Transcript Slide 1

Trade Negotiations and
Agreements
AAEC 3204
Dr. George Norton
Agricultural and
Applied Economics
Virginia Tech
Copyright 2009
Objectives
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Discuss multi-lateral agreements as
potential solutions to trade problems
• Discuss the GATT and WTO
• Regional agreements – for example
NAFTA
Developing country trade reform
interests
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With trade reform, many developing
countries would gain from lower barriers
for their exports; some would lose from
the projected 10-20% higher prices for
grain imports. Most countries would gain.
Europe and Japan have the highest trade
barriers, but U.S. and developing
countries also restrict trade significantly
OECD Producer Support Estimates,
2004, in Percent
Switzerland
68
Japan
56
European Union
33
Canada
21
United States
18
Mexico
17
Australia
4
New Zealand
3
30 Countries Overall
Source: OECD Agriculture Directorate
30
Average Producer Support in OECD
Countries, 2004, in Percent
Rice
75
Sugar
58
Milk
36
Beef & Veal
34
Wheat
33
Corn
31
Oilseeds
27
Pork
21
Overall
30
Source: OECD Agriculture Directorate
Domestic Effects of Subsidies to
Agriculture
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Increase total investment in agriculture
relative to other sectors
Distort what gets produced where
Affect price of land and other fixed assets
Holds people in agriculture that would
normally move to other sectors as
development proceeds
External Effects of Ag Protection
and Subsidies
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Fewer imports by importer (examples: US
sugar; Japan rice) can lower world price
For net exporter, larger production and
exports can depress world price (example:
US cotton)
Barriers to imports may reduce domestic
price variability but increase variability on
the world market
OECD Policies Depress Commodity
Prices Below Long Term Trend
Rice
33 - 50 %
Sugar
20 – 40 %
Dairy Products
20 – 40 %
Cotton
10 – 20 %
Peanuts
10 – 20 %
Source: World Bank. Global Economic Prospects 2002, Chap. 2.
Why Is It Difficult to Reduce Ag
Subsidies & Liberalize Trade?
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Benefits are capitalized into land values,
so value of land would fall
Labor adjustment difficult
• Specialized skills become less valuable
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Retraining may be costly (or impractical for older
people).
• Adjustment may require physical relocation
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May be both monetarily and emotionally costly
Those with benefits want to keep them
• Subsidy recipients don’t give up without a
fight.
• Politicians likely to lose campaign contributions
and/or bribes.
Gainers and Losers
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Gainers exceed losers, but there are
losers
The challenge is to define policies to
compensate losers:
• to facilitate their adjustment
• to neutralize political opposition
Multilateral Trade Agreements
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General Agreement on Tariffs and
Trade (GATT)
World Trade Organization (WTO)
GATT
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Temporary trade
agreement set up
after WWII when
agreement to form
an International
Trade Organization
was not ratified
4 basic principles of the GATT
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Tariffs are the only “legitimate” form of
trade restraint
No discrimination in application of tariffs
(most favored nation principle)
Consultation and negotiation to avoid and
settle disputes
Agreement to periodic multilateral
negotiations to lower trade barriers (with
reciprocity)
Non-tariff barriers legitimate if:
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Balance of payments problem
Severe shortage in domestic
economy (i.e. can put on export
restriction)
Import quotas can be put on goods
under production controls at home
Health, safety, copyright reasons,
etc.
Periodic Negotiations
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1949
1950
1956
1960
1964
1973
1981
1986
2001
– 51
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62 Dillon round
67 Kennedy round
79 Tokyo round
83 Geneva round
93 Uruguay round
? Doha round (under WTO)
Uruguay Round Agreement on
Agriculture
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Increased market access
• Change non-tariff trade measures to tariffs
• Establish tariff-rate quotas
• Bind all tariffs
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Reduced export subsidies
• Defined limits on export subsidies
• No new export subsidies
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Required scientific basis for SPS barriers
Acknowledged that some domestic agricultural
subsidies distort trade and categorized them by
degree of trade distortion into boxes: Green,
Amber, Blue
The WTO Colored Boxes
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“Green box” = non trade distorting
investments in public goods and
decoupled income transfers (no cap)
“Amber box” = trade-distorting
(bound and reduced) (capped)
“Blue box” = trade-distorting, but
offset by production controls or setasides
Estimated benefits of Uruguay
Round
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A few $billion to U.S. and world
economies per year (after fully
implemented)
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U.S. agricultural exports up a little
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U.S. net farm income up a little
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Some savings in domestic farm
support programs initially
World Trade Organization (WTO)
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What is the WTO?
How does it affect U.S.
agriculture?
Is the WTO harmful or
helpful to developing
countries?
Background on WTO
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153 member countries which negotiate to
revise trade rules
Secretariat, in Geneva, organizes
negotiations & follows a process to resolve
differences over whether rules are being
broken
Dispute settlement panels & an appellate
body interpret agreements
WTO can not force a country to change
policies, but it can authorize victims to
collect compensation via import duties on
the violator
Key Players in Doha Round
Agricultural Negotiations
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United States
European Union
G-20 (Brazil, India, China, S. Africa, +)
Cairns Group (Australia, New Zealand, +)
G-10 (Japan, Korea, Norway,
Switzerland,+)
Other developing Countries (the majority of
members, but heterogeneous interests)
Focus on Development
in the Doha Round
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Developing countries are potential growth
markets -- but only if they enjoy broadbased economic growth -- which will be
facilitated if they can export what they
produce relatively most efficiently.
Developing countries now are the majority
of WTO members. There will be no new
trade agreement until they feel it will help
them (unlike past trade agreements)
Developing countries in need of
development to improve living standards
Many U.S. Farmers:
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Losing confidence in their international
competitiveness
Don’t recognize potential for growth in
developing country markets
Think Uruguay Round Agreement on
Agriculture was unfair to U.S. farmers
And therefore are unenthusiastic about
the Doha round
Doha Round of Negotiations
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Was scheduled for completion in 2007
U.S. has proposed reducing ag subsidies
substantially, but only if other countries
provide greater access to their markets.
Developing countries won’t open their
markets as long as world market prices
are depressed by ag subsidies in
developed countries
Progress at a standstill with talks
suspended since July 2008
Increase in Regional Agreements
and Country Groupings
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Examples
• North America – NAFTA
• Europe – EU
• Asia – APEC, ASEAN, and others
• Africa – SADC, ECOWAS, COMESA, and
others
• Latin America – Andean Group,
Mercosur, ALADI, and others
Motivations for Regional
Integration
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Economic
• Economies of scale
• Specialization
• Increased
competition
• Market power
• Stabilization
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Social
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Cultural
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Political
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Military
Regional Economic Groupings
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Free Trade Area
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Customs Union
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Common Market
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Economic Union
Loose ties
Close ties
North American Free Trade
Agreement (NAFTA)
Conclusions
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A more open trading environment
can stimulate faster economic
growth, helping developed and
developing countries
Trade agreements and negotiations
are difficult but can facilitate trade
liberalization