contributions to the economic welfare gains from completely removing trade barriers globally

OECD Countries’ Policy: 

OECD Countries’ Policy The main aim of OECD government support policies has been to stabilize domestic agricultural prices and to guarantee security of supply.  increased volatility in world price. lower world market prices of agricultural goods. 1980-1993 agricultural goods prices rose by 1.4%/year, while the inflation rate of OECD countries was 6%/year.

EU’s Common Agricultural Policy (CAP): 

EU’s Common Agricultural Policy (CAP) EU's (CAP) began not as an export subsidy, but as an effort to guarantee high prices to European farmers by having the EU buy agricultural products whenever the prices fell below specified support levels. To prevent this policy from drawing in large quantities of imports, it was initially backed by tariffs that offset the difference between European and world agricultural prices.

Cont.: 

Cont. Since the 1970s, the support prices set by the EU became so high that Europe, which would under free trade be an importer of most agricultural products, was producing more than consumers were willing to buy. The result was that the EU found itself obliged to buy and store huge quantities of food. To avoid unlimited growth in these stockpiles, the EU turned to a policy of subsidizing exports to dispose of surplus production.

Europe’s CAP: 

Europe’s CAP D S Support price EU price without imports World price P Q exports

Consequence: 

Consequence West European countries were by far the world's largest agricultural exporters, accounting for almost 44% of total world agricultural exports in 1993. Only 1/4 of these flowed outside. The OECD countries as a whole subsidized agriculture to the order of 2% of GDP in 1990, while agriculture itself only accounted for 3% of GDP. Prices of crop products were some 50% above world prices in the EU, 6% in the USA, and 248% in Japan.

Cost of the Agricultural Policy: 

Cost of the Agricultural Policy In 1999, the overall cost of agricultural policies to OECD consumers and taxpayers was US$361 billion, or 1.4% of OECD GDP. Support to agricultural producers accounted for approximately 40% of the value of farm receipts.

Producer Support Estimates: 

Producer Support Estimates

Producer Support Estimates: 

Producer Support Estimates

What about developing countries?: 

What about developing countries? Bias against domestic agriculture: overvaluation of the RER, protection of manufacture, anti-export bias.

GATT: 

GATT From the beginning, agriculture was treated differently than other sectors under GATT rules. In agriculture, quantitative restrictions were permitted under certain circumstances. Export subsidies are also allowed as long as the country using them did not gain more than an equitable share of the world market.

Different Positions: 

Different Positions US and Cairns Group: eliminate import protection as well as export subsidies EC: accept some reform to limit the types of import protection, but not export subsidies Japan, Korea: accept the reduction of export subsidies, but not the reduction of import protection

URAA and the Developing Countries: 

URAA and the Developing Countries

Agriculture Agreement: 

Agriculture Agreement The WTO’s Agriculture Agreement was negotiated in the 1986–94 UR and is a significant first step towards fairer competition and a less distorted sector. It includes specific commitments by WTO member governments to improve market access and reduce trade-distorting subsidies in agriculture. These commitments are being implemented over a six year period (10 years for developing countries) that began in 1995.

Uruguay Round: 

Uruguay Round The conclusion of an agreement on agriculture in the Uruguay Round laid the foundations for reversing the growth in agricultural protection in OECD countries and thereby reducing the international price-depressing effects of those policies.

Three Main Components of the Achievement: 

Three Main Components of the Achievement 1) increases in import market access 2) cuts in domestic producer subsidies 3) reduction in farm export subsidies

Slide21: 

Numerical targets for cutting subsidies and protection

Tariffication: 

Tariffication All nontariff import barriers are required to be converted to bound tariffs. Tariff equivalent of a non-tariff barrier is found by comparing the domestic price of a good with that of the equivalent import.

Market Access: 

Market Access Importers should maintain market access at rates at least equivalent of those prevailing prior to tariffication. In cases where no access was available, some countries agreed to provide a minimum market access opportunity, such that the share of imports in domestic consumption for products subject to import restrictions rises to at least 5% by the year 2000 under a tariff quota.

A tariff-quota: 

A tariff-quota Imports entering under the tariff-quota (up to 1,000 tons) are charged 10%. Imports entering outside the tariff quota are charged 80%. Under the Uruguay Round agreement, the 1,000 tons would generally be based on actual imports in the base period or an agreed “minimum access” formula. Tariff quotas are also called “tariff-rate quotas”.

Domestic support: 

Domestic support Domestic policies that do have a direct effect on production and trade have to be cut back. Measures with minimal impact on trade can be used freely — they are in a “green box”. They include government services such as research, disease control, infrastructure and food security. They also include payments made directly to farmers that do not stimulate production, such as certain forms of direct income support. Also permitted, are certain direct payments to farmers where the farmers are required to limit production (sometimes called “blue box” measures).

Export Subsidies: 

Export Subsidies The Agriculture Agreement prohibits export subsidies on agricultural products unless the subsidies are specified in a member’s lists of commitments. Where they are listed, the agreement requires WTO members to cut both the amount of money they spend on export subsidies and the quantities of exports that receive subsidies.

Problems: Market Access: 

Problems: Market Access (1) The years 1986-88 were chosen as the base for tariffication because world prices for many agricultural commodities were the lowest in decades. (2) The initial tariff bindings are in many cases far higher than the actual tariff equivalents in 1986-88. 'dirty tariffication'

Problems: Domestic Support: 

Problems: Domestic Support Aggregate measurement of support (AMS) for industrial-country farmers is to be reduced to four-fifths of its 1986-88 level. For many countries, support was substantially higher in the base period than it was in 1990-92.

Problems: Export Subsidies: 

Problems: Export Subsidies While the definition of export subsidies is fairly rigorous, the definition of commodities is not. Countries declared commodity aggregates instead of individual tariff lines. Aggregations give exporting countries a flexibility in export competition that line-by-line commitments would not allow. Aggregation appears likely to shift export subsidy competition to products with greater value added.

Undesirable features of TRQs: 

Undesirable features of TRQs they legitimize a role for state trading agencies they generate quota rents they introduce scope for discriminating between countries they can reduce national welfare by much more than similarly protective import tariffs. In numerous cases quotas are far from being filled one possible reason is that quotas are allocated to imports from high-cost suppliers incapable of making full use of them quota often represents 100% of total imports out-of-quota tariffs are virtually prohibitive

Assessment: 

Assessment (-) Implementing the reforms agreed to in the UR will involve only very modest benefits from liberalization by 2000 for developing country agriculture. Efforts to reduce market access barriers in high-income countries, are required. (+) UR has begun to bring agriculture back into the mainstream of the WTO.

World Prices: 

World Prices Tariff reduction reduces the prices paid for agricultural goods in the domestic market.  higher consumption and higher world price Reduction in subsidies means that domestic producers receive less for their product.  reduction in supply and higher world price Therefore, tariff reductions and subsidy cuts should mutually reinforce each other in boosting world prices.

Winner and Losers: 

Winner and Losers The EU benefits from the reductions in both export and production subsidies. Japan and Korea are also a big winners, but because they cut border protection. OECD farmers lose out, but consumers benefit from lower government spending and lower domestic prices. Because of the higher prices, net importers will invariably be worse off.

Impact on LDCs: 

Impact on LDCs Ministerial Decision (WTO, 1994) While the implementation of the Uruguay Round will generate increasing opportunities for trade expansion and economic growth to the benefit of all Members, least-developed countries and net food-importing developing countries may experience negative effects in terms of the availability of adequate supplies of basic foodstuffs from external sources on reasonable terms and conditions. FAO report The majority of low-income countries, especially Least Developed Countries, are net food importers.

Food Security: 

Food Security Food security exists when all people, at all times, have physical, social and economic access to sufficient, safe and nutritious food which meets their dietary needs and food preferences for an active and healthy life. Food self-sufficiency: the provision of a level of food supplies from national resources above that implied by free trade Food self-reliance: the sources of food are determined by international trade patterns and the benefits and risks associated with it.

Countries classified according to income status and agricultural trade, 1995-1997 (number of countries): 

Countries classified according to income status and agricultural trade, 1995-1997 (number of countries)

Countries classified according to food trade and agricultural trade, 1995-1997 (number of countries): 

Countries classified according to food trade and agricultural trade, 1995-1997 (number of countries)

Current Negotiations and Beyond: 

Current Negotiations and Beyond

Current Negotiations: 

Current Negotiations WTO members agreed to initiate negotiations for continuing the agricultural trade reform process one year before the end of the implementation period, i.e. by the end of 1999. These talks began in early 2000 under the original mandate of Article 20 of the Agriculture Agreement. At the November 2001 Doha Ministerial Conference, the agriculture negotiations became part of the single undertaking in which virtually all the linked negotiations are to end by 1 January 2005.

Developing Countries’ Interests: 

Developing Countries’ Interests Four group of countries exporters of tropical farm products facing low tariffs on most of the primary exports but high effective tariffs on processed products exporters of temperate zone farm products facing high import tariffs and restrictive tariff rate quotas net food importer countries rapidly accumulating capital and industrializing whose comparative advantage is moving away from primary products to labor-intensive manufactures.

The Legacy of URAA: 

The Legacy of URAA In OECD countries, because of ‘dirty tariffication’, actual tariffs will provide as much protection at the beginning of this century as the nontariff barriers of the late 1980s and early 1990s. a one-third cut in the bound tariffs on other manufactures would bring the average down to each region’s applied rate average for all goods, whereas for textiles and clothing a cut of about one-half would be needed and for agriculture the cut would have to be about four-fifths.

Further reform: 

Further reform dirty tariffication + extremely high ceiling bindings → isolation from international market options with respect to tariff across-the-board tariff cut Swiss formula zero-for-zero approach TRQs optimistic view: 1% increase per year would soon make it nonbinding pessimistic view: MFA (multilateral food arrangement)?

Agriculture and other sectors: 

Agriculture and other sectors Nonagricultural negotiations are relevant to agriculture for the following reasons: Pa/Pm ↑ → the price of intermediate inputs to agricultural sector ↓ Pa/Pm ↑ → labor and capital moves to agricultural sector exchange of concessions

Agriculture and New Trade Issues: 

Agriculture and New Trade Issues Technical Standards, SPS, Food safety Multifunctionality

Technical Standards, SPS, Food safety: 

Technical Standards, SPS, Food safety SPS Agreement defined new criteria that had to be met if a country chose to impose regulations more onerous than those agreed in international standards-setting bodies resulted from the desire to reduce the risk of re-instrumentation of agricultural support to SPS measures in response to reforms committed to under the URAA Interests of developing countries SPSA must require a WTO member to provide scientific justification and to formally assess the risks Maintaining and increasing access to other members’ markets that are protected by SPS measures.

Winners and Losers of SPS: 

Winners and Losers of SPS In many cases, domestic farmers gain, whereas domestic consumers and foreign producers lose. The consumers’ concerns were not represented in the negotiations consumers right to have better access to lower-priced imported food consumers’ right to know more Issue of GMOs (genetically modified organisms)

Multifunctionality: 

Multifunctionality non-trade concerns security of food supplies protection of the environment viability of rural areas Externalities Do positive externalities exceed negative externalities from farming by more than the net positive externalities produced by other sectors? Is protection the most efficient way to take advantage of these externalities?

Options for Developing Countries: 

Options for Developing Countries agree to discuss at least some of the new trade issues if they want to ensure that agricultural (and textile) market access remains high on the WTO’s agenda exchange more MFN market access with OECD countries rather than seeking special and differential treatment and tariff preferences act collectively to push hard for greater market access

Slide49: 

Q&A

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