Seminar Paper, 2011
26 Pages, Grade: 1,3
List of Figures
2 Types of protectionist measures
2.1 Border measures
2.2 Non-border measures
3 Outcome of the Uruguay Round
3.1 Export subsidies
3.2 Market access
3.3 Domestic support
3.4 Impact of URAA
4 Agricultural issues delay the DDA
4.1 Developed countries’ point of view
4.2 Developing countries’ point of view
5 Extent and gravity of agricultural subsidies and tariffs
5.1 Agricultural tariffs
5.2 Agricultural subsidies
6 Beneficiaries of liberalization in agriculture
6.1 Analysis by Anderson et al. (2006)
6.2 Analysis by Adler et al. (2009)
7 Concluding Thoughts and Outlook
Figure 1: OECD: Evolution of Indicators of Support
Figure 2: Producer support estimate by country (Percentage of gross farm receipts)
List of Tables
Table 1: Tariffs in agriculture (August 2009)
Table 2: Tariffs in agriculture (per cent)
Today we live in a globalized world and anybody can buy any product from any country in the world. But that is not completely true. Trade is not as free as many of us always think it is. There are still so many trade barriers which make international trade sometimes such an adventure. The World Trade Organization (WTO) was established to liberalize trade by reducing or eliminating tariffs and any other trade barriers. Therefore, all members have to contribute to that undertaking and make concessions. In the current round, named the Doha Development Agenda this does not work as it was meant to. A crucial issue in that conflict is agriculture. Developing countries and least developed countries complain about large amounts of subsidies paid by high-income countries such as the EU. In contrast, developed countries want developing countries to make concessions in terms of trade related intellectual property rights and trade related investment measures. So each country blames the other one instead of taking action and making the first step.
There is not much time left for concluding the current round. By now, the Doha Round is the longest-running round of trade negotiations in the post-war era. According to Sutherland (2011) this round has to be concluded in this year, unless it will be impossible to bring it to a close for a period of years. He argues that the presidential election in 2012 will lead to paralyses in world trade negotiations for a protracted period. The deadline is December 31 2011. Furthermore, there is so much progress already achieved. All this should not have happened in vain. So it is important to pocket the gains already substantially agreed to (Adler, Brunel, Hufbauer & Schott, 2009, p. 2).
This essay is structured into two main parts. The first part informs about some basics of protectionism and what happened so far in terms of agricultural liberalization. Chapter two gives a short overview of the existing types of protectionist measures to get a first impression how manifold opportunities for protectionists are. In this case, measures were divided into border measures and non-border measures. Chapter three informs about the outcome of the Uruguay Round, namely the Agreement on Agriculture to give an impression what was the state of WTO negotiations before the Doha Round started and what the impact of the URAA was. All previous rounds are not stated here because the Uruguay Round was the first round to achieve major results in liberalizing agriculture.
The second part of the work (chapters 4 to 7) describes the actual situation. Chapter 4 starts with the investigation why agricultural issues delay the Doha Development Agenda.
Therefore, both sides, namely the developed countries´ view and developing countries´ view, are treated to deliver a balanced picture. Extent and gravity of agricultural tariffs and subsidies are explained in chapter 5. In chapter 6 the results of two major studies are presented to get an impression how much benefits are at stake for negotiation partners. In the last chapter I make some concluding remarks and try to give a future outlook how the fiasco of trade negotiation might be resolved.
Grimwade (1996, pp. 194-204) distinguishes between two types of protectionist measures, those at the border and those behind the border. Protectionist measures at a country´s border are the most obvious way of distorting activities in international trade.
The first category of border measure is tariffs. When a tariff is imposed on a certain product it is getting more expensive for importers to purchase the specific product from abroad. In terms of agriculture farmers in particular countries are protected from foreign competition by those tariffs. Thus, prices of agricultural goods on the domestic market are supposed to rise (Neumair, 2008, p. 48).
More important than tariffs are nontariff barriers. Such measures are even more protectionist as they do not increase import prices but totally or partially ban a product from a certain market. For example import quotas are such a quantitative trade distortion. A second type of nontariff barriers are variable import levies. The EU has been using it in case of cereals in their Common Agricultural Policy. An imported cereal is subject to a certain amount of tariff which adjusts the import price to the domestic price. The country imposing import levies exports instability to the rest of the world (Sampson & Snape, 1980, p. 1029). Furthermore, other types of import restriction such as health and sanitary requirements and state trading organizations have influence on imports. Finally, there are export incentives which are paid in the amount of the difference between world market price and the country´s internal price (Grimwade, 1996, p. 197). A low level of export subsidies for agricultural products in 1995- 1996 reflects high world prices (relative to domestic prices). During a few months of this period, prices were so high that the EU imposed export taxes on goods traditionally benefiting from export subsidization (Hoekman & Messerlin, 2006, p. 200).
In addition to border measures non-border measures also distort trade significantly. Target or minimum prices are one instrument of protecting agricultural products on the domestic market. Most industrialized countries use this instrument. In the EU a target price was fixed annually for cereals. Official intervention agencies, which operate in all member states, then bought cereals at a price which was 90 per cent of the target price. The target price is the price level which should be attainable under normal market conditions. Especially when the price on the world market fell more than ten per cent it was profitable for farmers to sell to intervention. This was an incentive to surplus production in the agricultural sector, for example “milk lakes” and “butter mountains” (Jones, 2001, p. 214).
Another thing is deficiency payments. This method was operated by the UK before they joined the EC in 1973. Therefore, we will not go into detail here. More important non-border measures are output quotas. Because of surplus production of many agricultural goods there were spent large amounts of money for export subsidies. This led to the implementation of output quotas for example on milk. A certain price was guaranteed for a certain amount of milk. What was produced beyond that amount could only be sold to a significantly lower price. Now, different types of agricultural protectionist measures have been presented und examples of special cases were given. In the next step it is the aim to examine which of all those measures should be abolished after the Uruguay Round.
There have been seven rounds before the Uruguay Round, but all of them dramatically failed to reach substantial progress in terms of agricultural liberalization. While trade in industrial goods has been progressively liberalized, trade in agricultural goods still was subject to many trade barriers and protectionist measures (Grimwade, 1996, p. 192). This should change in the Uruguay Round which started in 1986 in Punta del Este, Uruguay. It lasted till 1994 when it was concluded in Marrakech, Morocco. A major success of this round was the establishment of the WTO as an organization. The United States was the chief sponsor of ambitious negotiations on agriculture as they were highly competitive as a producer of a wide range of agricultural products. The Cairns Group1 had nearly the same interests as the US. In contrast, the EU wanted to defend its common agricultural policy (CAP) by keeping cheap producers out of the market (Croome, 1999). After seven years of being torn between pressures to protect agriculture at home and open up their markets for international trade officials signed off the Uruguay Round Agreement on Agriculture (URAA). This agreement includes three pillars which will be further examined in the next paragraphs (Balaam, 2004, p. 169). The URAA stipulated the implementation of disciplines in each of the three pillars over six years for developed countries (1995-2000) and ten years for developing countries (1995-2004).
Export subsidies are a huge problem and a major source of distortion in agricultural trade. By granting export subsidies a country is able to offer a specific product at a lower price on the world market than that prevailing in its domestic market. Furthermore, export subsidies depress world prices, particularly if the exporting country accounts for a significant share of world trade (OECD, 2001). Therefore, export subsidies were a major provision of the URAA. According to the URAA they had to be cut from a 1986-1990 base period by 36 per cent and by 21 per cent for each product in terms of volume. However, there is a certain amount of flexibility for some products (European Parliament, 2000).
Least developed countries (LDC) were supposed to cut export subsidies by 24 and 14 per cent respectively over a ten year period (Balaam, 2004, p. 170). For the US and the Cairns Group that outcome must have been very unsatisfactory as they both sought the complete liberalization of trade in agriculture. Particularly the US was concerned about export subsidies (Hoekman & Kostecki, 2002, p. 215). Export subsidies as nontariff barriers had to be converted in tariff equivalents to be quantified and then to be cut equally to tariffs.
On market access it was also agreed to convert nontariff barriers (NTBs) into tariffs and to be reduced by 36 per cent on average or at least 15 per cent for each product in a five year transition period (1995-2000) for developed countries and by 24 per cent for developing countries (Ghazalian & Cardwell, 2010, p. 333). All agricultural tariffs are bound. This conversion of nontariff barriers was called tariffication. The tariff bindings that were implemented by many countries were much higher than the actual tariff equivalents of NTB. Many countries, developed and developing countries, bound their tariffs on agricultural imports 50 to 150 per cent higher than the actual tariff equivalent of NTB was. That means there had been no improvement in agricultural protection since the early 1980s due to this “dirty” tariffication (Hoekman & Kostecki, 2002, p. 217).
This problem was intended to be resolved by granting minimum access for imports, called tariff rate quota. That means each signatory country had to establish quotas for third countries in 1995 equivalent to 3 per cent of domestic consumption during the 1986-1988 reference period. This percentage was to rise up to 5 per cent in the last of five years (Rayner, Ingersent, & Hine, 1993, p. 1519). Least developed countries were not committed to any reductions. Tariff rate quotas intend to create a minimum of market access. A certain amount of imports are subject only to an in-quota tariff which is unbound a much lower than the MFN rate. Exceeding this quota, imports are only permitted at an out-of-quota rate which is much higher than the MFN rate (Jean, Laborde, & Martin, 2006, p. 82).
Domestic support in agriculture was quantified by an Aggregate Measure of Support (AMS). Thereby, a system of boxes was implemented. Domestic support measures were divided into a green box, an amber box and a blue box according to how trade distorting the measure was. “Green box” activities were exempt from reduction as they are considered minimally trade distorting, whilst the rest was subject to a uniform cut of 20 per cent and 13 per cent for developed and developing countries, respectively. This measure was to apply when the AMS exceeded the de minimis provision of 5 per cent or 10 per cent of total value of production for developed and developing countries, respectively (Ghazalian & Cardwell, 2010, pp. 333- 334). WTO members have had a ten year period to examine their domestic support guidelines and restructure their agricultural support to fit under the new provisions. The United States passed the farm bills of 1996 and 2002 and the EU brought to pass their reforms on their Common Agricultural Policy in the Agenda 2000 and 2003 (Beghin & Hart, 2006, p. 222). There is another new support concept that came up in the Uruguay Round, namely the overall trade-distorting support (OTDS), defined as the total AMS plus 10 per cent of the average total value of agricultural production in the 1995-2000 period, plus the higher of average blue box payments, or 5 per cent of the average total value of farm production in the same period. As the OTDS is capped and has a reduction commitment it was intended to function as a constraint on policymakers’ overall ability to support agriculture (Blandford, Gaasland, Garcia, & Vardal, 2010, p. 1473).
The Uruguay Round marked a shift in the history of international trade negotiations. The outcome of the agreement was that developed countries would give market access to developing countries for their export goods, in return developing countries made concessions in terms of intellectual property rights and trade-related investment measures. This round was perhaps the most ambitious set of trade negotiations ever (Stiglitz & Charlton, 2007, p. 45). However, due to the complexity of the URAA schemes and the subsequent implementation it is not clear if the URAA affected international trade flows (Ghazalian & Cardwell, 2010, p. 341). Stiglitz (2007) puts it more pessimistic. According to him, developing countries, especially LDC are the losers of the Uruguay Round, losing a total of US $600 million a year. As a reason he states that the modeled scenarios were not fully reflected in actual agreements and subsequent events after the Uruguay Round.
Moreover, several reforms which were supposed to bring large gains did not proceed as had been hoped in the negotiations. This is a good example that all the effort of seven years of negotiations can be in vain if state governments themselves don´t really want to proceed as agreed. It is believed that developed countries agreed only to liberalizations they had already implemented. Those countries continue supporting farmers because cuts in distortive measures were only achieved by a mixture of design and ruse (Oxfam, 2005, p. 17). What is missing is the willingness to act. But all this could be changed in the current Doha Round, also called the Doha Development Agenda (DDA). Bringing agriculture within the GATT can be regarded as a first important and major step to further liberalization in agriculture. That may be the cornerstone for future of negotiations in agriculture, whereby the GATT may play a more important role (Rayner et al., 1993, p. 1525). It is up to all participants to make international trade, particularly from the agricultural point of view, a bit fairer. Fairness or contribution-based distributive justice in world trade exists only if free enterprise and free market competitive forces are allowed to work their way to equilibrium (Zampetti, 2006, p. 38). That means any kinds of distortive measures have to be eliminated.
1 The Cairns Group is an interest group of 19 exporters of farm products such as Brazil, Argentina and Chile.
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