The Implications of the Multilateral Trade Negotiations & WTO Rulings on US Agricultural Policy:WTO Agreement (?) & Impacts on US Farm Policy
Larry D. SandersJuly 2006
2
Farm Bill Pressures and Dynamics
Twin Deficits Trade Deficit Federal Budget Deficit
Trade Situation & Policy Political Economy
Domestic International
3
Trade & Trade Deficit:US Trade Balance, 1990-2006($ million)
-900000
-800000
-700000
-600000
-500000
-400000
-300000
-200000
-100000
0
Trade Balance
NOTE:
1991: $31.1 b.
2005: -$725.8 b.
(China: 28%)
2006(projected): -830 b.
1991: -$31 bil.
10/05: $68 bil.
4
US Agricultural Trade Balance ($mil/FY; agricultural product only)*
0
10000
20000
30000
40000
50000
60000
70000
91 92 93 94 95 96 97 98 99 0 1 2 3 4 520
06f
IMPORTS EXPORTS
WTO
NAFTA
*NOTE: If fish & forest product added to ag, trade balance would be -$21.1 b.for fy05.
$64.5 b.
$63.5 b
5
U.S. BUDGET PROJECTIONS,2005-2016 (Deficit or Surplus, $ bil.)
-700
-600
-500
-400
-300
-200
-100
0
100
2005 2007 2009 2011 2013 2015
CBO-status quo
CBO-realistic
Sources: CBO budget baseline, March 2006, and CBO study requested by Rep. Spratt (D, SC)Note: fy05 is actual data; Total, 2007-2016: -$832 billion
6
Expected Additions to Deficit Omitted Items, $ BillionFiscal Year 2007 2007-16
Further Cost of Iraq, Afghan Wars -71 -563
AMT Repair -42 -865
Additional Debt Service -2 -506
Katrina -15 -450
Making Tax Cuts Permanent -18 -2,011
Resulting added Deficit -355 -3,637
7
Agricultural Producer Support By Country
1986-88 and 2001-03
-Percent of Total Farm Receipts from Government-
Source: OECD's database (see www.oecd.org)
12%
33%26%
40%
62%
71%
2%
20% 20%
39%
60% 65%
New Zealand Canada United States EU Japan Korea
0%
20%
40%
60%
80% 1986-1988
2001-2003
8
Trade Distorting Domestic Support
The ‘Big 3’ (US, EU, Japan) expected to take the largest cuts
Reductions in Total Allowable Support Market Price Supports Non-Exempt Direct Support Other: De Minimis, Crop Insurance, Market
Loss Payments
9
Total Allowable Trade Distorting Domestic Support, ‘The Big 3’, 2002
WTO, Trade Policy Review and calculations.
$128
$49 $48
European Union United States Japan$0
$20
$40
$60
$80
$100
$120
$140
Billion $
Includes Amber + Blue Boxes, Product Specific & Non-product Specific De Minimis Each Based on 5% of Total Value of Agricultural Production
10
Trade Distorting Domestic Support Reductions (Doha Work Program)
Year 1 Down Payment: 20% Reduction in Total Allowable TDDS
Subsequent Reductions May Be 40-50% Over a Specified Time Period (t.b.n.)
Likely Some Spending Caps on Boxes $7.6 billion for Amber Box? $23.1 billion for Blue Box?
11
Total Trade Distorting Domestic Support Remaining After Year 1 Down Payment (calculated)
$100.2
$39.2 $38.4
European Union United States Japan$0.0
$20.0
$40.0
$60.0
$80.0
$100.0
$120.0
Billion $
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The Proposed Modified BoxesAmber New Blue Green
Payments coupled to production & prices
Payments decoupled from production but coupled to prices
Payments decoupled from production and prices
Policies that are trade distorting & targeted for reductions under the URA (price supports, marketing loans, payments based on ac or # of livestock, input subsidies, etc.)
Policies that are trade distorting but exempt from reductions under URA, including direct payments linked to certain production-limiting policies (US counter-cyclical payments, crop deficiency payments, EC compensatory payments, etc.)
Policies that are non-trade distorting & are acceptable under URA, including tax-payer-funded and non-trans-fers from consumers (research, extension, pest/disease control, crop insurance, marketing/ promotion, natural disaster relief, conservation programs, public stockholding, decoupled income support, income safety nets, etc.)
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Trade Distorting Domestic Support Reductions (DWP continued)
Amber Box: Reduced & Capped Product Specific Caps
Blue Box: Capped at 5% of Production Over a Period To Be Negotiated Flexibility for Countries w/Large Support
Green Box: Criteria Reviewed & Clarified Minimal Distortions, Environment, Rural
Economic Development De Minimis: Reduced by Amount t.b.n.
Current: 5%; US proposal 2.5%
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Total Trade Distorting Domestic SupportAssuming 50 Percent Reduction
Calculated
$50.1
$19.6 $19.2
European Union United States Japan$0.0
$10.0
$20.0
$30.0
$40.0
$50.0
$60.0 -Billion Dollars-
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Recent Economic Analysis(see References)
Generally conclude gains from reform unevenly distributed Benefits few competitive exporters (Australia,
NZ, Brazil, Argentina, Thailand) Benefits consumers in developed countries
that liberalize trade (EFTA, Korea, Taiwan, somewhat EU)
Most important benefit: benefits of further market opportunities in services & trade facilitation (reduced trade costs) World income gains 25% from agriculture,
32% from industrial products, 43% from services
Benefits to poorest limited
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The Next Farm Bill: 2007? 2008? 2011?
Current farm bill: 6-year act (2002-2007) Debate for the “next” farm bill already
engaged Rewrite of FSRIA02 began in 2005
Budget Reconciliation Appropriations Response to WTO Cotton case (Step 2 gone; change
export credit guarantee) New “enabling” legislation in 07-08-11?
2006 & 2008 election anxiety may encourage a 2007 farm bill
Doha Round complications suggest late 07, early 08 or 2011 WTO agreement and new farm bill
TPA expires Jul 07
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Evolutionary…not Revolutionary Change?Never do today what you can put off ‘til tomorrow. --Matthew Browne
Near term program changes marginal; likely more to come in 2007
But, WTO restrictions likely to coincide with writing of next farm bill; cuts may become dual purpose 20-50% cuts for WTO? $3-$20 billion in cuts for deficit reduction?
Production expenses (fuel, fertilizer, interest rates) will continue to rise faster than commodity prices
Budget deficit/debt solution choices Increase taxes Cut spending Grow economy Do nothing
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Politics: Political Triangle of Ag & Trade Policy
JUDICIAL
EXECUTIVE
LEGISLATIVE
INTERESTGROUPS
•New committees•Turf battles•Reconciliation•TPA in ’07?•2006, 2008 •Bush Doctrine
•Bush Budget•USDA•Trade talks•2008
•Ag groups one voice?•Non-ag groups•Competitors•Revolving door
WTO
•Doha Agreement?•Dispute settlement•Bilateral alternatives
•COOL
19
Net Farm Income & Direct Government Payments
01020
30405060
708090
net farm income
govt payments
NFI-G
1996 Farm Act$ Billion
*Projected
2002 Farm Act
71.5
22.7
48.8
20
Net Farm Income & Direct Government Payments: Assume 20%-50% cut in Govt Payments 1996-2005
01020
30405060
708090
net farm income
adj NFI (20% cut in G)
adj NFI (50% cut in G)
1996 Farm Act$ Billion 2002 Farm Act
20%: 2-8% reduction in NFI
50%: 5-20% reduction in NFI
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Medicaid, Medicare Social Security
U.S. Budget Outlays by Program, FY 2004
19%
63%
5%
7%
1% 5%
Defense
Human Resources
Physical Resources
Net Interest
Agriculture
Other
Physical Resources includes: transportation, community and regional development, etc.Source: Budget of the U.S. Government, www.whitehouse.gov/omb/budget/fy2006/pdf/hist.pdf
Medicaid, Medicare Social Security
22
Farm Bill Program Spending by Title
18%
5%
1%
71%
5%
Commodities
Conservation
Trade
Food Programs
Miscell. (Sec 32 & FCIC)
Based on CBO March 2002 Baseline.
Total $248.6 Billion, 2002-07
*$782 Billion 2002-11
Food Stamps, Nutrition,Women, Infants,& Children
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CCC Net Outlays—2006E:$21.7 billion:How to cut a smaller pie & have more pieces?
Feed Grains(43.2% )Wheat (14.3% )
Cotton (16.6% )
Other (8.5% )
Expenses (2.8% )
Conservation(14.5% )
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Summary
Twin deficits of trade & Federal budget will overshadow what happens in Washington
Politics will affect ag policy reform and trade policy reform
Coincidence of issues could cause “do nothing” (status quo) to be most likely outcome, but specter of dispute settlement will likely disrupt status quo
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Summary (continued)
Reform will have mixed impacts Employment adjustment, Lower land prices, Lower
land rents for tenant farmers, DCs/LDCs gain relatively more (especially if tariffs cut), ag/food corps. gain relatively more than producers
The ‘Big Three’ will need to make major reductions in trade distorting domestic support, resulting in benefits to taxpayers and consumers
Possibly large potential gains to producers in Developed Countries
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Conclusions
Agricultural Reform is at a Critical Crossroads Progress or Protectionism?
TDDS* critical to reform Without a Joint Effort by the ‘Big 3’ to Encourage
Reform & Lead by Example, Failure is Almost Certain WTO failure will likely mean:
less pressure on Federal agricultural policy reform & Federal spending
Continuing trade deficits Continuing WTO dispute settlement challenges to
US ag support
*Trade Distorting Domestic Support
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APPENDIX
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Unilateral Reform Initiatives
EU: Reduce CAP Funding to Allow Expansion US: President’s Budget Cuts Ag. Spending 5%,
Congressional Cuts Focus on CRP & Food Program Japan: Redirect Spending to More Productive Farms
Direct Payment Scheme, Moving from Price Support to Income Support
Grains, Oilseeds, Dairy, Fruits/Vegetables May Be Covered Reduce Import Tariffs Promote Environmental Quality & Biomass Promote Healthy Diets by Growing Healthy Farm Products Increase Exports Reduce the Amount of Idle Farmland Increase Food Self-sufficiency to 45% by 2015
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Proposed Amber/AMS Reductions (%)
Tier US EU G-20
Proposed1.EU 83 70 80
2.Japan & US 60 60 70
3.Other countries 37 50 60
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Terms De minimis provision:
The total AMS includes a specific commodity support only if it equals more than 5% of its value of production, & non-commodity specific support only if it exceeds 5% of total ag output. The de minimis rule excludes support from the AMS if it does not exceed the 5% threshold.
(USDA-FAS, May 2005)
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References
Anderson & Martin (World Bank)CEPII (French institute)Copenhagen EconomicsDee & Hanslow (Australian Productivity
Commission)IFPRI (Washington institute)Hertel & Keeney (Purdue)Polaski (Carnegie Institute)Swedish National Board of Trade
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Thank You! Questions? Larry D. Sanders Department of Agricultural Economics Oklahoma State University Stillwater, OK
74078 E-mail: [email protected] Phone: 405.744.9834