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Agricultural Economics

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Title: Agricultural Economics


1
Agricultural Economics
  • Lecture 7 International Influences

2
  • Agricultural Trade Issues and Policies
  • Relationships
  • Trade Issues
  • Geopolitical Centers of Influence

3
International Policy
  • Live in a global economy where
  • Interdependence of policies
  • Global Agriculture Markets
  • Few commodities are isolated through barriers to
    trade (successful only in varying degrees)

4
  • Trade Policy does NOT exist in Isolation
  • A component of Foreign Policy
  • Intertwined in Domestic/Economic Policy
  • Intertwined in Ag Food Policy

5
Trade Policy Issues
  • Food Diplomacy
  • Increased Market Access
  • Building Markets
  • Developing Market Economies
  • Increasing Food Security
  • Protectionist Policies

6
Market Access
  • Why do we want market access?
  • Why would we refuse others access?
  • Access is gained by reducing barriers to trade
  • Bilateral Multilateral Trade Agreements
  • Free-trade Agreements
  • Customs Unions
  • Common policy toward non-members
  • Common Markets
  • Free movement of factors of production
  • Alignment of major economic agricultural
    policies
  • Economic Unions
  • Unified social/economic policies

7
Building Foreign Markets
  • Market Intelligence
  • Export Credit and Enhancement
  • Cash or Commodity Subsidies
  • Credit Guarantees

8
Building Market Economies
  • Typically Mingled with Multiple Objectives for
    Developing Economies
  • Partnerships with UN, World Bank, Voluntary
    Organizations
  • Institution Building
  • Technical Assistance
  • Infrastructure Development
  • Applied Research

9
Food Security
  • Global Food Availability
  • Individual Food Security
  • Food Safety

10
Protectionist Policies
  • Barriers to Trade
  • All Domestic Farm Policies
  • Trade Remedy Laws
  • Anti-Dumping Provisions
  • Countervailing Duty (Tariff)

11
Geopolitical Centers of Influence
  • Countries or groups (blocs) of countries that
    have (or could have a major impact on agriculture
    and agribusiness
  • Some individual countries are in this position
    now, have been, or will be
  • Mexico
  • Canada
  • Japan
  • China
  • Russia
  • Some are organized into blocs
  • NAFTA
  • EU
  • MERCOSUR/FTAA
  • Cairns group
  • APEC

12
Geopolitical Centers of Influence
  • Then there are the developing countries
  • Largely ignored up to now
  • Want preferred access to developed country
    markets
  • There are interest groups outside the countries
    and blocs that try to influence the world agenda
  • Greenpeace
  • UN/FAO

13
NAFTA (North American Free Trade Agreement)
  • 3 Separate Agreements
  • Canada US Trade Agreement (CUSTA) effective in
    1989
  • Canada Mexico Trade Agreement effective in 1994
  • US Mexico Trade Agreement effective in 1994

14
NAFTA Trade
  • U.S Absolute (Comparative) Advantages
  • Corn, Soybeans, (Poultry, Fed beef, Hogs)
  • Canada Absolute (Comparative) Advantage
  • (Wheat, Oats, Barley, Canola, Flax, Fed Beef)
  • Mexico Absolute (Comparative) Advantage
  • Vegetables, (sugar)

15
NAFTA Issues
  • Countries maintain separate domestic farm
    policies
  • U.S. Price/Income Support to Farmers,
    Conservation
  • Canada State Trading (CWB), Production
    Controls, Conservation, NISA
  • Mexico -- Direct Support, Price Supports
  • Dispute Settlement, 5 member panel of judges

16
MERCOSUR
  • Argentina, Brazil, Paraguay, and Uruguay
  • Established in 1991
  • Competitive in Corn, Soybean, Beef, and Orange
    Juice Production
  • U.S. has lost some beef markets because of the
    freer trade within MERCOSUR
  • Strong Advocate for Eliminating Subsidies
  • Opportunities
  • Expand to include Bolivia, Chile, Peru, Ecuador,
    Colombia, Venezuela
  • Potentially a part of FTAA
  • Problems
  • Political and Economic Instability

17
Cairns Group
  • Established in 1986 in Cairns, Australia
  • 18 southern hemisphere countries
  • Major members include Australia, New Zealand,
    Brazil, Argentina, Chili, Thailand, Canada
  • All export dependent
  • Wheat, rice, coffee, beef, dairy, soybeans
  • Ag policies
  • Works largely through WTO
  • Seeks removal of barriers to trade
  • Seeks elimination of ag subsidies (Critics of
    U.S. and EU)
  • Members not free of ag policies that impede trade

18
APEC
  • Asian Pacific Economic Cooperation,
  • 21 countries that border Pacific Ocean
  • Highly diverse membership including U.S.,
    Japan, China, Russia, Mexico, Chile, Australia,
    New Zealand, Vietnam, Thailand
  • Accounts for 60 of World GDP
  • Accounts for 60 of U.S. ag exports
  • Accounts for 50 U.S. of imports
  • Objectives
  • Free trade among developed country members by
    2010
  • Free trade throughout by 2020

19
Japan
  • 125 M people
  • Ag
  • 40 self-sufficient on food needs
  • Income increases encourages dietary change
  • Ag Policy
  • Conversion from rice to FV
  • Control dietary change through Japan Food
    Agency purchases in international market.
  • 3rd largest US customer but Australia and New
    Zealand has location advantage.
  • Strong Protectionist Stance

20
China
  • 1.3 Billion people
  • Ag
  • Essentially self-sufficient
  • Undergoing substantial dietary change
  • Ag Policy
  • State dominated
  • Transition to market economy
  • Entry into WTO

21
Russia
  • 145 M people
  • Ag
  • Grain, sugar beets, rapeseed/canola, beef, milk
  • Net importer (major market for U.S. meat)
  • Ag Policy
  • Slow conversion to market economy
  • Privatization of land
  • State control of imports

22
Developing Countries
  • 67 Countries (40 of world population)
  • Low-Income (lt 2000 per capita)
  • Net-Importers (dependent on food aid)
  • Mostly trade with developed countries
  • Policies Center Around Increased Income
  • Expansion of Exports
  • Difficult to establish export markets
  • Reluctant to allow imports

23
EU Common Agricultural Policy (CAP)
  • EU History
  • 1957 Treaty of Rome formed European Economic
    Community
  • Customs Union No internal barrier to trade
    among members common external tariff Free
    movement of labor and capital
  • 1992 Maastricht Treaty formed European Union to
    establish common currency
  • 1999 European Monetary Union (Adoption of the
    Euro)

24
EU Common Agricultural Policy (CAP) cont.
  • 25 Members
  • Original Treaty of Rome Included
  • France
  • Germany
  • Italy
  • Belgium
  • Netherlands
  • Luxembourg

25
EU Common Agricultural Policy (CAP) cont.
  • Governance
  • Council of the European Union
  • Decision body with heads of state for each
    country (like Senate)
  • European Parliament
  • Legislature body with 626 members appointed by
    population (like House)
  • European Commission
  • Executive branch implements policy
  • Commission on Agriculture manages CAP
  • Court of Justice
  • Dispute settlement body

26
EU Value of Ag Production and Processing (B)
US EU 15
Ag Production 222 526
Processed Products 364 784
27
Dimensions of the EUs Common Agricultural Policy
  • Price Supports
  • Intervention price (EU purchase for storage)
  • Direct Payments
  • Related to historical yield and current acres
  • Payment per head for livestock
  • Production Controls
  • Set aside percent of cropland
  • Marketing/production quotas in dairy
  • Export subsidy to prevent stocks in storage from
    becoming excessive

28
Dimensions of the EUs Common Agricultural Policy
  • Multifunctional Payments
  • Noncommodity outputs that are jointly produced by
    agriculture
  • Countryside benefits of farming
  • Notion that agriculture can become too intensive
    and farmers need to be compensated for making it
    less intensive
  • Organic Farming
  • Sanitary Phytosanitary Standards
  • Import restrictions on hormone treated beef
  • Import restrictions on GMOs

29
Why Expand?
  • EU
  • Political influence
  • Security
  • Globalization
  • Trade

30
Common Elements in CAP Reforms and Policy Change
in Turkish Agriculture
  • a) Basic reasons
  • External WTO Reform Process
  • Internal Efficiency, Taxpayer and Consumer
    Concerns
  • b) Overall Sectoral Change
  • Market Orientation,
  • Higher Competitiveness
  • c) New Objectives food safety, environment,
    rural development
  • d) Procedural Registration and Control
    Mechanisms

31
  • AGRICULTURAL PAYMENTS UNDER THE BUDGET
  • ? Agricultural payments covered under National
    Fiscal Budget are
  • Payments for General Services
  • Operating Expenses
  • Investments (related with annual investment
    program) and
  • Agricultural Support Payments
  • ? Agricultural payments, which are explained in
    detail in the
  • presentation for State Aids, are dispersed
    between the budgets of three
  • different institutions
  • Ministry of Agriculture and Rural Affairs
    (MARA)
  • Ministry of Environment and Forestry (MEF)
  • Undersecretariat of Treasury (Treasury)
  • ? Main agricultural supports are placed under
    MARA and Treasury

32
Trade Issues
  • Benefits of Trade
  • More efficient use of resources
  • Reduce world hunger
  • Problems
  • Interdependence among nations

33
Barriers to Trade
  • Tariffs Tax on imports
  • TRQ Tariff varies in increments with quantity
    imported
  • Tariffs preferred because transparent
  • Subsidies
  • Export subsidies
  • Domestic production/price subsidies
  • Nontariff tariff trade barriers
  • Restrictions on imports other than tariffs
  • Quotas
  • Embargos
  • Sanitary and phytosanitary
  • Technical barriers (definitional)

34
Origins of WTO
  • General Agreement on Tariffs and Trade (GATT)
  • Established in 1947 as a forum to reduce trade
    barriers
  • WTO replaced GATT in 1995 as legal and
    institutional foundation of multilateral trade
    relations
  • Designed to strengthen the trade rules by
    providing a stronger set of institutions for
    resolving disputes and enforcing agreements
  • Negotiations take place in rounds
  • There have been 9 to date
  • Begins with an agreement among members on agenda
  • Most recent completed round was Uruguay Round
  • Currently on Doha Round

35
Three Basic Principles
  • Once a tariff concession is agreed to, it cannot
    be raised
  • MFN, any advantage given to one country must be
    given to all
  • Imported goods treated the same as domestic goods
    in terms of regulation and taxes

36
Three Pillars of URAA (Uruguay Round Agreement
on Agriculture)
  • Market access Convert import quotas to tariff
    or TRQ and reduce over time
  • Domestic support Reduce domestic support by 20
    from 1986-89 level
  • AMS Aggregate measure of support total of red
    and amber box (trade distorting subsidies)
  • Limits on value and volume of export subsidies
    from 1986-89 level

37
Loop Holes in URAA
  • Precautionary principle WTO requires that SPS
    decisions be based on science. This principle
    allows restrictions when scientific evidence is
    deemed to be insufficient. Requires seeking
    evidence over reasonable time period.
  • Safeguards permit imposition of higher tariffs if
    there is a surge in imports above specified
    levels
  • Multi functionality Green box justification for
    subsidies based on contributions to the
    environment
  • Programs are classified by box by the reporting
    country, but is subject to challenge by WTO or a
    complaining country

38
4 Pillars of Doha Round(Reflects broader US
goals in trade policy)
  • Market access Substantially reduce tariffs and
    increase quantities in TRQs
  • Export competition Eliminate export subsidies,
    variable export taxes, and exclusive import
    rights by state trading importers
  • Domestic support Substantially reduce amber box
    subsidies and simplify into exempt and nonexempt
  • Developing countries Enhance input into WTO and
    their benefits from international trading

39
Boxes of WTO
  • Green box Not trade distorting
  • Blue box Minimally distorting because
    production is controlled
  • Amber box Trade distorting, subsidies tied to
    price and/or production
  • Red Box Subsidies that must be stopped (empty
    box)

40
Amber Box Limits for U.S. and E.U.
41
WTO Classification
  • These classifications are based on recent US
    notifications to the WTO
  • The fixed payments and conservation programs have
    been classified as green box
  • Direct payments on a fixed payment base are
    considered as income support
  • Conservation program payments are considered
    exempt as long as the payments do not exceed the
    actual cost of conservation efforts or the
    opportunity cost from idling land or producing
    under conservation production practices

42
WTO Classification
  • The marketing loan benefits, dairy programs, and
    sugar price support have been classified as
    commodity-specific amber box.
  • All of these programs require production of the
    commodity to receive a payment and the size of
    the payment is contingent on the amount of
    production.
  • Price support programs (such as dairy) are also
    placed here. Even though no payments flow out
    because of the program, the amount of price
    protection is charged against the WTO limit
    (calculated as the product of production eligible
    for price support and the price gap between the
    price support level and a reference price).

43
WTO Classification
  • The countercyclical and crop insurance programs
    have been classified as non-commodity-specific
    amber box.
  • The countercyclical program falls into the amber
    box because payments depend on current prices and
    into the non-commodity-specific box because
    production is not required to receive payments.
  • Crop insurance has been placed here and reported
    in aggregate (net indemnities across all crops).
    Given the nature of crop insurance, it probably
    should be classified as commodity-specific.
    Insurance at or under 70 coverage could be
    reported as green box, while higher coverage
    could be reported as commodity-specific amber.

44
De Minimis Rule
  • The de minimis rule exempts small domestic
    support payments
  • Whether payments are small or not is defined by
    the product covered by the payment
  • For the U.S., a five percent rule is applied for
    de minimis
  • For commodity-specific support, payments are
    compared to 5 of the value of production for the
    commodity
  • For non-commodity-specific support, payments are
    compared to 5 of the total value of U.S.
    agricultural production

45
Why Classification Matters
  • The classification of the new countercyclical
    program in the non-commodity-specific amber box
    helps the U.S. in meeting the domestic support
    limits
  • Expenditures from programs in the
    non-commodity-specific category are compared
    against the value of all agricultural production
    in the country (as opposed to crop value for
    commodity-specific programs)
  • Given U.S. agricultural production values of 200
    billion, the non-commodity-specific amber box can
    hold up to 10 billion in support before reaching
    the de minimis mark and counting against the
    domestic support limit

46
Where We Are in Doha Round?
  • Most recent Ministerial in Cancun failed
  • Open rift between developed and developing
    countries
  • Meetings came to abrupt end in Sept 03 when four
    African countries submitted a proposal to
    eliminate the U.S. cotton program
  • G-22 (coalition of 22 developing countries)
    unwilling to open their markets in return
  • Peace clause expired in Dec. 2003
  • Cant challenge other members export and domestic
    subsidies on agriculture

47
  • Trade Tools
  • Import Quota
  • Import Tariff
  • Export Subsidy

48
An Import Quota by Importing Country
Exporting Country
Trade Importing Country
Quota

S
S
Excess Supply
World Price
Excess Demand
D
D
Q/yr
Quantity Traded is reduced
49
An Import Quota by Importing Country
Exporting Country
Trade Importing Country
Quota

S
S
Excess Supply
World Price
Excess Demand
D
D
Q/yr
Quantity Traded is reducedPrice in the
Importing Country is raised
50
An Import Quota by Importing Country
Exporting Country
Trade Importing Country
Quota

S
S
Excess Supply
World Price
Excess Demand
D
D
Q/yr
Quantity Traded is reducedPrice in the
Importing Country is raisedPrice in the
Exporting Country is reduced
51
A Tariff by Importing Country
Exporting Country
Trade Importing Country

S
S
Excess Supply
World Price
Excess Demand
D
D
Q/yr
Excess Supply is raised by the amount of the
tariff
52
A Tariff by Importing Country
Exporting Country
Trade Importing Country

S
S
Excess Supply
World Price
Excess Demand
D
D
Q/yr
Excess Supply is raised by the amount of the
tariffQuantity Traded is reduced
53
A Tariff by Importing Country
Exporting Country
Trade Importing Country

S
S
Excess Supply
World Price
Excess Demand
D
D
Q/yr
Excess Supply is raised by the amount of the
tariffQuantity Traded is reducedPrice in the
Importing Country is raisedPrice in the
Exporting Country is reduced
54
An Export Subsidy by the Exporting Country
Exporting Country
Trade Importing Country

S
S
Excess Supply
World Price
Excess Demand
D
D
Q/yr
Excess Demand is increased by the
subsidyQuantity Traded is increased
55
An Export Subsidy by the Exporting Country
Exporting Country
Trade Importing Country

S
S
Excess Supply
World Price
Excess Demand
D
D
Q/yr
Excess Demand is increased by the
subsidyQuantity Traded is increasedPrice in
the Importing Country is reduced
56
An Export Subsidy by the Exporting Country
Exporting Country
Trade Importing Country

S
S
Excess Supply
World Price
Excess Demand
D
D
Q/yr
Excess Demand is increased by the
subsidyQuantity Traded is increasedPrice in
the Importing Country is reducedPrice in the
Exporting Country is raised
57
Impact of Exchange Rates
  • What does it mean when currency exchange rates
    rise fall.
  • What happens to
  • Excess Supply
  • Excess Demand
  • Quantity Traded

58
Wrap up
  • Can you draw each of the three trade tools?
  • Then Identify
  • New Price in each country
  • New Quantity traded
  • New Quantity supplied and demanded in exporting
    country
  • New Quantity supplied and demanded in importing
    country
  • Can you explain the impact of exchange rates?
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