«PATRICK A. MESSERLIN 1/ August 2002 INTRODUCTION WTO negotiations in agriculture have embarked on a wild roller-coaster. In accordance with Article ...»
(leaning towards uniform policy approach) and suggested by the EC (leaning towards an early harvest approach), as discussed below. And this issue will be exacerbated by the food safety dimension which is much more difficult for certain farm products (meat) than for others (sugar).
2. The current instruments of protection: their very low “transfer efficiency” Table 3 also presents the major instruments for protection which are grouped in three categories (border instruments, non-border price-based instruments, non-border quantity-based instruments). Grades of 1 (low) to 3 (high) have been given to each instrument in order to reflect their importance. Table 3 shows a wide difference between the U.S. and the EC in grains and oilseeds, but a close similarity in milk and sugar (the 2002 Farm Bill has reinforced similarities and narrowed dissimilarities, see below). It also suggests that deep changes in the pattern of instruments used are unlikely in the coming decade, except in export subsidies.
Tables 5 and 6 try to go further. Table 5 breaks down total support into its components: producer support (PSE), support granted to agriculture in general (GSSE), and consumer support (CSE, which is marginal, except in the U.S. and Mexico). It shows few changes in these three sources of support since the Uruguay Round, except again in pro free-trade OECD countries and in Canada. In all the protectionist countries, the PSE share in total support in agriculture is higher than 80 percent and stable. The evolution is less clear for the rest of the OECD countries with, at the two ends of the spectrum, Mexico and New Zealand.
Support granted to agriculture in general gives some indications about the real danger of “non-trade concerns” being used as substitutes to straight protection in the protectionist countries. Its stability in the protectionist and middle-of-the-road countries may be a good omen in this respect, though its evolution in the Czech Republic, Hungary, and Turkey is an additional source of worries for these “new” protectionist countries.
Table 6 goes one step further by decomposing PSEs in the four major instruments concretely used for transferring public support to farmers. It shows that only Canada and Australia have taken the Uruguay Round spirit of “decoupling” support from production seriously, with a noticeable use of payments to farmers directly based on overall farm income. Market price support remains, by far, the dominant instrument used by protectionist OECD countries–with some exceptions, such as in the EC where subsidies on acreage and headage represent one-fourth of PSE.
All these observations lead to an important argument that negotiators and governments could use for convincing farmers of the necessity of reforms–a crucial point since, as mentioned above, consumers and taxpayers support for freer trade is not guaranteed. The argument is that ultimately, farmers get only a small portion of all the money poured into agriculture–in other words, the “transfer efficiency” of the existing public support to agriculture is low and a large share of these transfers are ending up in unintended pockets– landowners, suppliers of other farm inputs–and in pure waste.
Recent estimates of transfer efficiency for each of the four PSE components listed in Table 6 show substantial variations among the four components [OECD, 2002]. Area payments would be the least inefficient kind of transfer since they would translate into net farm income for one-half of their amount if–a big if–one ignores its long term impact on land prices and rents. Other instruments have a much lower transfer efficiency–from one-fourth for market price support and payments based on output to one-fifth for input subsidies. Table 6 applies these estimates to the main components of PSE. It leads to the conclusion that only 25 to 30 percent of producer support ends up in farm incomes.
That only 25-30 cents of one dollar of support really goes to farm income (once again, the rest of transfers to farmers being dissipated in higher land prices or rents, higher prices of inputs, and pure waste of resources) is a powerful argument in the context of the Doha negotiations. Underlining the inefficiency of the existing transfer regimes from the farmers’ point of view seems to fit much better the current political economy of protection in most OECD countries which may be characterized by a lack of will from consumers to oppose farm policies, by a wide public support to domestic farmers as producers of environment and healthy food, and by an increasing divide between large and small farmers (the latter being more interested in an improved transfer efficiency, see section 3).
3. The recent moves of the “two dinosaurs” Between May and July 2002, the two “dinosaurs” have taken several important domestic and trade initiatives: the new U.S. Farm Bill adopted in May 2002, the European Commission’s proposals on further reforms of the Common Agricultural Policy (CAP) within the framework of the Mid-Term Review announced in June 2002, the U.S. proposals for farm liberalization, and the EC request for re-negotiating tariffs on wheat under GATT Article XXVIII, both tabled in the WTO in July 2002. As these initiatives have taken opposite directions, they have generated a debate on whether they reflect profound changes in the usual relative positions of the two dinosaurs, particularly whether the U.S. is still more supportive of freer-trade than the EC.
What follows argues that the EC remains the most worrisome source of difficulties for farm liberalization in the coming years, despite the adoption of the new U.S. Farm Bill (officially the “Farm Security and Rural Investment Bill,” a title evoking self-sufficiency and multifunctionality which are the two most powerful motives for protection because they are widely accepted by the public opinion). This view relies on arguments strictly related to the U.S.-EC recent moves, and on arguments linked to EC enlargement.
The U.S.-EC relative moves in Summer 2002 The first reason suggesting the EC as still the key obstacle for farm liberalization is that it almost completely lacks farm export lobbies. Relatively efficient British or French farmers do not seem to realize that the current CAP favors inefficient farmers at the detriment to all efficient farmers, being from outside the EC or from the EC itself. In other words, they do not seem to realize that the substantial but limited decrease of EC protection that the Doha Round could deliver will provide benefits to them as well as to the efficient farmers from the rest of the world.
By contrast, export lobbies exist in the U.S., and they did provide the necessary support to the U.S.
proposals on farm liberalization in the Doha Round. These proposals need a lot of clarification which will be at the heart of the coming negotiations, particularly on the subsidies to be banned (what would be the new scope of the amber-blue box, the new de minimis rules, the new rules on the remaining export subsidies or associated practices?) and on the tariff-quotas (what would be the new allocation rules, the base year?). But the U.S. proposals have the great advantage of avoiding the above-mentioned dangers of an early harvest approach [see www.ustr.gov, 27 July 2002].10/ They focus on tariff peaks by using the “Swiss” formula with a /Another positive feature of the U.S. proposals is to be not too extreme (contrary to what happened during the Uruguay Round). The last decade has made clear that it would be naive to believe that the Doha Round will completely eliminate all the export subsidies and other trade barriers (some export subsidies and tariffs will remain as in manufacturing, and some key “non-trade concerns” are likely to be shared by all WTO members). The EC insistence on including the terms “without prejudging the outcome of negotiations” and “with a view to” in the Doha Ministerial Text was mostly an effort to cope with the widely disseminated perception in Europe that the rest of the world is pushing for a full and rapid liberalization in agriculture. Of 25 percent maximum tariff, they expand all tariff-quotas by 20 percent (with the elimination of all in-quota duties), and they favor a more uniform level of non-border protection by merging the blue and amber boxes, and by capping these subsidies to 5 percent of the total value of farm production.
course, this perception is wrong, but it is carefully fuelled by European anti-globalization leaders in order to create panic among farmers.
It remains that U.S. export farm lobbies have had a relatively passive attitude vis-a-vis the 2002 Farm Bill. How to reconcile this passivity with their support to the U.S. proposals in the Doha Round? A first reason is institutional. Traditionally, Congress has had a strong leadership in Farm Bills, and all the subtle differences between the House and the Senate (small versus large farms, South and West versus Midwesterners) provide many opportunities for small, but well-organized, vested farm interests. By contrast, the President can take initiatives in trade issues, conditional to Congress’ final say. Another key reason for the U.S. export farm lobbies passivity may be that the 2002 Farm Bill does not change significantly the magnitude of U.S. support to farmers for the crops already subsidized by the 1996 Farm Bill (everything else remaining constant). In fact, what the new Bill does in the short run is mostly to transform the subsidies granted ex post under the previous 1996 Farm Bill into ex ante subsidies.11/ In the medium run, the Bill does more, largely because it increases the coverage of the farm products benefiting from support.
In the long run, the potentially depressing impact of the 2002 Farm Bill on world farm prices will depend, among other factors, on the capacity of the Bill to reduce the U.S. ability to quickly reverse to a less protectionist farm trade policy (if the Doha Round makes progress), and from its contagion effect to other WTO members. The answers to these questions largely depend on timing.
Take first the U.S. ability to reverse to a more open farm policy. Commitments on dismantling farm trade barriers on which the U.S. could agree by 2003-05 under the Doha Round would be implemented in 2006-08 at the earliest–that is, under the auspices of the 2008 Farm Bill (the 2002 Bill will last six years, although financial appropriations are established on a ten-year basis). In other words, the 2002 Farm Bill does not directly constrain the U.S. negotiating freedom. But, it will make delays in the Doha Round negotiations on agriculture very costly because such delays may strongly induce to perpetuate the 2002 Farm Bill, worsening substantially its long run impact (and the fact that the U.S. has rapidly tabled its liberalization proposal may aim at reducing the risks of such delays).
/Under the previous 1996 Farm Bill, U.S. support for major crops has tended to increase more rapidly than EC support when world prices were declining (but also to fall more markedly when world prices were rising). As a result, U.S. support has reached the EC level at times of low world prices, whereas it has been well below the EC level at times of high prices. In other words, since 1998, U.S. farmers could reasonably expect–with more and more confidence as years passed–that their desired amount of subsidies will always be granted ex post to them. The decoupled status of the U.S. farm policy under the 1996 Bill was increasingly questionable. According to most estimates, the new Bill should not prevent the U.S. to fulfill its Uruguay commitments, except possibly on its AMS ceiling under specific conditions.
Second, the assertion that the 2002 Farm Bill could have only a negative impact on the farm policies of other WTO members–particularly on the EC–is debatable. First, the current situation does not differ so much from the one prevailing in 1992-94 where the U.S. was able to play the role of a pivotal deal-maker between protectionists and free-traders, at a time where its farm policy was as protectionist as it will be under the 2002 Farm Bill. Of course, the 2002 Bill weakens the Europeans who counted on the U.S. lead for liberalization (all the more because the Bill is adopted in the year of the EC Mid-Term Review).