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Agricultural Economics. Lecture 7: International Influences. Agricultural Trade Issues and Policies Relationships Trade Issues Geopolitical Centers of Influence. International Policy. Live in a global economy where: Interdependence of policies Global Agriculture Markets - PowerPoint PPT Presentation

Text of Agricultural Economics

  • Agricultural EconomicsLecture 7: International Influences

  • Agricultural Trade Issues and PoliciesRelationshipsTrade IssuesGeopolitical Centers of Influence

  • International PolicyLive in a global economy where:Interdependence of policiesGlobal Agriculture MarketsFew commodities are isolated through barriers to trade (successful only in varying degrees)

  • Trade Policy does NOT exist in IsolationA component of Foreign PolicyIntertwined in Domestic/Economic PolicyIntertwined in Ag & Food Policy

  • Trade Policy IssuesFood DiplomacyIncreased Market AccessBuilding MarketsDeveloping Market EconomiesIncreasing Food SecurityProtectionist Policies

  • Market AccessWhy do we want market access?Why would we refuse others access?Access is gained by reducing barriers to tradeBilateral & Multilateral Trade AgreementsFree-trade AgreementsCustoms UnionsCommon policy toward non-membersCommon MarketsFree movement of factors of productionAlignment of major economic & agricultural policiesEconomic UnionsUnified social/economic policies

  • Building Foreign MarketsMarket IntelligenceExport Credit and EnhancementCash or Commodity SubsidiesCredit Guarantees

  • Building Market EconomiesTypically Mingled with Multiple Objectives for Developing EconomiesPartnerships with UN, World Bank, Voluntary OrganizationsInstitution BuildingTechnical AssistanceInfrastructure DevelopmentApplied Research

  • Food SecurityGlobal Food Availability

    Individual Food Security

    Food Safety

  • Protectionist PoliciesBarriers to TradeAll Domestic Farm PoliciesTrade Remedy LawsAnti-Dumping ProvisionsCountervailing Duty (Tariff)

  • Geopolitical Centers of InfluenceCountries or groups (blocs) of countries that have (or could have a major impact on agriculture and agribusinessSome individual countries are in this position now, have been, or will beMexicoCanadaJapanChinaRussiaSome are organized into blocsNAFTAEUMERCOSUR/FTAACairns groupAPEC

  • Geopolitical Centers of InfluenceThen there are the developing countriesLargely ignored up to nowWant preferred access to developed country marketsThere are interest groups outside the countries and blocs that try to influence the world agendaGreenpeaceUN/FAO

  • NAFTA (North American Free Trade Agreement)3 Separate AgreementsCanada US Trade Agreement (CUSTA) effective in 1989Canada Mexico Trade Agreement effective in 1994US Mexico Trade Agreement effective in 1994

  • NAFTA TradeU.S Absolute (Comparative) AdvantagesCorn, Soybeans, (Poultry, Fed beef, Hogs)

    Canada Absolute (Comparative) Advantage(Wheat, Oats, Barley, Canola, Flax, Fed Beef)

    Mexico Absolute (Comparative) AdvantageVegetables, (sugar)

  • NAFTA IssuesCountries maintain separate domestic farm policiesU.S. Price/Income Support to Farmers, Conservation

    Canada State Trading (CWB), Production Controls, Conservation, NISA

    Mexico -- Direct Support, Price Supports

    Dispute Settlement, 5 member panel of judges

  • MERCOSURArgentina, Brazil, Paraguay, and UruguayEstablished in 1991Competitive in Corn, Soybean, Beef, and Orange Juice ProductionU.S. has lost some beef markets because of the freer trade within MERCOSURStrong Advocate for Eliminating SubsidiesOpportunitiesExpand to include Bolivia, Chile, Peru, Ecuador, Colombia, VenezuelaPotentially a part of FTAAProblemsPolitical and Economic Instability

  • Cairns GroupEstablished in 1986 in Cairns, Australia18 southern hemisphere countriesMajor members include Australia, New Zealand, Brazil, Argentina, Chili, Thailand, CanadaAll export dependentWheat, rice, coffee, beef, dairy, soybeansAg policiesWorks largely through WTOSeeks removal of barriers to tradeSeeks elimination of ag subsidies (Critics of U.S. and EU)Members not free of ag policies that impede trade

  • APECAsian Pacific Economic Cooperation, 21 countries that border Pacific OceanHighly diverse membership including: U.S., Japan, China, Russia, Mexico, Chile, Australia, New Zealand, Vietnam, ThailandAccounts for 60% of World GDP

    Accounts for 60% of U.S. ag exportsAccounts for 50% U.S. of imports

    ObjectivesFree trade among developed country members by 2010Free trade throughout by 2020

  • Japan125 M peopleAg40% self-sufficient on food needsIncome increases encourages dietary changeAg PolicyConversion from rice to F&VControl dietary change through Japan Food Agency purchases in international market.3rd largest US customer but Australia and New Zealand has location advantage.Strong Protectionist Stance

  • China1.3 Billion peopleAgEssentially self-sufficient Undergoing substantial dietary changeAg PolicyState dominatedTransition to market economyEntry into WTO

  • Russia145 M peopleAgGrain, sugar beets, rapeseed/canola, beef, milkNet importer (major market for U.S. meat)Ag PolicySlow conversion to market economyPrivatization of landState control of imports

  • Developing Countries67 Countries (40% of world population) Low-Income (< $2000 per capita)Net-Importers (dependent on food aid)Mostly trade with developed countriesPolicies Center Around Increased IncomeExpansion of ExportsDifficult to establish export marketsReluctant to allow imports

  • EU Common Agricultural Policy (CAP)EU History1957 Treaty of Rome formed European Economic CommunityCustoms Union: No internal barrier to trade among members; common external tariff; Free movement of labor and capital1992 Maastricht Treaty formed European Union to establish common currency1999 European Monetary Union (Adoption of the Euro)

  • EU Common Agricultural Policy (CAP) cont.25 MembersOriginal Treaty of Rome Included:FranceGermanyItalyBelgiumNetherlandsLuxembourg

  • EU Common Agricultural Policy (CAP) cont.GovernanceCouncil of the European UnionDecision body with heads of state for each country (like Senate)European ParliamentLegislature body with 626 members appointed by population (like House)European CommissionExecutive branch implements policyCommission on Agriculture manages CAPCourt of JusticeDispute settlement body

  • EU Value of Ag Production and Processing ($B)

  • Dimensions of the EUs Common Agricultural PolicyPrice SupportsIntervention price (EU purchase for storage)Direct PaymentsRelated to historical yield and current acresPayment per head for livestockProduction ControlsSet aside percent of croplandMarketing/production quotas in dairyExport subsidy to prevent stocks in storage from becoming excessive

  • Dimensions of the EUs Common Agricultural PolicyMultifunctional PaymentsNoncommodity outputs that are jointly produced by agricultureCountryside benefits of farmingNotion that agriculture can become too intensive and farmers need to be compensated for making it less intensiveOrganic FarmingSanitary & Phytosanitary StandardsImport restrictions on hormone treated beefImport restrictions on GMOs

  • Why Expand?EUPolitical influence

    Security

    Globalization

    Trade

  • Common Elements in CAP Reforms and Policy Change in Turkish Agriculturea) Basic reasons;External: WTO Reform ProcessInternal : Efficiency, Taxpayer and Consumer Concernsb) Overall Sectoral Change;Market Orientation,Higher Competitivenessc) New Objectives; food safety, environment, rural developmentd) Procedural; Registration and Control Mechanisms

  • AGRICULTURAL PAYMENTS UNDER THE BUDGET Agricultural payments covered under National Fiscal Budget are; Payments for General Services Operating Expenses Investments (related with annual investment program) and Agricultural Support Payments Agricultural payments, which are explained in detail in thepresentation for State Aids, are dispersed between the budgets of threedifferent institutions: Ministry of Agriculture and Rural Affairs (MARA) Ministry of Environment and Forestry (MEF) Undersecretariat of Treasury (Treasury) Main agricultural supports are placed under MARA and Treasury

  • Trade IssuesBenefits of Trade:More efficient use of resourcesReduce world hunger

    Problems:Interdependence among nations

  • Barriers to TradeTariffs: Tax on importsTRQ: Tariff varies in increments with quantity importedTariffs preferred because transparentSubsidiesExport subsidiesDomestic production/price subsidiesNontariff tariff trade barriersRestrictions on imports other than tariffsQuotasEmbargosSanitary and phytosanitaryTechnical barriers (definitional)

  • Origins of WTOGeneral Agreement on Tariffs and Trade (GATT)Established in 1947 as a forum to reduce trade barriersWTO replaced GATT in 1995 as legal and institutional foundation of multilateral trade relationsDesigned to strengthen the trade rules by providing a stronger set of institutions for resolving disputes and enforcing agreementsNegotiations take place in roundsThere have been 9 to dateBegins with an agreement among members on agendaMost recent completed round was Uruguay RoundCurrently on Doha Round

  • Three Basic PrinciplesOnce a tariff concession is agreed to, it cannot be raisedMFN, any advantage given to one country must be given to allImported goods treated the same as domestic goods in terms of regulation and taxes

  • Three Pillars of URAA (Uruguay Round Agreement on Agriculture)Market access: Convert import quotas to tariff or TRQ and reduce over timeDomestic support: Reduce domestic support by 20% from 1986-89 levelAMS = Aggregate measure of support = total of red and amber box (trade distorting subsidies)Limits on value and volume of export subsidies from 1986-89 level

  • Loop Holes in URAAPrecautionary principle: WTO requires that S&PS decisions be based on science. This principle allows restrictions when scientific evidence is deemed to be insufficient. Requires seeking evidence over reasonable time period.

    Safeguards permit imposition of higher tariffs if there is a surge in imports above specified levels

    Multi functionality: Green box justification for subsidies based on contributions to the environment

    Programs are classified by box by the reporting country, but is subject to challenge by WTO or a complaining country

  • 4 Pillars of Doha Round(Reflects broader US goals in trade policy)Market access: Substantially reduce tariffs and increase quantities in TRQsExport competition: Eliminate export subsidies, variable export taxes, and exclusive import rights by state trading importersDomestic support: Substantially reduce amber box subsidies and simplify into exempt and nonexemptDeveloping countries: Enhance input into WTO and their benefits from international trading

  • Boxes of WTOGreen box: Not trade distorting

    Blue box: Minimally distorting because production is controlled

    Amber box: Trade distorting, subsidies tied to price and/or production

    Red Box: Subsidies that must be stopped (empty box)

  • Amber Box Limits for U.S. and E.U.

  • WTO ClassificationThese classifications are based on recent US notifications to the WTOThe fixed payments and conservation programs have been classified as green boxDirect payments on a fixed payment base are considered as income supportConservation program payments are considered exempt as long as the payments do not exceed the actual cost of conservation efforts or the opportunity cost from idling land or producing under conservation production practices

  • WTO ClassificationThe marketing loan benefits, dairy programs, and sugar price support have been classified as commodity-specific amber box.All of these programs require production of the commodity to receive a payment and the size of the payment is contingent on the amount of production.Price support programs (such as dairy) are also placed here. Even though no payments flow out because of the program, the amount of price protection is charged against the WTO limit (calculated as the product of production eligible for price support and the price gap between the price support level and a reference price).

  • WTO ClassificationThe countercyclical and crop insurance programs have been classified as non-commodity-specific amber box.The countercyclical program falls into the amber box because payments depend on current prices and into the non-commodity-specific box because production is not required to receive payments.Crop insurance has been placed here and reported in aggregate (net indemnities across all crops). Given the nature of crop insurance, it probably should be classified as commodity-specific. Insurance at or under 70% coverage could be reported as green box, while higher coverage could be reported as commodity-specific amber.

  • De Minimis RuleThe de minimis rule exempts small domestic support paymentsWhether payments are small or not is defined by the product covered by the paymentFor the U.S., a five percent rule is applied for de minimisFor commodity-specific support, payments are compared to 5% of the value of production for the commodityFor non-commodity-specific support, payments are compared to 5% of the total value of U.S. agricultural production

  • Why Classification MattersThe classification of the new countercyclical program in the non-commodity-specific amber box helps the U.S. in meeting the domestic support limitsExpenditures from programs in the non-commodity-specific category are compared against the value of all agricultural production in the country (as opposed to crop value for commodity-specific programs)Given U.S. agricultural production values of $200 billion, the non-commodity-specific amber box can hold up to $10 billion in support before reaching the de minimis mark and counting against the domestic support limit

  • Where We Are in Doha Round?Most recent Ministerial in Cancun failedOpen rift between developed and developing countriesMeetings came to abrupt end in Sept 03 when four African countries submitted a proposal to eliminate the U.S. cotton programG-22 (coalition of 22 developing countries) unwilling to open their markets in returnPeace clause expired in Dec. 2003Cant challenge other members export and domestic subsidies on agriculture

  • Trade Tools

    Import Quota

    Import Tariff

    Export Subsidy

  • An Import Quota by Importing CountryQ/yrExporting Country Trade Importing Country $SSExcessSupplyDDExcessDemandWorld PriceQuota

    Quantity Traded is reduced

  • An Import Quota by Importing CountryQ/yrExporting Country Trade Importing Country $SSExcessSupplyDDExcessDemandWorld PriceQuota

    Quantity Traded is reduced

    Price in the Importing Country is raised

  • An Import Quota by Importing CountryQ/yrExporting Country Trade Importing Country $SSExcessSupplyDDExcessDemandWorld PriceQuota

    Quantity Traded is reduced

    Price in the Importing Country is raised

    Price in the Exporting Country is reduced

  • A Tariff by Importing CountryQ/yrExporting Country Trade Importing Country $SSExcessSupplyDDExcessDemandWorld PriceExcess Supply is raised by the amount of the tariff

  • A Tariff by Importing CountryQ/yrExporting Country Trade Importing Country $SSExcessSupplyDDExcessDemandWorld PriceExcess Supply is raised by the amount of the tariff

    Quantity Traded is reduced

  • A Tariff by Importing CountryQ/yrExporting Country Trade Importing Country $SSExcessSupplyDDExcessDemandWorld PriceExcess Supply is raised by the amount of the tariff

    Quantity Traded is reduced

    Price in the Importing Country is raised

    Price in the Exporting Country is reduced

  • An Export Subsidy by the Exporting CountryQ/yrExporting Country Trade Importing Country $SSExcessSupplyDDExcessDemandWorld PriceExcess Demand is increased by the subsidy

    Quantity Traded is increased

  • An Export Subsidy by the Exporting CountryQ/yrExporting Country Trade Importing Country $SSExcessSupplyDDExcessDemandWorld PriceExcess Demand is increased by the subsidy

    Quantity Traded is increased

    Price in the Importing Country is reduced

  • An Export Subsidy by the Exporting CountryQ/yrExporting Country Trade Importing Country $SSExcessSupplyDDExcessDemandWorld PriceExcess Demand is increased by the subsidy

    Quantity Traded is increased

    Price in the Importing Country is reduced

    Price in the Exporting Country is raised

  • What does it mean when currency exchange rates rise & fall.What happens to Excess SupplyExcess DemandQuantity TradedImpact of Exchange Rates

  • Can you draw each of the three trade tools?Then IdentifyNew Price in each countryNew Quantity tradedNew Quantity supplied and demanded in exporting countryNew Quantity supplied and demanded in importing countryCan you explain the impact of exchange rates?Wrap up