AGEC 429: AGRICULTURAL POLICY LECTURE 24: U.S. AGRICULTURAL TRADE POLICY

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1 AGEC 429: AGRICULTURAL POLICY LECTURE 24: U.S. AGRICULTURAL TRADE POLICY

2 AGEC 429 Lecture #24 U.S. AGRICULTURAL TRADE POLICY Free Trade: Long-time stated goal of U.S. agricultural policy - World trade in agricultural goods free of any government intervention. - In practice, U.S. favors free trade more in our export markets than in our import markets. - Why do you think that has been the case? Many groups within the U.S. oppose the policy of free trade. - Why is that the case? - What groups are likely to oppose free trade?» Groups that LOSE from free trade will tend to oppose opening markets to trade.» What groups tend to lose from trade? - What groups are likely to favor free trade?» Groups that GAIN from free trade will tend to favor opening markets to trade.» What groups tend to gain?

3 Who Gains and Loses from Free Trade? Producers in export markets gain - Free, open, growing global markets provide access to large consuming populations outside the country. - U.S. or foreign policies that restrict our exports reduce our production and producer profitability. Producers in import markets lose - Free trade means these producers must compete with imports which reduces their production and profitability Livestock & prod Grains & feeds Fruits & vegs Coffe & cooca Sugar Alcoholic beverages Other What about consumers? Do they benefit from free trade? - Answer: It depends! - Consumers in export markets lose while those in import markets gain

4 Globalization and Economic Integration World has become increasingly interdependent in recent years - Changes in markets in one country affect markets in other countries - Rapid improvements in transportation and communication technology, among other things. - The increasing economic interdependence among countries is called globalization. Globalization is forcing greater integration among countries - Creates challenge for U.S. policymakers in managing the type and extent of integration that the U.S. desires with other countries. - Trade policy used to manage the economic integration process. Three key types of integration occurring in world markets: (1) Economic systems integration (2) Market integration (3) Policy integration

5 Globalization and Integration Three Types of Integration Economic Systems Integration: The to commercial interaction among countries. - Forces closer coordination of economic systems among countries (economic and macroeconomic policies). - Continual economic systems integration eventually leads to adoption of same currencies and monetary systems, free movement of resources (capital and labor) across borders. Market Integration: The among countries. - Markets in trading countries behave as single market rather than as many separate markets. - Market integration occurs in commodity markets but also in financial and resource markets if there are no barriers to free flow of financial commodities or resources. Policy Integration: among countries - Market regulations and policies must be adjusted to keep commodities flowing freely among countries. - Without policy integration, market distortions will occur. - Inconsistent policies among trading countries generate pressures for change.

6 U.S. Agricultural Trade Policy Goals and Objectives General stated goals have been to promote free trade and economic integration between the U.S. and its trading partners. Four specific objectives of U.S. agricultural trade policy: (1) Expand market access for U.S. agricultural commodities. (2) Build markets for U.S. agricultural commodities. (3) Assist countries in their economic development. (4) Increase U.S. and world food security.

7 U.S. Trade Policy Goals and Objectives Objective #1: Expanding Market Access Overriding goal of U.S. agricultural trade policy Negotiating agreements to reduce trade barriers with trading partners - Primary means of gaining greater access to foreign markets for U.S. agricultural and food commodities Three types of negotiation strategies - trade negotiations to establish free trade agreements between two countries to reduce trade barriers (examples: U.S.- Israel, U.S.- Chile, U.S.- Canada) - trade negotiations to establish free trade agreement among countries in a geographic region to reduce trade barriers examples: NAFTA, MERCOSUR, European Union) - trade negotiations to establish free trade agreements among a large number of countries across geographic regions to reduce trade barriers (Example: WTO)

8 U.S. Trade Policy Goals and Objectives Many rounds of multilateral trade negotiations have occurred: 1947 Geneva Dillon Round 1949 Annecy Kennedy Round Torquay Tokyo Round Geneva Uruguay Round The Round (signed in 1994) - Most important round for agriculture. - First time that reductions in agricultural trade barriers were negotiated. - Negotiations lasted 8 years ( ) - Signed by 111 countries with others signing later Agriculture Played Central Role in Negotiations - Completely new operational rules for agriculture agreed upon. - Three major areas (pillars) of negotiation and agreement: 1. Market Access 2. Export Competition 3. Domestic Subsidies

9 U.S. Trade Policy Goals and Objectives Summary of Uruguay Round Results Pillars of Negotiation Market Access Rules change non-tariff trade measures (like quotas) to tariffs ( tarrification ) bind all tariffs (no increases allowed) Liberalization reduce existing and new tariffs by 36% on ave. over 6 yrs reduce tariffs for each item by 15% = Need to know for exam Safeguards, Accommodations and Guarantees guaranteed access opportunities for exporters through tariff-rate quotas special safeguard measures for importers Export Competition Trade distorting include coupled policies Domestic Subsidies Non-trade distorting include decoupled policies defined limits on existing export subsidies no new export subsidies defined tradedistorting and nontrade-distorting policies reduce expenditures by 36% over 6 years reduce volume by 21% over 6 years aggregate level of trade-distorting support reduced by 20% over 6 years adherence to food aid rules negotiate later on export credits many developing countries subsidies exempted payments under production limiting programs exempted

10 New Round of Trade Negotiations: Doha Development Agenda New WTO negotiations on agriculture began in early Negotiators met in Doha, Qatar to begin consideration of negotiating proposals submitted by 121 governments - Attempt to make additional progress in the three pillar areas of negotiation A lot of negotiating for 17 years but little progress: - Negotiations were to conclude by January 2005 but still ongoing - Negotiations suspended several times (April 2006, July 2008, Oct 2011) Where to now in WTO negotiations? - Main persistent differences include tariff reduction plans and domestic subsidies. - According to WTO, countries are still a long way from where we should be th ministerial meeting in Nairobi, Kenya (December 2015) agreed on the Nairobi Package to: (1) abolish export subsidies and (2) allow government stock holding for food security purposes. - Debate on public stockholding continues - 11th Ministerial Conference in Buenos Aires in December 2017 Will countries ever reach a final agreement? - After 17 years of negotiating, many countries giving up hope and looking to regional trade agreements (RTAs) like NAFTA, MERCOSUR, the Transatlantic Trade and Investment Partnership (TTIP), Trans-Pacific Partnership (TPP), and many others.

11 U.S. Trade Policy Goals and Objectives Objective #2: Building Markets for U.S. Agricultural Commodities USDA Foreign Agricultural Service (FAS) administers three major programs to help build foreign markets: (1) Market Development and Promotion Programs (2) Foreign Market Information Program (3) Export Credit and Enhancement Programs FAS Program #1: Market Development and Promotion Programs - Federal funds combined with producer check-off funds (voluntary or mandatory producer contributions) to fund activities in foreign countries. - Extensive overseas programs to persuade foreign consumers to prefer and buy U.S.- produced agricultural food products. - Commodity groups include beef, pork, corn, soybeans, cotton, and others like blueberries, potatoes, citrus, dates, and many more

12 U.S. Trade Policy Goals and Objectives Objective #2: Building Markets for U.S. Agricultural Commodities (cont d) FAS Program #2: Foreign Market Information Programs - FAS has a world-wide market information program. - Agricultural counselors and attachés located in American embassies identify potential U.S. agricultural. m - They also gather intelligence on foreign agricultural markets to provide timely information on markets like where droughts are occurring, prices in foreign markets, technology used abroad, etc.) to help U.S. agriculture sector to effectively compete in world markets and help inform U.S. regulatory and policymaking officials. - Bad or old information can lead to producer market decisions or U.S. policies that are inconsistent with the realities of world markets. - Example: disease outbreak in some region of the world should lead to quick policy response to restrict food imports from that region.

13 U.S. Trade Policy Goals and Objectives Objective #2: Building Markets for U.S. Agricultural Commodities (cont d) FAS Program #3: Export Credit and Enhancement Programs - Administered by FAS - Programs offer purchasing credit or other inducements to generate additional sales of U.S. agricultural commodities. - Two main programs: (1) Export Credit Guarantee Program USDA guarantees loans so that private U.S. financial institutions will extend financing to buyers in emerging markets that want to purchase U.S. agricultural exports. The 2008 farm bill made changes to export credit programs to conform to U.S. commitments in the World Trade Organization (WTO). (2) Export Subsidy Programs Step 2 cotton program (export subsidy) - provided subsidy to foreign cotton buyers but was challenged by Brazil as illegal under the WTO agreement. U.S. lost the case and the step 2 program was terminated in August Dairy Export Incentive Program (DEIP) - uses either dairy products or cash to subsidize exports of manufactured dairy products.

14 U.S. Trade Policy Goals and Objectives Objective #3: Assisting Countries in Their Economic Development Efforts Key objective in U.S. efforts to build markets for U.S. goods. (Why?) Agriculture is typically the starting point for U.S. economic assistance to developing countries. (Why?) - Agricultural development activities help poor people feed themselves. - As agriculture sectors become more productive, labor can then be transferred out of agriculture and employed in other economic activities, making the economy less dependent on agriculture. - U.S. economic development followed this process. Also, Japan, South Korea, Taiwan and other formerly underdeveloped countries - Development brings increases in incomes and standards of living. Increased income leads to. U.S. is major food exporting country so foreign economic development leads to increased foreign demand for food and.

15 U.S. Trade Policy Goals and Objectives Objective #3: Assisting Countries in Their Economic Development Efforts (cont d) Four General Categories of Economic Development Assistance: (1) - helping developing countries build governmental and private institutions to support and administer an efficient agriculture and food system such as ministries of agriculture, land and property rights management, universities, extension services, producer marketing cooperatives, and much more. (2) - building transportation, energy, irrigation systems, storage facilities, etc. essential to the efficient functioning of agricultural markets and too expensive for developing countries alone to finance. (3) providing services of experts from developed countries to assist in institution building and infrastructure development. (4) - research by U.S. and international agencies to find practical solutions to problems facing the agricultural sectors of developing countries. (Example: International Maize and Wheat Improvement Center (CIMMYT) in Mexico.)

16 U.S. Trade Policy Goals and Objectives Objective #4: Increasing U.S. and World Food Security Three Dimensions of U.S. Efforts to Improve World Food Security: (1) - establishing policies to ensure the safety and integrity of the U.S. and world food supply such as meat plant inspection systems, regulation and use of pesticides and other chemicals in food production, regulation of food additives, policies to limit importation of contaminated or diseased foods, etc. (2) - food aid and foreign assistance programs to move food from surplus areas of the world (U.S.) to food deficit areas and to help foreign producers learn how to be more productive. (3) - programs to enhance access of poor to food, such as food stamp program, the Women, Infant, and Children (WIC) program, and the school lunch program. Food Security Problems Most Prevalent in and Parts of and. - U.S. is world s largest supplier of food aid, though PL480 (Food for Peace) program. - Free trade policy considered to enhance global food security by allowing for greater food production, lower food prices for food, and greater access to food by lowerincome consumers.

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18 What About Trade Policies Related to Imports? Free trade in import markets leads to increased imports of food which reduces U.S. agricultural production. Policies - Trade policies to limit imports (eg.: tariffs on Mexican tomato imports) - Polices for domestic purposes that limit imports (e.g.: COOL) - Trade Remedy Laws (TRLs) intended to provide temporary safeguards against injurious imports established in Trade Act of 1974 and in U.S. Farm Bills. Two Most Prominent (Trade Act of 1974): - - provides temporary protection against imports to facilitate adjustments to a loss of international competitiveness. To justify need for temporary protection, only serious injury or the threat of serious injury must be demonstrated by the industry. President empowered to impose a tariff (called Countervailing Duty or CVD) to provide protection against imports. - - prohibits unfair trade practices which most commonly is dumping. Dumping is when one country sells its goods in another country at a price below the cost of production. CVDs or other regulatory measures can be imposed.