NAFTA and Domestic Policy Reform: Observations from Canada

1
NAFTA and Domestic Policy Reform Observations
from Canada

• Rick Barichello
• University of British Columbia
• Presented at University of California Silverado
  Symposium on Agricultural Policy, Napa CA,
  January 19-20, 2004

2
Introduction

• Canada signed 3 major trade agreements since
  1988, CUSTA, NAFTA and URA
• Although trade very important to Canadian economy
  (40 of GDP), trade policy still secondary to
  domestic policy
• Some see these trade agreements as facilitating
  unwanted policy changes, others see them as
  facilitating needed policy reforms
• Our focus what effect has these trade
  agreements, particularly NAFTA, had on domestic
  policy reform? Has NAFTA really caused much
  change in domestic policy?

3
Outline

• What are the ag policy reforms Canada has
  actually undertaken since 1988
• What are apparent causes of this reform?
• Insights from Canada-U.S. Free Trade Agreement
  (CUSTA) and NAFTA negotiations
• Reviewing the reforms
• Details of sample of trade disputes between
  Canada and U.S. since 1988
• Long term disputes
• Anti-dumping and Countervail disputes
• Dairy Policy Reform Prospects?
• Conclusions

4
Ag Policy Reforms since 1988

• Significant shift in ag policies during 1990s
• Movement to substantially less subsidized
  position
• Somewhat more open trade environment
• Canadas PSE as percent of total farm receipts
• Fell from 34 to 18 over 13 years from 1986-88
  to 1999-2000
• Major component of border protection due to
  highly restrictive TRQs which did not change
  significantly
• Therefore, most of PSE decline due to cuts in
  government subsidy support
• Result dichotomous policy environment today
• 80 of ag sector has little government budget
  support and little or no border protection
• Remaining 20 (dairy, poultry production) heavily
  protected via commodity marketing boards using
  domestic and import quotas

5
Actual Policy Changes 1

• Major budget cuts in 1995/96
• Crow Rate freight rate subsidy eliminated
  800 M/yr
• Direct dairy subsidy phased out, 1996-2002 300
  M/yr
• Now, no commodity policy, no direct payments and
  no government commodity purchases
• Stabilization Policy evolution
• Process of change from traditional price supports
  began in 1970s pace continued in 1990s
• Now stabilization policy is cross-commodity,
  insurance style schemes, focus on aggregate farm
  gross margins (revenue less purchased inputs) and
  crop insurance, with moderate degree of subsidy
  (approaching C1B)

6
Actual Policy Changes 2

• Centerpiece of new agricultural policy regime
  Agricultural Policy Framework (APF)
• Key features illustrated by its 5 pillars
• Food quality and safety
• The environment
• Science and innovation
• Sectoral renewal
• Business risk management
• Focus on niche markets, branding unique Canadian
  product, controlling attributes throughout food
  chain
• Environmental programs reducing run-off,
  providing wetlands and biodiversity
• Research spending maintained in real terms
  extension support under provincial funding has
  fallen substantially

7
Balance of Agricultural Policy

• Supply Management
• Largely maintained unchanged since mid-1970s
• Farm-level marketing quotas set Prodn Impts
  Cons
• TRQs _at_ 5-8 of domestic consumption
• Over-TRQ tariffs 100-250 much water in
  tariffs
• Economic rents high Dairy quotas average
  1M/farm poultry farm quotas similar (eggs,
  2-2.5M/farm)
• Lobby strength legendary sector extremely
  resistant to policy change
• Canadian Wheat Board -very large STE
• No supply control, no significant ongoing subsidy
• Monopoly export rights domestic international
  debate

8
Evidence from CUSTA Negotiations

• What precipitated this major reduction in
  subsidy?
• Due to commitments in trade agreements? NAFTA or
  URA? Other pressures?
• CUSTA negotiations (1985-87)
• No major policy reform options embraced in those
  negotiations
• both Canada and the U.S. made it crystal clear
  that they were proceeding on the premise that
  while their mutual objective was to eliminate all
  agricultural tariffs, the most sensitive existing
  quantitative import restrictions would remain.
  This is in fact what finally occurred. (Mike
  Gifford, 2001)
• Could argue CUSTA led Canada to regulate further
  its dairy industryit imposed import quotas on
  ice cream and yogurt where before there were
  tariffs

9
Evidence from NAFTA Negotiations

• Canadas negotiating stance with Mexico similar
• Willing to negotiate tariff reductions but not
  NTBs on dairy, poultry and eggs (potential gains
  in other areas not worth the risk)
• URA negotiations were in mid-stream and Canada
  wanted no risk to its position in those
  negotiations concerning GATT Art.11 which
  permitted Canada to impose import quotas for
  supply managed commods
• Canada clearly chose to put its major policy
  areas (supply management, CWB) on the negotiating
  table only in the GATT negotiations (as least re
  market access)
• Same position in FTAA TRQ levels, over-TRQ
  tariffs, and STEs are matters only for the Doha
  Round

10
Contrast with U.S. Position

• Bilateral between U.S. and Mexico in NAFTA was
  very different
• US and Mexico agreed to tariffy all import quotas
  as well as phase out all ordinary tariffs and
  tariff equivalents
• Result border protection for even sensitive
  commodities was to be removed
• Why? Gifford argues, the value of market access
  gained, plus the greater ease politically of
  selling a no-exceptions approach, was worth the
  risks of damage from the greater competition that
  would be felt in sugar and dairy
• Conclusion it was simply a calculation of
  political costs and benefits, not more general
  view of bilateral vs multi-lateral negotiations,
  and these would vary case by case

11
Apparent Causes of 1990s Reforms

• Main elements of reforms
• removal of export grain freight subsidy and dairy
  direct subsidy,
• changing of commodity-based stabilization
  programs, and
• reduction of variety of smaller subsidies
• Federal govt budget cutting pressures clearly
  primary reason for the policy changes,
  particularly large expensive policies
• Reform of Crow freight subsidy also influenced by
  URA
• Export subsidy commitments including cutting back
  Crow, but this required only 36 over 5 years,
  not 100 in 2 years
• Dairy subsidy some cut would meet domestic
  support commitments but actual cut well beyond
  minimum reqd
• So strong impression that these two cuts were
  primarily budget pressure-induced

12
Causes of Earlier Reforms

• Changes in stabilization programs earlier in
  decade have closer connection to trade policy
• Change not for a NAFTA or URA commitment
• Rather due to trade remedy law, countervail
  provisions
• Canada vulnerable to countervails due to previous
  design of stabilization programs
• Shift to whole farm, cross-commodity,,
  insurance-style program was substantially a
  response to U.S. countervail procedures in effort
  to avoid US CV duties
• These concerns were discussed widely since
  mid-1980s when hogs and pork were subject to a
  series of CVD examinations

13
Other Causes of Policy Changes

• The changing role of farm lobbies could also be
  argued to be an important factor in at least some
  policy changes in the 1990s
• More sub-groups of producers began to exert
  independence from the monolithic positions of the
  key farm lobbies
• Farm lobby groups became more fragmented by
  commodity, region, between different farm
  sectors, and between farmers and processors
• With producers holding more mixed positions, the
  lobby position for certain policies weakened, and
  the government was left with more latitude to cut
  programs without clear and consistent opposition,
  including cuts that would not have been feasible
  a decade or two earlier

14
Negotiations and Reforms Summary

• Role of trade policy appears to be secondary in
  reforms undertaken by Canada since mid-1980s
• In those cases where trade policy was important,
  it appears that NAFTA was much less important
  than URA
• Same observation holds for Canadas CUSTA, NAFTA,
  UR and FTAA negotiations key policy areas where
  reforms might be major have kept off the table in
  the CUSTA, NAFTA and FTAA negotiations
• U.S. negotiation strategy quite different in
  NAFTA (Mex)
• Exception in earlier stabilization program
  reforms where key objective clearly to reduce the
  vulnerability of new programs from countervailing
  duty claims. Here trade policy considerations
  were critical in program reform.

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Selected Dispute Studies Dairy 1

• Series of border disputes in dairy since CUSTA
• all brought by US,
• on issues of unilateral imposition of import
  quotas, the validity of tariffication as done to
  implement URAA, and export subsidies
• 1988 ice cream and yogurt case brought by US
  after Canada imposed ice cream and yogurt import
  quotas unilaterally after CUSTA negotiated
• US won this case Canada responded via Uruguay
  Round implementation in 1995
• 1996 Did Canadas tariffication for URA violate
  NAFTA rules? Which agreement dominates?
• Ruling supported Canada URA provisions had
  priority over NAFTA

16
Dairy 2

• Late 1997, early 1998 US (and New Zealand)
  brought complaint to WTO against Canada for
  subsidizing milk exports
• Canadas milk product exports to US grew
  substantially in period after 1995 implementation
  of URA
• 5 years of appeals and challenges, requests for
  compliance panel, need for new data only
  resolved in Dec 2002
• US/NZ win case with major repercussions for
  Canadas supply management sector all exports
  above 1995 levels are deemed to be subsidized and
  must be stopped

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Dairy 3 Lessons

• Reasons for disputes?
• Canadas very high over-TRQ tariffs upon URA
  implementation invited challenges
• Milk revenue pooling was partly opportunistic at
  outset, invited challenge also
• US has strong belief it is more competitive than
  Canada in milk production and can successfully
  dominate Canadian market
• US has strong suspicions about Canadas supply
  management regime fears EU might adopt similar
  measures to result in much larger export
  subsidies
• Neither side seems interested in compromises
• In these trade policy disputes, NAFTA played a
  small role, but mostly the issues were
  WTO-related
• In the one case where tariff reduction rules
  differed between the two, WTO rules were judged
  to dominate

18
Selected Dispute Studies Horticulture

• Red Delicious apples
• Long history of free trade, but 1989 bumper crop
  in Pacific NW so Canada claimed Washington State
  was dumping Red Delicious apples into Canada
• Classic agricultural case exporting at below
  cost was easy to prove as was injury in Canada
  Result AD duties were imposed
• Second case in 1994, same result. Removed 2000.
• Lessons
• not area of longstanding dispute no cases since
  1994
• Opportunistic application of AD regulations
• Solution reform of AD rules, at least as
  applied to agriculture

19
Greenhouse/Fresh Tomatoes 1

• Two cases, 2001-2002, both AD, one by Canada, one
  US
• US case concerned greenhouse tomatoes
• Rapid growth in exports from Canada to US over
  1990s
• Critical element of case was definition of like
  product are greenhouse tomatoes different from
  fresh field tomatoes?
• Dumping was found, preliminary and final
• Injury was not found in final examination due to
  like product issue greenhouse tomatoes were
  small part of fresh tomato market and no price
  effects were due to greenhouse tomato imports.
  No AD duties, case closed

20
Greenhouse/Fresh Tomatoes 2

• Canadian case involved fresh field tomatoes
• Complaint filed several months after US case
  launched
• Dumping was found to have occurred
• Injury claim rejected
• Strange result Canadian complainants withdrew
  complaint near conclusion, two months after US
  cases decided against imposition of AD duties
• Apparent case of tit-for-tat
• Lessons
• Not area with potential for major policy reform
  rather trade friction
• Only NAFTA cases filed, and only for questions of
  whether national procedures followed were
  appropriate

21
Examining Ag Trade Dispute Data

• 53 specific complaints over 1988-2003 period
• From 30 different case types
• 22 disputes brought before NAFTA
• These covered 14 of the 30 cases
• But almost all (20/22) involved AD or CVD, as
  illustrated in the Horticulture cases detailed
  above
• 9 were brought by the U.S.
• 13 were brought by Canada
• In areas of major bilateral dispute where
  significant policy reforms could occur, most have
  been taken to WTO panels, not to NAFTA

22
Dairy Policy Reform Prospects

• Reform in a mechanical sense would involve either
• reducing over-TRQ tariffs from 100-250 range to
  25-35 range (much water in these tariffs)
• Increasing TRQ levels
• The first would ultimately lower domestic milk
  prices, the second would involve a loss of quota
  sales in the short run and prices if TRQs rose
  significantly
• Both steps would be resisted very strongly
• Indications of strength of opposition
• Value of milk quotas nationally 16-22 Billion,
  1 million/farm
• Compensation almost certainly required lobbies
  have stated this publicly
• Level of compensation could not approach the full
  value of quotas
• Crow Rate compensation cost was 1.6 B

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Conclusions I

• Effect of NAFTA on domestic ag policy reform
  appears to be minimal from every angle
• True in negotiations and in 1990s period of
  reforms
• WTO/GATT agreement (URA) associated with some
  major actual or potential policy reforms
• Post-URA implementation did require some kinds of
  policy reform, however modest for the most part
• No absence of policy reforms in Canada recently
• These reforms due primarily to budget pressures
  by both federal and provincial governments
• Some reform pressures from URA implementation
• Increased lobby fragmentation may have
  contributed to some reforms

24
Conclusions II

• US experience quite different in comparing role
  of NAFTA with WTO/URA agreements all commodities
  with no exceptions on table with Mexico-US NAFTA
  bilateral negotiations
• This seems due to due to weighing political costs
  and benefits, not for philosophical reasons of
  merits of either type of trade agreement
• Reviewing major bilateral ag trade disputes since
  1988 again supports contention that NAFTA has
  played secondary role in terms of dispute types
  it has been used for (AD, CVD)
• Significant policy dispute or reform areas have
  gone to WTO panels
• Dairy sector potential for major reform
• Politically very difficult quota values
  aggregate to 16-22 Billion
• Compensation critical experience from Australia,
  Crow relevant