Transcript ROBERT L. THOMPSON - farmdoc: Farm Decision Outreach

Trade & Globalization:
Is Free Trade Beneficial?
Robert L. Thompson
Gardner Professor of Agricultural Policy
University of Illinois
September 13, 2005
Outline of Presentation
• Globalization is here to stay
• Why free trade?
• Importance of assistance to
facilitate/smooth the transition/adjustment
• Current WTO ag trade negotiations
• Current politics and looking towards Hong
Kong
Globalization
• Increasing integration of economies (from the
most local level) around the world
–
–
–
–
Trade
Technology/knowledge
People/labor
Financial capital
• Result of technological advances that reduce
cost and increase speed of international
transactions
• Creates unprecedented opportunities for
specialization and exchange of goods and
services (global sourcing & supply chains)
• Exposes previously isolated markets to
competition
Why Trade?
• Increase standard of living by obtaining
goods that others can produce at lower
cost in exchange for things we can
produce relatively cheaper
– By lowering the cost of living, makes a
household’s purchasing power stretch further
– Increases a country’s GNP by employing its
land, labor & capital where they are most
productive
Then Why Do Governments Seek
Self-Sufficiency & Restrict Ag Trade?
• National security (security of food supply, esp.
after wars when hunger occurred)
• Protect existing/create new jobs
• Favor to rent-seekers
– Benefit friends and relatives
– Response to bribery
– Response to campaign contributions
• Low public profile because, while benefits are
concentrated, costs are diffuse.
– For example, the US sugar program may give each
grower over $100,000 per year while costing the
average consumer only an additional $12 per year.
U.S. Producer Support, 2001-2003
(Percent of gross farm receipts)
Sugar
Milk
58
44
Rice
Sorghum
44
37
Wheat
Barley
Corn
Soybean
Wool and lamb
Pork, beef and broilers
Overall
34
30
20
19
17
4
19
Source: OECD PSE database
Ag Commodity PAC Contributions to Federal
Candidates, 2004 Election Cycle
Commodity
Sugar
Dairy
Cotton
Rice
Contributions ($ 1,000)
2,375
1,757
479
283
Peanuts
Citrus
Wheat
Potatoes
218
167
100
57
Corn
Soybeans
37
17
Source: Center for Responsive Politics (Federal Election Commission data)
World Agriculture in Disarray*
• In most high income countries, farmers are
few in number, but have large political clout
– Subsidize agriculture, distorting relative returns to
various outputs and induce larger total investment
in agriculture relative to other sectors.
• In many low income countries the political
clout is in the cities, and the numerically
larger group of farmers has little political clout
– Food policies turn the terms of trade against
agriculture to keep urban food prices low, reducing
the incentive to invest; agriculture underperforms
relative to its potential.
*Title of an excellent study by D. Gale Johnson.
OECD Producer Support Estimates,
2004, in Percent
Switzerland
Japan
European Union
Canada
United States
Mexico
Australia
New Zealand
30 Countries Overall
Source: OECD Agriculture Directorate
68
56
33
21
18
17
4
3
30
Average Producer Support in OECD
Countries, 2004, in Percent
Rice
75
Sugar
Milk
Beef & Veal
Wheat
Corn
Oilseeds
Pork
Overall
58
36
34
33
31
27
21
30
Source: OECD Agriculture Directorate
Divergent Relative PSEs Distort Mix
of What’s Produced Where, 2003
Product Austral
E.U.
Japan
Poland
Switz. U.S.A.
Wheat
5
46
87
7
60
25
Corn
--
41
--
10
74
15
Rice
6
35
81
--
--
34
Oilseed
3
34
83
17
84
19
Sugar
11
63
55
51
78
61
Milk
15
51
41
8
80
45
Beef
4
77
77
-2
71
3
Chicken
3
37
33
8
85
4
Pork
4
24
55
-4
70
4
Domestic Effects of Protection and
Subsidies to Agriculture
• Increase total investment in agricultural sector
relative to other sectors of the economy
• Distortions in relative prices distort what gets
produced where.
• Inflate price of land and other fixed assets
– Largest producers and farm land owners get most of
the benefits
• Retain too many people in agriculture
– Out-migration is normal and essential.
– Effects of trade liberalization are often confused with
adjustment that occurs normally during economic
development.
External Effects of Ag Protection
and Subsidies
• In net importers, smaller imports result in lower
world price than would otherwise be the case,
e.g. US sugar & dairy and Japan rice
• In net exporters, larger production and exports
depress world market price below where it would
otherwise be, e.g. US cotton and EU sugar
• Notes:
– Important to distinguish between long-term downward
trend in world price and effects of subsidies
– Non-tariff barriers to imports may reduce domestic
price variability while increasing volatility of world
market prices received by other countries’ farmers.
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 So Difficult to Reduce Ag
Subsidies & Liberalize Trade?
• Benefits are capitalized into land values, so
value of land would fall.
– Farmers who borrowed heavily to buy land likely to go
bankrupt.
– Many farmers’ retirement savings are in their land.
• Labor adjustment difficult
– Specialized skills become redundant or worthless.
• Retraining may be costly (or impractical for older people).
– Adjustment may require physical relocation
• May be both monetarily and emotionally costly
• Greed
– Rent seekers don’t give up their rents without a fight.
– Politicians likely to lose campaign contributions and/or
bribes.
Gains from Trade Liberalization
• Economic theory tells us that the gains of
the gainers exceed the losses of the losers
• It does not tell us there are no losers!
• The challenge is to define policy
interventions to compensate losers for
their losses:
– to facilitate the adjustment
– to neutralize opposition of politically powerful
opponents who could stop liberalization dead
Anti-Globalization Activists:
An Unholy Alliance
• Socialists who prefer public-sector to private- sector
solutions and oppose big business, especially
multinational firms and large scale commercial farms
• Labor unions whose main interest is preserving jobs in
protected sectors, often at very high cost per job saved
• “Environmentalists” whose main goal is to impede/stop
economic growth and population growth
• “Consumer Organizations” whose efforts usually reduce
consumer choice, often at higher cost, e.g. oppose ag
chemicals and GMOs (advocate “natural” foods, e.g.
“organics”, “free range” poultry and livestock, etc.)
• Farm organizations that seek to preserve subeconomically small family farms
• Many churches and development NGOs seeking “social
justice” for the poor (in both high & low income countries)
Trade Liberalization and Poverty
• A more open trading environment can stimulate
faster economic growth
• Trade a more powerful engine of growth than aid
• Trade liberalization creates both winners and
losers, with the gains of the gainers exceeding
the losses of the losers
• Who the losers are matters: the rich and
powerful? or the politically weak poor?
• For trade liberalization to benefit the LDC poor,
need pro-poor development strategy, adjustment
assistance, and green box public good
investments.
Does Trade Liberalization Hurt the
Environment?
• There is no reason it should nor evidence
that it does
• In fact, attempts to achieve self-sufficiency
where no comparative advantage exists
are more likely to be both economically
wasteful and environmentally
unsustainable.
Global Trading Environment
Impedes LDC Poverty Reduction
• OECD protectionist barriers to LDC goods
reduce their foreign exchange earning capacity
& economic growth.
• Food aid is most available in years of OECD
surplus, not LDC deficit.
• Depressed world market prices reduce returns
to poor farmers, increasing their poverty, and
slowing agricultural and national economic
growth.
• Widespread poverty in LDCs impedes growth in
their food demand, preventing them from
fulfilling their potential as growth markets for ag.
Developing Countries’ Own Policies
Impede Their Development
• Corruption and/or macroeconomic instability
• Lack of definition or enforcement of property
rights and contract sanctity
• Underinvestment in public goods, such as rural
infrastructure, education and R&D.
• Cheap food policies to keep urban consumers
quiescent – often reinforced by food aid or
subsidized exports from OECD
• Lack of technology adapted to local agroecological conditions (soils, climate; slope)
Free Trade Agreements vs.
Multilateral Trade Liberalization
• FTAs are clearly second best – but often
better than no liberalization (e.g. the huge
success of free trade among the 50 United
States!)
• Questionable tactic as practiced today
– Generally leave out agricultural trade
liberalization (“leave it for the WTO”)
– Risk addressing other sectors’ problems and
losing leverage from them in the WTO
World Trade Organization
• An informal association of 148 countries which
meets periodically (“rounds of negotiations”) to
review/revise the rules of international trade
• Its Secretariat, in Geneva, organizes these
negotiations and a dispute settlement process to
resolve differences among members over
whether these rules are being broken
• Dispute settlement panels & an appellate body
interpret agreements and build up a body of
case law (necessary when wording is fuzzy)
• WTO cannot force any country to change its
policies, but it can authorize the victims of
violations to collect compensation via import
duties on the violator’s exports
Uruguay Round Agreement on
Agriculture: Accomplishments
•
•
•
•
•
Increased market access as % of consumption
Reduced export subsidies (value & volume)
Converted all non-tariff barriers to tariffs
Required scientific basis for all SPS barriers
Acknowledged that some domestic agricultural subsidies
can distort trade and categorized them by degree of
trade distortion:
– “Green box” = non trade distorting investments in public goods
and decoupled income transfers
– “Amber box” = trade-distorting (bound and reduced)
– “Blue box” = trade-distorting, but offset by production controls or
set-asides
But the Uruguay Round Did Little to
Liberalize Agricultural Trade
• Uruguay Round established a useful
framework
• But, it did little to open markets, and
OECD countries are still spending over
$750 million per day subsidizing their
farmers
• Doha Round needs to be more ambitious
than the Uruguay Round by closing
loopholes and tightening disciplines to
prevent circumvention of the intent of the
agreement.
Why the Focus on Development
in the Doha Round?
• Developing countries are the only potential
growth markets of the future -- but only if they
enjoy broad-based economic growth -- which will
come only if they are allowed to export what they
produce relatively most efficiently.
• Developing countries now make up the majority
of WTO members. There will be no agreement in
the current trade negotiations until they feel
there is something of value in it for them (unlike
past trade agreements).
• It’s the right thing to do!
Key Outcomes Developing Countries
Need from OECD Countries
• A more open trading environment that can
stimulate faster economic growth
• Market access for goods in which developing
countries have a comparative advantage
• Eliminate import barriers and domestic and
export subsidies which depress world market
prices and increase their variance
• Foreign aid and international lending for
investment in necessary infrastructure,
technology, know-how, etc. and to facilitate
adjustment.
Key Players in Doha Round
Agricultural Negotiations
•
•
•
•
•
•
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)
Doha Round Agricultural
Agreement: What Is Possible?
• Eliminate all forms of ag export subsidies
• Reduce trade-distorting domestic subsidies
(highest the most, but exceptions possible)
• Reduce tariffs (highest the most, but exceptions
allowed if increase minimum market access)
• Tighten definition of what subsidies are “nontrade distorting”
• Allow developing countries smaller cuts over
longer period (definition? exempt LDCs
completely? exempt “sensitive products”?)
Minimalist Outcome Possible
in Hong Kong
• Tariff cuts from bound, not applied, tariffs (& no cap)
• No increase in minimum market access
• Cuts in domestic ag supports smaller than presently
unused “capacity” (or increase the cap!)
• Cuts to be made from product aggregates, not individual
products
• Redefine blue box to include countercyclical payments
• Everyone’s most-subsidized commodities avoid cuts by
being categorized as “special products”
• Developing countries overuse new “sensitive products”
• Least-developed countries don’t have to do anything
WTO Ag Negotiations Hung Up
on Who Goes First
• U.S. has proposed reducing its ag subsidies
substantially, but only if other countries provide much
greater access to their markets.
• The EU is proceeding with its reforms, including sugar,
while the US reversed course in the 2002 farm Bill
• Developing countries won’t open their markets as long
as world market prices are depressed by ag subsidies in
OECD countries (and they have more than half of the
votes in the WTO)
• Despite rhetoric at July 2005 G-8 Summit, no more
progress in WTO ag negotiations occurred this summer.
• After almost losing CAFTA-DR vote, other countries
doubt U.S. ability to deliver on commitments.
• Unclear that U.S. negotiators have authority to strike
meaningful deal.