Agribusiness Perspectives Papers 1997/98

Paper 10
ISSN 1442-6951

Unfinished business - global trade reform in agriculture

Mr Lyall Howard

National Farmers Federation, Canberra

• Introduction
• GATT and the Uruguay Round
• How bad is it really?
• How did world agriculture get into such a mess?
• Why is reform so difficult?
• Has there been any progress since the Uruguay Round?
• The Cairns Group
• Issues for the 1999 Round
• Conclusion
• References

Introduction

Trade in food and agriculture is the most distorted part of world trade. But reform through multilateral negotiations can yield multi-billion dollar benefits.

In 1999, the World Trade Organisation (WTO) will meet to decide how to mount a new round of global trade negotiations in agriculture. Without diminishing the achievements of the Uruguay Round, trade negotiators this time face a mountain of unfinished business.

The Uruguay Round accomplished more in agricultural trade reform than had ever been achieved before. The conversion of non-tariff barriers to tariffs was a huge feat, but the resulting tariffs often seem incredibly high. Compared with industrial goods, where successive rounds of negotiations under the General Agreement on Tariffs and Trade (GATT) have reduced tariffs on manufactures to an average of just 3.8 per cent in rich countries 1, agriculture has barely a 'foot in the door'. Dairy is a sector where extreme cases of high tariffs can be found. Canada's Uruguay Round commitments will see over-quota tariffs on butter fall from 343% in 1996 to 299% by 2001. This 'liberalisation' is not expected to result in a significant increase in trade 2.

Fortunately, the Uruguay Round Agreement on Agriculture included a 'continuation clause' for further talks on trade liberalisation in 1999. The question is whether that opportunity can be seized - or whether those countries that want to 's the clock' on trade reform will successfully delay the process, possibly for years.

GATT and the Uruguay Round

The depression years of the 1930s were the most overtly protectionist era of the twentieth century. Depressionary pressures induced most countries to retreat from free trade. By contrast, the post-war era has been a period of sustained output and trade. In part, this can be directly attributed to the dismantling of protective barriers under the GATT.

The GATT, which was replaced by the World Trade Organisation (WTO) in 1995, was a post-war multilateral institution created at the Bretton Woods Conference of 1947. The objective of the GATT was to provide a formal negotiating framework for reducing protective barriers to trade. Tariff liberalisation under the GATT has taken place under a series of 'Rounds', the most recent being the Uruguay Round that was launched in 1986 and was concluded in 1994.

Prior to the Uruguay Round, tariff cuts were largely restricted to industrial products. Farm products were discussed in past rounds but no headway was made because socio-political pressures made agriculture 'too sensitive' for reform. During the preparations for the Uruguay Round in the mid-eighties, the US supported liberalisation of agriculture, but the European Community (EC) did not. To get agriculture on the agenda a group of 14 agricultural exporting nations met in Cairns, Australia, in 1986 3.

The Cairns Group created a 'third force' which, in alliance with the US, made the inclusion of agriculture unavoidable. The Cairns Group applied pressure at a time of crisis in the European agriculture budget and at the height of an export subsidy war between the two powers.

These circumstances combined to place agriculture, for the first time, 'on the negotiating table' - something that nobody would have dared take for granted when the Uruguay Round was launched. The Uruguay Round Agreement on Agriculture produced some immediate gains, but the potential gains from bringing agriculture inside the WTO rules-based system that are of even greater value to Australia. As an efficient producer, Australia's growth in agricultural exports is still blocked in world markets by high trade barriers. The new Round creates an opportunity to achieve deep cuts in protection.

How bad is it really?

The growth and profitability of Australia's agricultural exports is held back by a lack of reform. The problem is that protection is so intricate and pervasive, and the costs so camouflaged, that it is difficult for the losers to gain a realistic appreciation of how much they are being hurt. Nevertheless, over the past 15 years, agricultural economists have used mathematical models to transform the debate about the costs of protection. The latest estimate, from the Centre for International Economics in Canberra, is that the potential gain to the world trading system from trade reform in agriculture is US$260 billion 4.

There are many instances of protection distorting individual economies and global trade. A glaring example is the European, American and Japanese sugar industries. America uses import quotas to help US growers get high prices, the European Union (EU) uses production quotas, and Japan offers farmers guaranteed prices and direct grants. The burden of these policies falls on consumers. An OECD study found that, as a percentage of the average household bill for sugar, the consumer tax was 150 per cent. The effects of sugar protection do not end there. An industry making artificial sugar has evolved to compete with the one growing real sugar at artificial prices. Corn syrup and aspartame are two reasons why soft-drink manufacturers have given up using sugar. Sugar's share of the American sweeteners market has fallen by half since 1970 5.

The Uruguay Round had only a slight effect on sugar. This compares with beef where Uruguay Round commitments to the year 2000 will see some cuts in tariffs to Japan, greater access to Korea and a 20 per cent decline in EU subsidised exports. All the same, the scope for further gains in beef is as big as those already achieved. Complete trade liberalisation in 2001 could increase the value of Australian beef production by an estimated $5 billion over the next 15 years 6.

In dairy, Australia and New Zealand are the lowest cost producers. But trade barriers in Asian countries restrict our exports. In Japan, imports of milk powder and butter are controlled by tariff quotas, and until recently, Korea was effectively a closed market. Currently, access is severely restricted by prohibitive tariffs and very limited tariff quotas. Also in dairy, export subsidies by the US, under the Dairy Export Incentive Program (DEIP), and the EU, have a depressing effect on world prices. This leads to a corresponding drop in Australian farmers' manufacturing milk returns. The goal for Australia in the 1999 Round must be the total elimination of agricultural export subsidies.

How did world agriculture get into such a mess?

Agricultural policy has a very long history. From the early Middle Ages in England, the 'Corn Laws' regulated internal trade and restrained all exports of grain. From 1660, grain imports were restricted by tariffs until their celebrated repeal in 1846. From the mid-1840s to the Great Depression (1880-1900) there was an interlude of free trade which spread from Britain throughout Western Europe.

During the late 19th century, exports of grain and meat from North America and frozen meat from Australia were highly competitive. Britain took advantage of this 'cheap' food and held determinedly to its policy of free trade. But France and Germany, who were unable to compete, shielded their farmers behind high tariff walls. The second great convulsion was when Europe was drawn into the economic crisis of the 1930s. Markets contracted, prices fell and farmers went bankrupt. This time, laissez-faire was abandoned even in Britain and all countries maintained their protective measures up to the Second World War 7.

Governments in Europe and the US steadily increased the amount and complexity of support over the years. This alarming and rising trend was given a further boost by the advent in 1962 of the Common Agricultural Policy (CAP) which transformed the EC from the world's biggest importer of food to the world's biggest exporter. The present problems of agriculture have been foreseeable. They are the culmination of a trend which has long worried observers of international trade, who have noted the marked contrast between the post-war liberalisation of industrials under successive rounds of the GATT, and the situation with agricultural products 8.

Why is reform so difficult?

The previous discussion has examined agricultural protection from an economic and historical standpoint. However, if we want to find the real explanation for the continuation of economically costly and inefficient policies, we need look no further than the politics of agriculture.

In all parts of the world, agricultural interest groups have a long history of political influence. Farm lobbies are solid and deeply entrenched pressure groups. Ironically, and contrary to their beliefs, most farmers have not benefited much from support as it has not always raised their relative income position as a group. A high proportion of the gross benefits received in price support are dissipated in high land values. When land is bought or sold, the price reflects the stream of subsidies that have made it more valuable. The buyer of the land gains nothing because he has already paid for the future subsidies in the price of the land. Further, policies designed to stabilise domestic prices actually make world prices more volatile. As protection has grown, so has the instability of world markets 9.

For some industrialised countries 'food security' is still used to justify protection. The hunger of Europeans and Japanese during and after the Second World War affected the outlook of an entire generation. The Japanese Cabinet continues to issue projected food self-sufficiency rates on a caloric basis. The Central Union of Agricultural Co-operatives in Japan regularly publishes articles which urge the Government to take 'effective measures' in response to 'fears' of a decline in the self-sufficiently rate. Ironically, modern transport systems mean international trade is the best policy to guarantee food supplies. But trade as an institution is corrupted by policies that emphasise self-sufficiency.

Protection is far harder to dismantle than to introduce. Once subsidies have been created, lobbies grow up to defend them. The Swiss farmer who earns 80 per cent of his income from subsidies has a strong incentive to spend 80 per cent of his time defending them. The calculation is rather different for consumers who only spend 7 per cent of their income on food. It is simply not worth their while to organise other consumers and pester politicians 10.

Possibly the most elaborate system of institutional rent-seeking is in Japanese agriculture. A complex web of highly imaginative arrangements have been built up over time between agricultural organisations, local governments, the Ministry of Agriculture, Forestry and Fisheries (MAFF) and the Liberal Democratic Party. The most important player in the system is the agricultural bureaucracy. Although there have been some cuts in price support mechanisms and subsidies, the big money is spent by the MAFF on rural public works and this has been boosted 11.  

Has there been any progress since the Uruguay Round?

Progress seems so slow. That, at any rate, is the view of efficient Australian farmers who cast their eyes on overseas markets corrupted by agricultural protection.

The US reductions in production subsidies in the 1990 Farm Bill were sufficient to meet their commitments under the Uruguay Round. But the US has now taken the further step, in the 1996 Federal Agricultural Improvement and Reform (FAIR) Act, of replacing deficiency payment support for wheat, feedgrains, rice and cotton with direct payments over a seven-year time frame. The US is still protectionist in peanuts, sugar and dairy 12 but much more progress has been made in the US than in the EU.

Agenda 2000 is the European Commission's proposals for the future of the CAP. The proposals contain deeply unsatisfactory compromises and will only buy a brief 'breathing space' before pressure builds for a further round of reform in the next decade. Agenda 2000 contains promising price cuts for cereals and beef but the proposals for milk will do nothing to solve the problems in the dairy sector. The most conspicuous omission from Agenda 2000 is the absence of any proposal on sugar 13. The proposals also send the wrong message to the acceding Central and East European countries to "gear up their sugar and milk sectors as quickly as possible to take advantage of the Commission's failure to address the issues" 14. 

The Cairns Group

The Cairns Group accounts for around 20 per cent of the world's agricultural exports and represents the same number of people as the combined populations of the US and the EU.

The Cairns Group made significant contributions in the early stages of the Uruguay Round. Because of these contributions, and the publicity that goes with them, opponents of reform are well aware of its efforts and are ever ready to counter them. French farmers, who fought so hard to deny Cairns Group countries billions of dollars in export income in the Uruguay Round, will be lobbying hard to defend their position in 1999.

An important job for the Cairns Group is to maintain a close watch on the implementation of Uruguay Round commitments. As Clayton Yeutter, a former US Trade Representative and US Secretary of Agriculture points out, "there is always some 're-interpretation' after a trade agreement is signed, particularly one as complex as the Uruguay Round. But everyone ought to honour the spirit of the Agreement, and we should make a concerted effort to ensure that 'slippage' is minimised". The WTO should affirm that participants in 1999 enter the negotiations with clean hands 15.

At the last meeting of the Cairns Group, in Rio de Janeiro, in June 1997, Ministers resolved to develop options and strategies for consideration at the 18th Ministerial Meeting in Sydney in April, 1998. The Sydney meeting will start to shape the negotiating position of the Cairns Group for 1999. For this reason, the Ministerial will be watched and analysed in the capitals of the world.

But the Sydney Ministerial is also momentous because it will include a ground-breaking industry meeting. Presidents from peak farm organisations in the Cairns Group countries will hold a 'parallel meeting' in Sydney to broadcast to the world that industry and government are united in their determination to see fundamental trade reform in food and agriculture. Industry leaders will also review strategies for farm organisations to support the push to open world markets for agriculture. 

Issues for the 1999 Round

When the Uruguay Round of GATT negotiations finished in 1994 the trade environment had undergone substantial change. First, the GATT was strengthened and replaced by the WTO - which has a tougher mechanism for settling trade disputes. Second, membership of the WTO had increased from 94 countries in 1986 to 114 countries, with 30 countries - including Russia and China - applying to join. Third, Trade Ministers agreed to get together every two years to push things along. This is a situation we have not faced before. The first meeting was in Singapore in 1996 and the next WTO Ministerial is in May, 1998.

The 1999 Round offers huge potential benefits, but these gains do not come easily. They involve a process of difficult negotiations. The progress of the new Round and the key to its success will depend upon reform in the sectors heavily traded by the US and the EU. The main issues for the 1999 Round are the elimination of export subsidies, deep cuts in tariffs, greater access to major markets and reductions in domestic support.

Regardless of the Uruguay Round's 'built-in agenda' for further talks on agriculture in 1999, it is still necessary to build political support for 'deep cuts' to be achieved. As Hugh Corbet, from George Washington University, said at a recent symposium on agricultural trade strategies,

"just as a horse can be dragged to water but not made to drink, so negotiations can be initiated but not made to yield results, not unless there is a constructive interest in them".

To keep trade reform on track there is a huge job to build a domestic consensus in all WTO member countries. Because of anxieties in the public mind about 'globalisation' and the rapid pace of change this consensus is more fragile than ever before. In one sense, the process of getting results will be easier this time around because it has been accepted that agriculture is part of the main game. In another sense, this time around will be tougher because there is a growing international constituency opposed to reform.

A further challenge is that agriculture is the only sector 'on the table' in 1999. In 2000, the Services Agreement is up for negotiation, but we are still a long way from a new 'comprehensive' multilateral round. If we go into 1999 with agriculture alone it may be difficult for the EU, Japan and Korea, because there are no opportunities for sectoral trade-offs. This is why Australia supports calls by Sir Leon Brittan for the 1999 Round to be comprehensive.

For the US, there are some difficult issues to be faced in 1998, in the lead-up period to the next Round - the Asian economic crisis; the question of China's entry into the WTO; and the Clinton administration's absence of fast-track negotiating authority. Both the Asian economic crisis and the trade deficit with China could lead to calls from Congress for a new strategy to fight trade imbalances. This could harm the delicate consensus on US trade policy that is necessary for approval on fast-track.

The US was an important ally for Australia in the Uruguay Round and this will be the case again in 1999. American leadership will be crucial to achieving a good outcome from the new Round. Australia has an enormous stake in the agriculture negotiations and this is why we should be watching US trade policy very closely over the next 12 months.

Conclusion

Trade in food and agriculture is the most distorted part of world trade. But reform through multilateral negotiations can yield multi-billion dollar benefits. Australia played an important role in the Uruguay Round and because of our chairmanship of the Cairns Group this role was, and continues to be, highly visible. Equally, countries that protect their inefficient farmers have a fierce interest in opposing reform. If the world is ever to achieve free trade in food and agriculture, the Australian Government must take a strong position, work closely with industry, and allocate substantial resources to what is shaping up to be an intense round of global trade negotiations.

References

1 "World Trade - All free traders now?" The Economist, Dec 7, 1996, pp 23-25.

2 Langley, S., Stillman, R. and Hogie, L. 1997, 'Dairy Policies are Limiting US-Canada Trade', Agricultural Outlook, US Department of Agriculture, January-February, pp 19-23.

3 The original 14 countries were Argentina, Australia, Brazil, Canada, Chile, Colombia, Fiji, Hungary, Indonesia, Malaysia, the Philippines, New Zealand, Thailand, and Uruguay. There are now 15 members. South Africa and Paraguay have joined the Cairns Group and Hungary has left.

4 Stoeckel, A. 1997, 'Agricultural Trade Negotiations Background Paper', paper presented at Centre for International Economics, 'Agricultural Trade Strategies Symposium', Canberra, 29 September.

5 Carr, E. 1992, 'Agriculture - the new corn laws' The Economist Survey of Agriculture, December 12.

6 'Benefits to the Meat and Livestock Industry from Agricultural Trade Reform', Australian meat and livestock industries submission to the House of Representatives Standing Committee's inquiry into the benefits to rural Australia of international agricultural trade reform, 27 March, 1997.

7 Tracy, M. 1982, 'Agriculture in Western Europe', Granada, London, 2nd edition.

8 Howarth, R. 1985, 'Farming for Farmers - a critique of agricultural support policy', Hobart Paperback No. 20, Institute of Economic Affairs, London.

9 Carr, E.

10 Carr, E.

11 Boyd, T. 1997, Rich harvest in rural Japan', Australian Financial Review, October 4-5.

12 Yeutter, C. 1997, 'Agriculture in a Global Context', Presidential address given at a May 20 seminar in Buenos Aires, hosted by the International Food and Agribusiness Association.

13 Tangermann, S. 1997, 'An Assessment of the Agenda 2000 Proposals for the Future of the Common Agricultural Policy', Institute of Agricultural Economics, University of Gottingen.

14 Buckwell, A. 1997, 'Towards a Common Agricultural and Rural Policy for Europe', paper presented at a European Parliament conference, 'Agriculture in Society', Brussels, November.

15 Yeutter, C.