Global trade and protection regimes in rice trade

Transcription

1 Global trade and protection regimes in rice trade Draft Report Eric J. Wailes University of Arkansas September 2003 Executive Summary Rice accounts for more than 20 percent of global calories consumed. This percent is even higher for low income and food deficit developing countries. A relatively small share of global rice production is traded compared to other major grains and oilseeds. The low percent of rice traded is a result of highly protectionist policies found throughout the world, but particularly in Asia. Protectionist policies are the result of national policy objectives of food security, support for domestic producers, and price stability. Over 90 percent of rice production and consumption occurs in Asia. Three countries China, India, and Indonesia account for nearly two-thirds of global output. Much of the Asian rice production is subject to monsoon climates, resulting in uncertain rice yields and rice supplies. Global rice trade is highly segmented by rice type (long and medium), degree of processing (milled, brown, and paddy) and quality (generally pertaining to the percent of broken kernels). As a staple food, the demand for rice is not responsive to price and income changes. The combination of a high degree of protection, geographic concentration, market segmentation, and inelastic demand response to price and income results in volatile rice prices and volumes traded. Distortions in rice trade occur throughout the world. The highest levels of protection are found in the high-income nations of Northeast Asia including Japan, South Korea, and Taiwan. State trading enterprises are used widely in rice trade most notably by China, Indonesia, India, Japan, South Korea, Vietnam and Australia. Thailand is a clear exception as rice trade is managed by a very competitive group of export companies. Domestic policy distortions exist in a number of major rice trading nations including the United States, the European Union, and Japan. In the case of the US and the EU, domestic supports result in implicit or direct export subsidies. In Japan, the government s commitment to support rice prices is based upon an 1

2 aggressive rice land diversion program and a tightly managed tariff rate quota (TRQ). Tariff escalation occurs in many nations who desire to protect their rice milling sectors. Tariffs are generally higher on processed (milled) rice, which distort rice trade and milling activities. Central American nations are particularly inclined to this approach to rice trade policy. Policy reforms to eliminate protection in the global rice economy are estimated to result in an increase of economic welfare of over USD 7.4 billion per year. Most of these gains can be achieved through the elimination of tariffs on imports. Consumers in importing countries gain USD 32.8 billion while producers in importing countries lose USD 27.2 billion. Importing country governments lose USD 2.9 billion tariff revenue but gain USD 2.7 billion by eliminating domestic supports. The net welfare gain to rice importing countries is estimated to be USD 5.4 billion. Producers in exporting countries gain USD 70.2 billion while consumers in exporting nations lose USD 68.8 billion. Imports by the exporting countries result in a loss of tariff revenue of USD 5.3 million and elimination of domestic supports saves USD 598 million. The net welfare gain in importing countries is USD 2 billion. Rice trade is estimated to increase by 10 to 15 percent. Prices received by exporters would be expected to be higher by 25 to 35 percent. Prices paid by importers would be expected to decline by 10 to 40 percent depending upon the type of rice. Rice trade despite the expansion would remain relatively thin. Complete policy reform, would result in an increase from 6.5 percent of consumption to 8.4 percent by Thus, one of the major sources of world rice price instability is likely to remain after liberalization. The implications for lower income, net importing countries who become more reliant upon world rice trade are not attractive. Political and food security is likely to be reduced. Medium grain rice is the most protected rice type. Consequently, policy reform would have its biggest impact on the countries that export and import medium grain rice. Japan is estimated to capture nearly 70 percent of the global economic welfare gains. Other developed countries such as the United States, Australia and the European Union who export medium grain rice would also be significant beneficiaries of trade policy reform. Ironically, countries that have little or no degree of protection are likely to be harmed from policy reforms. This result is due to the large country impacts that countries like Japan increased imports would have, increasing the demand for medium grain rice and thereby increasing world prices especially for medium grain rice. Countries, such as Turkey and Russia, which have imported medium grain rice with moderate levels or no protection, would experience higher prices 2

3 as a result of the increased volume of medium grain imports by Japan, South Korea, and Taiwan. Benefits of removing moderate levels of tariff protection as in the case of Turkey are swamped by the price effect of free and expanded trade in medium grain. The impacts of domestic policy reforms in the United States and the EU are estimated to reduce rice exports by less than 5 percent in the initial years and have no impact on trade in the longer term. Prices are estimated to be 5 to 10 percent higher initially but over the longer term the effect diminishes. Multilateral and regional trade policy reforms achieved over the past decade have contributed to an expansion in rice trade and more stable prices. The achievements of the Uruguay Round Agriculture Agreement (URAA) include the opening of the previously closed Japanese and South Korean markets. Limits placed on domestic support and export subsidies have yet to have a significant impact. Regional agreements such as NAFTA and MERCOSUR have increased western hemisphere rice trade. The prospects for the Doha Round of the WTO hinge to a great extent upon continuing the expansion of market access, reduction of tariffs and limits on export subsidies that will be effective. 1. Rice trade and domestic policy regimes 1.1 Introduction Rice is one of the most important food grains in the world, accounting for more than 20 percent of global calories consumed (Table 1). The share of calories is even higher for developing countries, 26.2 percent; for low-income countries, 29.2 percent; and for low-income food-deficit countries, 27.9 percent. Over the past five years, , global rice trade has accounted for only 6.5 percent of world consumption compared to wheat trade at 18.3 percent, corn at 11.9 percent, and soybeans at 34.5 percent (USDA, PS&D). The thinness of trade for rice is primarily a result of a variety of protectionist mechanisms based on national policy objectives in major rice producing and consuming countries to achieve desired domestic food security and producer prices and incomes. Jayne (1993) has argued that the link between domestic stabilization policies and instability in world rice prices has been exaggerated. His 3

4 study emphasizes thin and fragmented markets along with other factors as being major factors. Clearly however, domestic price stabilization policies have been achieved by restricting imports, thus contributing in a substantial way to the international market thinness. Therefore it is difficult to ignore the effect of domestic stabilization policies achieved through import and export restrictions as a significant cause of international rice price instability. In addition to the thinness of rice trade, another structural characteristic important for understanding the global rice market is the geographic concentration of production and consumption in Asia. Over 90 percent of production and consumption occurs in Asia and nearly two-thirds in just three countries China, India, and Indonesia. With as much as 40 percent of Asian rice cultivated under rain-fed systems, the monsoon weather effects are magnified on rice trade. Finally, there is substantial market segmentation by rice type and quality. One of the key structural dimensions is the degree of end-use differentiation in rice. Substitution among rice types and qualities is limited by differences in cooking and taste preferences. An important end-use characteristic is stickiness. This is a particularly important characteristic for the medium and short grain rice varieties. Long grain rice is typically non-sticky, and cooks to greater grain separation. Low substitutability for rice exists both on the demand (mill and end-use) and supply sides. On the demand side, the closest substitute is wheat, particularly important in south Asia (Pakistan and India). In many Asian nations, rice as a staple food has become an inferior good with 4

5 respect to income and is being substituted out of the diets by meats, fruits and vegetables. Different rice varieties require different climatic conditions and production and milling technologies. This limits the ability of producers to respond to price incentives as a guideline in selecting which type of rice to produce. Production of rice generally benefits greatly from access to plentiful supplies of surface or ground water and soils with poor drainage that can maintain a flood condition. These biotic and abiotic characteristics limit the rice production area but these conditions also limit the production of other crops that cannot withstand flood conditions. As the first major food crop to have its genomic structure fully described, rice genomics and biotechnology is progressing rapidly (Khush and Brar). A droughttolerant gene, for example, has been identified and varieties with this expression are in development. Development of rice varieties that will be much less dependent on water will have the potential to greatly expand production areas suitable for cultivation, changing costs of production and geographic areas of comparative advantage and disadvantage. Nevertheless, the current combination of high levels of domestic protection, geographic concentration and erratic weather, inelastic price responses in production and end-use markets, and relatively thinly traded volumes results in relatively volatile rice prices and trade (Wailes, 2002). 5

6 1.2 Progress in rice trade liberalization Trade liberalization is having a profound impact on the international rice market because of the very fact that rice trade has been highly protected in both industrialized and developing nations (Wailes, 2002). The relatively modest terms of agreement in the Uruguay Round Agreement on Agriculture (URAA) have contributed to global rice trade growth experienced in the latter half of the 1990s (Figure 1). Compared to rice trade in the 1970s and 1980s, post-uruguay Round trade has essentially doubled in volume and as a share of consumption. Nevertheless, rice remains, with sugar and dairy products, as one of the most protected food commodities in world trade. 1.3 Trade and domestic policies in key countries The following section discusses the trade and policy regimes of the key producing and consuming nations. As shown in Table 2, the major producing countries are also the major consuming countries. They also tend to be the leading exporting or importing countries (Table 3) China As the largest rice producing and consuming country, China accounts for nearly one-third of the global rice economy. Rice has been an important component of China s food grain security objectives and has been managed with the use of procurement support prices to ensure stable supplies. As a result, government stocks of rice increased in the late 1990s to a level approximately 100 mmt, 73 percent of domestic use. Consequently, in 1999 the government adopted a price and procurement policy that eliminated government purchases of low quality 6

7 early season rice and lowered procurement prices for rice that was purchased by the government. Area planted to rice has declined from 1998 to 2002 (USDA, PS&D). Rice stocks by the end of 2002 have been reduced by more than 30 percent to 67.6 mmt. In some selected coastal provinces the government has more recently eliminated the procurement policy completely, leaving producers to sell their rice on the open markets (Wade and Junyang). The government policy now emphasizes quality over quantity, and rice producers are quickly adopting improved quality varieties. The rice TRQ negotiated by China was initially 2.66 mmt in 2002, equally divided between long grain and medium-short grain or other rice (WTO, 2001). Only 10 percent of the long grain TRQ is designated for private firms and 50 percent of the medium-short grain TRQ for private firms. In 2003, the TRQ for long grain is 2.25 mmt and 1.53 for medium-short grain. The TRQ will increase to 5.32 mmt by 2004 (Sun and Branson, Zhang et al.). Nearly all rice imports into China are fragrant jasmine rice, primarily from Thailand. Domestic production of fragrant rice however is increasing and displacing imports. In all likelihood, without a significant weather event, China will not be expected to fill the rice TRQ. In-quota tariffs are 1 percent for grains (including milled rice) and no more than 10 percent for partially processed grain products. Over-quota tariffs will be 76 percent initially and reduced to 65 percent by 2004 (WTO, 2001). 7

8 China is a significant exporter of low quality long grain with principal markets in Cote d Ivoire, Indonesia, and Cuba. Medium grain rice is exported competitively into Russia, Japan, South Korea, and North Korea (Hansen et al.). While most rice exports are made by COFCO, the state trading agency, it is not believed that export subsidies, except for out-of-condition stock liquidation, are necessary for China s rice export shipments India As the second largest producer, consumer, and exporter of rice, India plays an important role in the global rice economy. India is a major supplier of low quality long grain rice and also fragrant basmati rice. As with China, rice in India is viewed as a strategic commodity with regard to food security. Consequently, the government actively intervenes in the market through grain procurement, price supports and export subsidies. In recent years, the government has procured approximately 25 percent of the annual harvested crop to replenish government stocks. Since April 2001 the government has actively subsidized rice exports at a rate of 50 percent of procurement prices, underselling Vietnam, Thailand, and Pakistan in low quality long grain markets by $15 to $20 per ton. Major markets for India s low quality parboiled and regular long grain rice include: Indonesia, Philippines, Bangladesh, Nigeria, Cote d Ivoire and South Africa. Major markets for basmati rice include Saudi Arabia, European Union, Kuwait, United Arab Emirates, and Iran. 8

9 Commitments on rice import tariffs under the URAA for India are bound at zero percent. Until May 1997, all rice was imported through the Food Corporation of India. Under an agreement to privatize rice trade, the government negotiated higher import tariffs that become effective April Current tariffs on paddy and brown rice and broken are 80 percent and milled rice is 70 percent Indonesia The third largest producing and consuming nation of rice, Indonesia is also the largest rice importer. Rice policy, particularly price stabilization policy, was historically implemented through quantitative management of imports by the state monopoly, National Logistics Agency (BULOG). In late 1998, Indonesia agreed to liberalize rice trade to private traders. Unable to sustain the domestic floor price, the market powers were restored to BULOG. Following Indonesia s financial collapse and political instability, the government of Indonesia sought to stabilize and support producer rice prices through the imposition of a specific rice tariff of Rp 430/kg (equivalent to a 30 percent tariff). Non-tariff barriers and trader response to risks and regulation including a 2002 requirement for an import license and redlining, have resulted in as much as an additional 75 percent tariff equivalent, such that the effective rate of protection for rice in Indonesia is currently at 100 percent (Timmer, 2002). Average border prices of milled rice were USD 200 per ton in 2002, while monthly rice retail prices in Jakarta averaged USD 377 per ton (Katial-Zemany and Alam, 2003). Nevertheless, due to a porous border, it is believed that as much as 30 percent of imports in 2002 were smuggled into the country in the face of the large difference between world 9

10 and domestic prices. The tariff policy is currently under review and producers are pressuring for an increase to Rp 510/kg, equivalent to a 36 percent tariff but well below the WTO bound rate of 160 percent until 2004 (Katial-Zemany and Alam, 2003). Floor prices for paddy and milled rice will be increased by 13 percent in BULOG s status has changed in early 2003 from an agency to a state trading enterprise. BULOG (PERUM) continues in its role of distributing subsidized rice to low-income consumers. Current import and domestic price support policies clearly have negative consequences for Indonesia s consumer and especially those in poverty as well as negative consequences on real wages and therefore economic growth Bangladesh Bangladesh is the fourth largest rice producing and consuming nation. It is also a significant but highly variable rice import market. Since much of the rice production in Bangladesh is subject to monsoon weather, production can fluctuate greatly from year to year. In 1998, Bangladesh was the world s second largest importer at 2.5 mmt but since 1998 has only imported an average of 500 thousand tons annually. Bangladesh has experimented with a rice import tariff policy over the past several years. In 2000, Bangladesh imposed an import tariff of 5 percent. In 2001 the government of Bangladesh raised the tariff rate to 25 percent, added an additional 10 percent regulatory duty mid-year, an advance income tax of 3 percent and a development surcharge of 2.5 percent. This set of import protections along with a crop shortfall in 2001 and a nutrition policy shift of distributing money instead of food grains in the national food distribution 10

11 program resulted in a higher domestic price and a rise in smuggled imports from India. As a result, the government withdrew the 10 percent regulatory duty in 2002 and more recently has reduced the Letter of Credit (LC) margins from 100 percent to 25 percent. Import restrictions that remain in 2003 include a tariff of 22.5 percent, an advance income tax of 3 percent, and a development surcharge of 3.5 percent. Bangladesh imposes no quantitative restrictions Vietnam Vietnam produces the fifth largest rice crop and is also the fifth largest rice consuming nation. Following the adoption of Doi Moi in late 1986, Vietnam s rice economy recovered and developed rapidly such that by the mid-1990s, Vietnam became the world s second largest rice exporter. No significant production support policies or export subsidy programs are used by Vietnam. Vietnam, along with other major Asian rice exporters, Thailand, China, India, and Pakistan have discussed the formation of a rice export cartel in response to the low world prices for rice over the past four years. India has rejected the concept but the others are at this time meeting to develop the concept. Vietnam exports both high and low quality long grain rice. Important export destinations include: Iraq, Indonesia, Cuba, Malaysia and several African countries. Rice exports and prices are under the control of the Ministry of Trade and Vietnam s Food Association (Vinafood) Thailand 11

12 Thailand has been the world s leading exporter for the past several decades. Private export companies supply world markets with a wide range in quality of long grain rice, including the fragrant jasmine rice. The primary government rice policy is the paddy mortgage scheme which is a loan program operated under the Bank for Agriculture and Agricultural Cooperatives (BAAC). Participating farmers obtain a loan from BAAC using their crop as collateral. The loan price is set at 95 percent of a government determined target price. In 2002 loans prices were in excess of market prices by $8 to $10 per ton (a 10 percent price support). Nearly one-third of the Thai crop was pledged to the loan price support program. Government stocks have increased as farmers default on their loans. The government procured rice is milled and then exported through Government-to- Government arrangements Japan Japan s rice economy is supported by high prices paid by consumers. Japan controls rice imports through a TRQ with a prohibitive over-quota tariff. As the traditional staple food, rice in Japan dominates the agricultural policy of the government. Over the past five years, Japan has introduced reforms in the domestic rice policy. In 1996, the government ended regulation over the marketing of rice, freeing up wholesale and retail markets from government supervision and licensing requirements. With market liberalization, prices to farms have declined. In 1998, the government adopted the Rice Farming Income Stabilization Program. If current year price falls below a 7-year moving average standard rice price, producers are paid 80 percent of the difference between the 12

13 current year price and the standard price calculation. Payments are made from the Rice Farming Income Stabilization Fund of which 25 percent are contributions from rice producers and 75 percent is from the government. Participation is voluntary, but to participate for full benefits, producers must enroll in the Production Adjustment Promotion Program (PAPP), which diverts land from rice to other crops (wheat, barley, soybeans, forages, vegetables, and fruits). Since payments in the Rice Farming Income Stabilization Fund are tied to diversion, Japan claims blue box treatment. Income stabilization payments to rice producers in the most recently reported year, 1999, were $815 million. Payments under the diversion program in 1999 were $1.03 billion. Until the completion of the Uruguay Round negotiations, Japan persisted over a 30-year period in banning rice imports. Under the minimum access agreement in the URAA, Japan, under a TRQ, now imports 682 thousand metric tons annually, 7.2 percent of domestic consumption in the base period In-quota purchases are controlled exclusively by the Food Agency, for which a markup of up to 292 yen/kg ($2.41/kg in 2001) is allowed. Imports are purchased through two systems, the Ordinary Market Access (OMA) and the Simultaneous-Buy-Sell (SBS). Rice purchased under the OMA accounted for 85 percent of the total imports in The Food Agency resells this rice into Japan s domestic market or donates to food assistance programs. The SBS purchases are made through an auction where importers sell rice to the Food Agency and simultaneously buy it back. The Food Agency selects bids that maximize the markup, which have 13

14 averaged between 100 and 200 yen/kg or $1,000 to $2,000 per ton. Over quota tariffs are 341 yen/kg, or $2,842 per ton in The average successful bid price of imports in the OMA rice tender in December 2002 was $318 per ton South Korea Similar to Japan, South Korea protected its rice sector with an import ban until 1995 when it agreed to a minimum access import commitment un the Uruguay Round agreement. In 2004, the final year of commitment, South Korea will import 205 thousand metric tons, 4 percent of domestic consumption in the base period. Declining consumption coupled with rising minimum market access imports has resulted in excessive stocks. In April 2002, the South Korean government released A Comprehensive Plan on the Rice Industry to cope with the structural problem of oversupply and to prepare for future restructuring. Previously, the government has relied upon a procurement program to support farm prices. In 2002, the government procured 789 thousand metric tons of a total production of 4,927 thousand metric tons at a price of 2,097 won/kg, equivalent to $1,667 per ton. Under the proposed comprehensive plan the government intends to decouple payments from price supports to income support. A Direct Payment System (DPS) payment in 2002 was made with a direct payment of 500,000 won per ha ($398) in agricultural promotion areas and 400,000 won per ha ($319) in non-promotion areas. This program will be similar to Japan s income stabilization program in that is will be linked to production adjustment system, shifting rice area to other crops (soybeans, forages and fallow) and therefore will claim blue box WTO status. In 2003, the government has 14

15 announced plans to pay producers to keep rice land fallow, 3 million won per ha ($2,531 per ha), on 27,500 ha or 2.6 percent of the South Korea s total rice area. The import regime is guided by the URAA minimum market access agreement. Permitted imports under this quota agreement are also assessed a 5 percent import tariff. Purchases are strictly controlled by the Ministry of Agriculture and have typically been low quality made available through controlled channels to end users European Union The EU maintains an intervention price on paddy rice at Euro/mt. Since 1996 the EU has accumulated intervention stocks as a result of increased production and imports. Direct payments were introduced in 1997 with payments made to a maximum guaranteed area (MGA) of 433,123 ha. The current direct payment rate is Euros per ha. Based on average yields, the direct payment is equivalent to Euros per ton. Therefore on a per ton basis, total EU support to rice producers, taking into account the intervention price and direct payment, is 351 Euros per ton. Under the Uruguay Round agreement, the EU agreed to convert variable levies to fixed tariffs and reduce them by 26 percent by Current tariff levels are 211 Euros per ton for paddy, 264 Euros per ton for brown rice, and 416 Euros per ton for milled rice. The tariff escalation by degree of milling makes the tariff on milled rice prohibitive. A variety of tariff concessions and preferences for EU 15

16 rice imports exist. Brown basmati imports from India and Pakistan are given a 250 Euro per ton reduction, resulting in a tariff of 14 Euros per ton. A TRQ was negotiated with accession of Finland, Sweden and Austria with zero tariff on 63 thousand metric tons of milled, 88 Euro per ton on imports of 20,000 tons of brown rice and 28 Euros per ton on 80,000 tons of broken rice. Egypt has an import concession for 39,000 ton at a 25 percent tariff reduction, and Bangladesh has a 4,000 ton concession at a 50 percent tariff reduction on brown rice. Preferences are given to a quota of 110,000 tons from ACP/OCT countries with a 35 percent reduction off normal tariff levels for ACP and zero duty for OCT countries. Beginning in 2006, tariffs on imports from the 48 least developed countries will be progressively reduced to zero by 2009 under the Everything but Arms agreement negotiated in Import prices in 2003 of brown rice are approximately 250 Euros per ton. The 264 Euro per ton tariff provides a rate of protection of 105 percent. The export regime for rice in the EU is based on Uruguay Round agreement commitments, which limit refunds to 133,400 tons of milled rice equivalent and a subsidy expenditure of not more than 36.8 million Euros ($39.4 million). Export refunds are set by rice type and by destination. In 2003, export subsidies range from 111 to 165 Euros per ton ($119 to $177 per ton) United States The United States is the world s fourth largest rice exporter. Exports account for nearly 45 percent of U.S. rice utilization. Under the 2002 Farm Bill, the U.S. 16

17 government provides price support through a market loan rate of $143 per ton of paddy rice. A market loan deficiency payment is made if the world reference price falls below the market loan rate. An average payment of $73 per ton has been paid for the 2002 crop. In addition, producers receive income support through two payment programs, a fixed decoupled direct payment of $51.80 per ton and a decoupled counter-cyclical payment, if the direct payment plus the higher of the market price or market loan rate are below a target price of $ per ton 1. When the market price is below the market loan rate the maximum counter-cyclical payment will be $36.68 per ton. Both direct payment and counter-cyclical payment are made on 85 percent of a fixed historical production level. Rice imports into the U.S. are subject to tariffs of $14 per ton for milled (11.2 percent ad valorem for parboiled), $21 per ton for brown ($8.30 per ton for basmati brown), and $18 per ton for paddy rice. In 2002 ten percent of exports, 380 thousand tons, were funded by government programs, all food aid shipments. Export subsidies under the Export Enhancement Program have not been used for U.S. rice exports since Magnitude of distortions in key rice markets 1 The direct payment is paid on a historical base production, decoupled from both current production and current market conditions. The counter-cyclical payment is also paid on a historical base production and while payment is decoupled from current production, it is triggered by current market price conditions. The United States government claims both payments as green box in the WTO. 17

18 The major types of distortion in world rice markets are import tariffs and tariff rate quotas in key importing countries and price supports in key exporting countries as discussed above. In 2000, the global trade weighted average tariff on all rice was 43.3 percent. Japonica rice markets are however far more distorted than indica rice markets due to the TRQ and quotas in the major japonica rice importing countries of Japan, South Korea, and Taiwan. Global trade weighted average rice tariffs for japonica rice markets were 217 percent compared to 21 percent for indica markets. In addition to trade protection by rice type, an important dimension of world rice trade is protection for the domestic rice milling industry. This form of protection is expressed in tariff escalation and is especially prevalent in Central and South American nations and the European Union. Tariffs on milled rice are higher than for brown or paddy rice. Tariffs on milled rice imports into the EU are 80 percent compared to only 46 percent for brown rice. In Mexico, paddy rice imports pay a 10 percent tariff while brown and milled pay a 20 percent tariff. The effect of tariff escalation is seen in the trade flows of milled high quality long grain. Most of this trade goes to nations with low tariffs. Most of the trade in brown and paddy rice however goes to nations that have high tariffs on brown and paddy, but even higher tariffs on milled rice. The trade weighted average tariffs by degree of milling for high quality, long grain rice is estimated to be 4.3 percent for milled, 31.4 percent for brown and 16.9 percent for paddy rice. This compares to simple non-trade weighted averages for milled of 13.7 percent, brown 18.7 percent and paddy 25.4 percent. Table 4 summarizes import protection on rice. 3. Influence of existing distortions, especially OECD policies, on diversification of agricultural output and trade in developing economies. 18

19 The greatest degree of protection in world rice trade is in medium/short grain. Prices of medium/short grain rice are reduced by approximately 100 percent as a result of protection by Japan, South Korea and Taiwan. Currently very few rice exporting countries produce medium/short grain rice. The clear beneficiary of trade liberalization in medium/short grain rice in the near term will be those countries and especially China, which has a competitive advantage in production costs and logistics relative to other export competitors, the United States, Australia, and Egypt. Trade liberalization would be expected to stimulate production of medium/short grain in other countries but current varieties are currently suitable for temperate climates. Thus South American exporters such as Argentina and Uruguay could develop adapted varieties more quickly. Many other developing countries have tropical or sub-tropical climates and would require over a decade, if ever, to develop varieties that would be competitive into the liberalized medium short-grain markets. Production capacity in Australia and the United States and to some degree China is increasingly constrained by lack of water. Long grain rice markets are far less protected than medium grain. Tariffs in major low quality rice importing nations such as Indonesia and Bangladesh are estimated to reduce prices by as much as 30 percent compared to full liberalization. The major impact of protection in low quality rice markets falls on consumers in these lowincome developing nations and producers in low quality rice exporting nations such 19

20 as Vietnam, India, Pakistan, and Thailand. Tariffs on high quality long grain markets are low by comparison with medium/short grain markets and low quality long grain markets. The most significant aspect of tariffs in high quality long grain rice trade is tariff escalation, where countries, particularly the European Union and several Central and South American nations have particularly high tariffs on milled rice relative to brown or paddy rice. This pattern of protection depresses world prices for milled high quality long grain relative to brown and paddy rice prices and places economic hardships on the milling sectors of high quality, long grain exporting nations such as Thailand, Vietnam, and the United States. Protection in high quality long grain milled rice markets is estimated to reduce prices by 10 to 20 percent. 4. Results of trade liberalization in rice, volume traded and prices. Global rice trade liberalization results in significant expansion of rice trade and price adjustments. Estimates of the impact of the elimination of import tariffs and export subsidies were generated through the use of a spatial equilibrium model, RICEFLOW (see Appendix 1 for a description). An earlier version of this model was used to assess trade liberalization prior to the Uruguay Round (Cramer, Wailes, and Shagnan; Cramer et al.). For this study, RICEFLOW was more completely disaggregated by rice type and degree of milling and the baseline trade flows and elasticity estimates were updated through the year The results reflect the effect of trade liberalization applied to year 2000 trade flows and prices. Detailed analysis by quantities traded and prices are presented in Table 5. The key results include: Complete trade liberalization in 2000 would have resulted in an expansion in global rice trade of nearly 3.5 mmt, a fifteen percent increase in trade. 20

21 Trade weighted average export prices would be 32.8 percent higher and trade weighted import prices would be 13.5 percent lower. Results by rice type and degree of milling also provide interesting estimates. As noted above, protection in medium/short grain rice markets is substantially greater than in long grain rice markets. Trade in medium/short grain with trade liberalization would increase by 73 percent. Producer export prices would rise by 91 percent and import prices would decline by 27 percent. In the most protected brown medium/short grain rice markets of Japan and South Korea, trade increases by 141 percent, export prices increase by 200 percent and import prices decrease by 41 percent. Milled medium/short grain rice markets would expand by 59 percent, with export prices higher by 71 percent and import prices lower by 25 percent. Long grain rice trade liberalization results in a 7 percent increase in volume traded. Export prices increase by only 2 percent but import prices fall by 18 percent, improving consumer welfare in rice importing nations. Most of the expansion in long grain trade occurs in the low quality markets such as Indonesia, Bangladesh and Philippines. Traded volumes increase by 13 percent and import prices fall by 14 percent, improving consumer welfare in many low-income developing countries. Removal of protection in these markets also improves producer welfare in developing countries as export prices increase by 7 percent. In the fragrant rice market of basmati and jasmine rice, free trade results in a 41.5 percent lower import price but only slight increases in the volume traded and the export price. Trade in the high quality long grain markets is subject to much less protection and as a result, trade liberalization results in only slight increases in volume traded 4 percent more paddy, 7 percent more brown and 3 percent more milled rice. Price effects are primarily seen in lower import prices 10 percent less for paddy, 31 percent lower for brown and 4 percent lower for milled rice. 5. Welfare analysis of rice trade liberalization. Consumer and surplus gains and losses are estimated using the results of the baseline and free trade results of the RICEFLOW model. The welfare estimates for producers 21

22 and consumers are summarized in Table 6. The results are reported for the major importing and exporting countries or regions by rice type and degree of milling. Table 7 includes the producer and consumer welfare estimates with the impact on government revenues lost due to tariff elimination and government expenditures eliminated because of the elimination of domestic support programs. Global rice trade liberalization results in a total economic surplus gain of USD 7.4 billion annually. Importing countries, as a group, have a net gain of USD 5.4 billion and exporting nations gain USD 2 billion. The magnitudes of the net gains vary considerably by country and by rice type and degree of milling. The estimates are based on the impact of full trade liberalization in year The key welfare results by rice type and degree of milling are: Reform of trade in medium grain milled rice accounts for more than 60 percent of the total global welfare improvement at USD 4.3 billion, of which importers benefit by $3.4 billion and exporters by $905 million. Brown medium grain rice importers benefit by $1 billion and exporters gain $449 million. Long grain trade liberalization generates total improvements of USD 1.14 billion. Importers gain $ 1.06 billion and exporters gain $ 80 million. High quality rice trade has welfare improvements of $218 million, with importers gaining $195 million and exporters gaining $23 million. Most of these gains occur for high quality milled, $69 million and brown rice, $124 million. Paddy rice trade liberalization improves the welfare of exporters by $2.4 million and importers by $22.4 million. Low quality rice trade liberalization improves the welfare of importing nations by $315 million and exporters by $52 million. Nearly all of these gains are captured by developing countries. Fragrant rice trade reform is estimated to improve importers welfare by $547 million, a result due primarily to Japan. Exporting nations of fragrant rice, India, Pakistan and Thailand gain only $6 million annually. 22

23 Results by country or region depend upon the type and degree of rice protection that is liberalized. The results by country or region are discussed in order by magnitude of impact of trade liberalization. Japan, the most protectionist nation in rice trade, gains the most from liberalization. Medium grain white rice prices decline from $3,098 per mt to $656 per mt. The volume of trade increases from 392 thousand mt to 2.18 million mt. A welfare gain of $ 3.6 billion per year would be achieved, accounting for over half of the total global net gain. Medium grain brown rice imports increase from 130 thousand mt to 676 thousand mt. Prices decline from $3,062 to $ 843 per ton. The annual net welfare gain for medium grain brown rice is $904 million. Should Japan continue to import jasmine rice from Thailand the volume would increase from 159 thousand tons to 277 thousand mt. Price of fragrant jasmine would decline from $3108 to $285 per mt. The welfare gain would be $471 million. For all rice, Japan s total net welfare gain would be $5 billion annually, which more than 70 percent of total global welfare gains. While the net welfare gains are large the internal welfare transfers would be extraordinarily large. The change in Japanese consumer surplus is estimated at $24 billion, which offsets the losses to producer surplus of $19 billion. China is the world s largest producer of medium grain rice and therefore would be the largest beneficiary of medium grain rice trade liberalization. Exports of milled medium grain rice would more than double, increasing from 614 thousand mt to 1.47 mmt. Export prices would increase from $270 per ton to $647 per ton. The annual welfare gain would be $480 million. Brown medium rice trade would be expected to increase from 113 thousand mt to 403 thousand mt. Prices of brown medium grain increase from $233 per ton to $834 per ton. Net welfare gain from brown medium grain rice trade would be $155 million annually. China is a significant exporter of low quality long grain rice. Exports with trade liberalization would increase from 1.94 mmt to 2.3 mmt. Prices increase from $178 per mt to $190 per mt. The net welfare gain is $12 million annually. China s high quality milled long grain rice exports and prices would increase slightly from 470 thousand mt to 476 thousand mt and price from $216 per mt to $224 per mt resulting in a small welfare gain of $2.2 million annually. China is an importer of fragrant jasmine rice from Thailand. The volume imported would not increase and the price would only fall by $2 per ton resulting in a net welfare gain of $625 thousand per year. Summing across all rice types, exports and imports, China s net welfare gain is $649 million annually. As the world s largest rice producer and consumer, changes in world prices have extremely large welfare effects on producers and consumers. With higher prices, consumer surplus losses are estimated at $63.6 billion but producers gain $64.2 billion. 23

24 As a significant export supplier of medium grain rice, the United States would be the next most important beneficiary of rice trade liberalization. Medium grain milled rice exports would increase from 226 thousand mt to 383 thousand mt. Prices increase from $270 per mt to $617 per mt. The net welfare gain would be $86 million annually. Brown medium grain exports increase from 292 thousand mt to 594 thousand mt. Prices increase from $296 per ton to $803 per mt. The welfare gain is $225 million. The United States is a major exporter of high quality long grain rice. Trade liberalization however only results in increases of high quality milled rice exports from 799 thousand mt to 834 thousand mt. Prices increase from $216 per ton to $223 per mt. The annual welfare gain is only $4 million. Long grain brown rice exports increase from 339 thousand mt to 401 thousand mt. Prices increase from $193 per mt to $220 per mt. Expanded trade results in a net welfare gain of $5 million annually. As the world s dominant export supplier of paddy rice, U.S. exports increase slightly from 843 thousand mt to 881 thousand mt. Prices increase by only $5 per ton from $153 to $158 per mt. The welfare gain for paddy rice exports is only $3 million annually. The United States exported low quality milled long grain rice of 434 thousand mt in Trade liberalization increases this volume to 470 thousand mt. Prices increase from $184 per mt to $196 per mt. The welfare gain from low quality rice exports is $3 million annually. The United States is a significant importer of fragrant jasmine and basmati rice. Imports of fragrant rice increase from 278 thousand mt to 280 thousand mt. Prices decline from $314 per mt to $305 per mt. The net welfare gain is $2.5 million annually. The US is a significant exporter of medium grain but also imports small quantities of milled medium grain rice, 31 thousand mt at a price of $270 per ton. With liberalization of this market, world prices increase primarily as a result of increased demand from Japan. Consequently, the import price more than doubles to a price of $617 per mt. Higher prices reduce imports to only 30 thousand mt and the US has a net welfare loss of $11 million annually. Medium grain exports however generate large welfare gains for producers, and losses for consumers. The net impact across both exports and imports is $86 million for milled medium grain and $225 million for brown medium grain rice. Summing across all rice imports and exports, the net gain to the United States is $326 million annually. The net gain is generated by higher total change in producer surpluses of 2.2 billion and losses to consumers of 1.9 billion annually. South Korea would capture large net welfare gains from trade liberalization. In 2000, South Korea imported only 106 thousand mt of brown medium grain rice. Border reform would increase imports to 306 thousand mt. Prices would decline from $1,952 per mt to $840 per mt. The net welfare gain to South Korea would be $231 million annually. South Korea also imported 35 thousand tons of fragrant rice. With liberalization, imports would increase to 43 thousand and prices would decline from $2,003 per mt to $288 per ton. Welfare gains from fragrant rice import reform would be $67 million annually. Total net welfare gains for South Korea would be $298 million 24

25 annually. Korean consumers have a net gain of 6.2 billion while South Korean producers would lose $5.9 billion. Australia is the third largest medium grain rice producer and exporter. Consequently, rice trade liberalization greatly benefits Australia. Exports of milled medium grain rice increase from 475 thousand mt to 756 thousand mt. Prices increase from 271 per mt to 615 per mt. The net welfare gain for milled medium grain rice is $211 million. Brown medium grain rice export prices would increase from $235 per mt to $805 per mt. With an increase in volume exported from 78 thousand mt to 165 thousand mt, the net welfare gain will be $69 million annually. Australia also exported 30 thousand tons of high quality long grain milled rice in Trade reform does not increase this volume but Australia gets a price increase from $242 per mt to $249 per mt, but a welfare gain of $201 thousand. Total net economic welfare gains to Australia are $281 million annually. Producer surplus gain in Australia is $1.03 billion while consumers lose from higher prices by $745 million. The fourth major medium grain exporter is Egypt. Trade reform would result in an increase in exports of milled medium grain rice from 326 thousand mt to 448 thousand mt. Prices increase from $298 per mt to $629 per mt. The annual net welfare gain to Egypt totals $128 million. Net gains are distributed with producer surplus of $1.39 billion and consumer losses of 1.26 billion. The Philippines is a major low quality long grain rice importer. Elimination of import tariffs results in an increase of imports in 2000 from 787 thousand mt to 1.02 mmt. Prices decline from $276 per mt to $215 per mt. The annual net welfare gain would be $72 million. Consumers gain 701 million annually and producers lose from lower prices by $629 million. The European Union would have an overall net welfare gain from rice trade liberalization of $145 million annually. As an importer of brown rice, the EU would increase imports from 451 thousand mt to 588 thousand mt. Prices would fall from $496 per mt to $260 per mt. The welfare gain for the high quality long grain brown rice imports would be $138 million annually. This gain is offset by the higher prices that the EU would pay for medium grain imports, raising from $372 per mt to $624 per mt. The volume of medium grain imports would decline from 645 thousand mt to 595 thousand mt. The net welfare loss for medium grain rice would be $14 million annually. EU rice is exported, primarily by two members, Italy and Spain. In this analysis, export subsidies are removed. The analysis shows that medium grain prices increase to compensate for the removal of the subsidies but the price increase for long grain is not sufficient to offset the removal of the subsidies. Exports of milled medium grain rice from Italy would increase from 707 thousand mt to 742 thousand mt. Price increases from $545 per mt to $616 per mt, for a net welfare gain of $52 million annually. Spain exports both milled medium grain and long grain rice. Medium grain exports would increase from

26 thousand mt to 148 thousand mt with a price increase from $545 to $617 per mt. Long grain exports would decrease from 129 thousand mt to only 83 thousand mt. The welfare gain to medium grain exports would be $2 million but the loss from long grain exports would be $55 million for a net negative impact on Spain of $53 million. In total, the distribution of EU net welfare change involves a gain to consumers of $254 million annually and a loss to EU rice producers of $109 million. Taiwan was a net exporter of medium grain rice in 2000 prior to WTO accession. Exports were generated as a result of domestic price supports that resulted in surplus production. With WTO membership, Taiwan agreed to a TRQ. For this analysis we have assumed a 2000 level of imports of 115 thousand mt. With trade reform this quantity would increase to 332 thousand mt. Prices would decline from $1,033 to $643 per mt. The net welfare gain from medium grain trade liberalization to Taiwan would be $186 million. We also assumed an import quantity of fragrant rice of 13 thousand mt, which increases to 15 thousand. Prices of fragrant rice decline from $1,034 to $300 per mt. The welfare gain is $10 million annually. Total economic welfare gains for Taiwan would then be $196 million annually. Consumers gain $697 million while rice producers lose an annual total of $501 million. Nigeria has become a major rice importer as it has relaxed quantitative restrictions and relies primarily on tariffs. Nigeria imports high and low quality parboiled milled rice. High quality imports would increase from 36 thousand mt to 144 thousand mt in Low quality imports would increase from 682 thousand mt to 877 thousand mt. Prices for high quality decrease from $378 per mt to $259 per mt and low quality prices decline from $321 per mt to $226 per mt. The annual net welfare gain for both long grain qualities for Nigeria would be $85 million. Rice producers in Nigeria would lose producer surplus of $186 million annually while consumers gain $271 million. Vietnam is the major low quality rice exporter. Therefore tariff reform by importers of this rice type will most benefit Vietnam. Exports would be expected to increase from 2.7 mmt to 3.1 mmt. Prices would increase from $173 per mt to $185 per mt. The net welfare gain for low quality rice exports would be $16 million. Vietnam has steadily increased its volume of high quality milled long grain rice. Trade reform would increase this volume from the 2000 level of 786 thousand mt to 819 thousand mt. Prices would be expected to increase from $215 per mt to $223 per mt. The welfare gain would be $3 million annually. Total annual net welfare gains for Vietnam add up to $19 million. Vietnamese consumers would lose from higher price by $210 million annually but producers would gain $229 million. The largest rice importer, Indonesia benefits from tariff reform of its low quality long grain rice imports. The volume of imports would increase from 1.3 mmt to 1.7 mmt. Prices would decline from $228 per mt to $196 per mt. 26