Canada\'s Agricultural Trade Policy: Choices and Challenges

Canada’s Agricultural Trade Policy: Choices and Challenges Invited Fellow’s Address, Canadian Agricultural Economics Society, Vancouver, July I998

Michele Veeman Department of Rural Economy, IJniversity of Alberta, Edmonton, Alberta its a small open economy, Canada has a considerable interest in the achievement of substantive lrade liberalization for agriculture in a multilateral context. Despite the advantages of a multilateral approach lo international trade rules, there are clear economic benefits for small countries like Canadajiom pursuing unilateral trade liberalization. In the context of Canadian agricultural policy this would require a considerable adjustment to the high levels oJprotection @orded Canada’s supply-managed sectors. The benefts of an open economy are often not rejected in public discussions or in the language of trade negotiations. Instead these tend to reject a focus on rent-seeking by special interest groups. This misrepresents the concessions qfreduced trade barriers as costs, rather than recognizing them asbenefits. There is a challenge Jor agricultural and applied economists to spell out the benefits of an open economy more clearlv. A related useful focus ofresearch is to explore the conditions and the nature of compensation to producer groups that would encourage rapid unilateral trade liberalization.

INTRODUCTION Canada’s longstandlng role as a supporter of

the multilateral rules-based internationaltradingsystemofthe General AgreementofTanffs and Trade (GATT) reflects its situation as a small or medium size open economy that is considerably dependent on world markets. In addition Canada’s trade policy is necessarily heavily influenced by its geography, in particular, by the feature of sharing muchof a continent with the world’s largest economic power, the United States. This has fostered the very high level of concentration of Canada’s international trade with the much more powerful United States. Consequently, in addition to support of GATT, Canadian trade policy has focussedalso onthe establishmentoftheinitial bilateral regional trade agreement with the IJnited States, the Canada-United States Trade Agreement, and the subsequent widening of this to the North American Free Trade Agreement, with the inclusion of Mexico (Veeman

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1996).Later efforts to broaden further the regional focus of this agreement have not yet been successful, but Canada has entered into trade agreements with Chle and Israel and maintains membership in a variety of interntional organizations that have goals focused on the reduction of trade barriers. However, the GATT continues to be viewed as the institution that offers most promise for anopen system that relies on accepted rules of conduct, rather than the exertion of market power, in international trade. The focus of h s paper is on choices and challenges that Canada currently faces in developingtrade policy foragriculture.The Agreement on Agriculture of the General Agreement on Tariffs and Trade provides for international discussions on agricultural trade to start in 1999, one year prior to the end of the implementation period of that agreement. Thus it is necessary to consider the trade policy choices that will be most advantageous for Canada.

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documented. The Agreement on Agriculture involved various speclfic commitments to reduce these distortions during the six years of the implementation period, from 1995to 2000 (a longer implementation period and somewhat different level of commitments apply for developing countries). The extension of rules-based trading to agriculture was heavily dependenton the concept the conversion of most of “tariffication” non-tariff trade baniers into bound tanffs, in the form of tanff-rate quotas, reflecting associated commitmentsfor minimum levels of access. T h ~process s has been applied to numben of non-tanff import restrictions previously associated with national farm programs. l h s included longstanding features of national agricultural policy, such as the border restrictions previously provided by the United States in its “Section 22” exemption. (This had enabled the US to impose quotas on imports of agncultural products in support of its domestic farm programs). As well, the import quotas that had been applied by Canada, under Section XI of the GA’IT, in support of its national supply-management programs, were converted to tariff-rate quotas. The general provisions of the Agreement on Agriculture are well known. In addition to the conversion of non-tariff border measures into bound tanffs and the staged reduction of bound tariffs on agricultural products, comtionist. mitments were made to provide import access to protected national markets for specific farm WHAT WAS ACHIEVED IN THE 1994 products. Import access commitments (which URUGUAY ROUND AGREEMENT ON are subject to safeguard provisions), were proAGRICULTURE? In the fifty years since the establishment, in posed to increase over time from 3% to 5% of 1948,oftheinternationaltradingsystemofthe each nation’s consumption levels, in volume G A T , the most recent round of negotiations, terms, during the six years of the agreement associated with the 1994 Uruguay Round period. Constraints were agreed to on the export Agreement (URA), were by far the most momentous for agriculture.The 1994 Agreement subsidizationof agriculturalproducts, providon Agriculture represents the first comprehen- ing for subsidized exports to fall very modsive inclusion of agriculture in the rules-based estly, by about one-fifth in volume terms system of the GATT, which is now adminis- (21%) or by two-thirds in terms of expenditered by the World Trade Organization tures (36%) for developed countries, relative (WTO). In the process of the extended nego- to the 1986-90 base period. Provisions were tiations of that round, the distortions of inter- also made for reductions in the aggregate level national trade in agricultural products that had of domestic support that is provided to farmers arisen from national farm programs were through those farm programs that are classiIt has been suggested that the forthcoming international discussions may be protracted and, if the historical pattern is followed, they may not necessarily lead to a large or full-scale “round” of trade negotiations. However, there are some factors that favor meaningful multilateral discussions for agnculture. One of the most important of these is a provision of the Agreement on Agriculture that is due to expire in the early 2000s, specifically the “peace clause”. This limits the challenges that may be directed against numbers of farm programs that are in conformity with the URA provisions but may, nonetheless injure other Mtions’production and trade.1 The peace clause benefits the United States and the European Union in shielding them from challenges to trade-distorting farm programs that might othewise be brought to the World Trade Organization by others, including the world’s small trading nations. Thus its prospective expiry may act as an incentive to meaningful discussions of agricultural trade policy by the major players. However, even if the forthcoming discussions on agricultural trade do not achieve substantivechanges in international trade rules for this sector, it is still necessary for nations like Canada to assess theiragncultural trade policy. There isastrong case for unilateral changes in those elements of agricultural policy that are hghly protec-

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fied as having the largest impact on production and trade (i.e., on programs classified as amber). Expenditure on these programs is to be reduced by one-fifth of its 198648 level during the agreement period. It was also agreed that the sanitary and phytosanitaq standards that nations may impose on traded agricultural products must be based on risk assessmentand restrict trade as little as possible. Another important feature of the URA for agricultural trade arises from the improvements in the appeal and enforcement provisions of the trade dispute settlement procedures of the General Agreement. Individual countries can no longer block the establishment of a dispute settlement panel nor can a single country block the adoption of a panel report. Thus the ability of small nations to challenge tradedistorting policies of large nations is much strengthened by the URA. Despite the very considerable achievements of the URA in incorporatingagriculture into the multilateral rules-based system of the GATT, the agricultural trade liberalization that was actually achieved in the round was only partial in nature and very modest in scope. The “Blair House Accord” aided the conclusion of the round, but t h s accord led to major t~ pes of agriculturalinterventionof the United States and the European Union being essentially left unchanged. The “blue box” was developed from a reclassification of “amber” programs in order to exempt major programs of these two nations from expenditure reductioncommitments. (Incontrast to “greenbox” programs, which were considered to be minimally trade-distorting, amber programs are considered to have greater production and trade impacts). The “blue box” category of programs was defined to include the deficiency payments that were, at that time, a major element of US farm policy, as well as the EU system of compensatory payments that compensate producers for reductions, introduced in 1992, in some intervention prices. Another feature of the URA that has limited its impact on agriculture was the choice of specified base periods against which agreed rcductions in tanffs, export subsidies and support to agriculture are based. In the base period,

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support to agriculturewas particularly high.In addition, inconverting their non-tariffbanien to tanffs, many countries adopted sufficiently high levels of bound tariffs for their politically sensitive products that these are expected to be prohibitive throughout the period of the Agreement. In some instances these new bound tanffs represent an increase in the potential rate of protection that had previously been provided to national producers (see, for example, Cymbal and Veeman 1995; Ingco 1994; Anderson 1998). Allied withthe minimum access provisions of the Agreement on Agriculture, the replacement of non-tanff bamers by tariffs has created a new type of GAT-legal agricultural trade restriction, tariff-rate quotas. The provisions for the gradual reduction of agricultural tariffs require that these need only be reduced by 15% for any individual item (tariff line), over the full six years of implementation.The requirement for a 36% decrease, on average, in agricultural tanffs relates to the required unweighted average tariff decrease. Consequently. tanff-rate quotas can confer a continuing high degree of protection for particular agriculturalsub-secton. Import access continues to be of concern in these cases. Another feature of concern, in circumstances where tariff-rate quotas confer sigruficant protection to a domestic industry, relates to the ability ofthe protected industry to extend the scope of discriminatory pricing between domestic and foreign consumers. T h s has been the route followed by the Canadan dairy sector, whch has augmented the longstandmg dairy industry practice of end-use pricing for milk by establishing lower priced export classes for manufacturing milk and pooling the returns from these sales with those from the hgher-priced domestic market. Tlus practice has been challenged, in an action that was brought to the WTO in 1997, by the United States and New Zealand. The result of this trade action will be known in 1999. Its outcome will be of considerableinterest to protected agricultural sectors in numbers of countries. If the extension of price discrimination between domestic and foreign markets is judged by the WTO to be anallowable practice

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of international trade, it can be expected that generally been complied with and several Msimilar procedures would also be pursued by tions have exceeded their export subsidy comother protected agricultural groups, including mitments. Canada’s 1995 deletionofprevious the dairy industries of the United States and rail transport subsidies for export grain and South Africa’s deletion of export subsidies, in the European Union. Even if Canada’s milk price-pooling prac- 1997,are two examples. Similarly, the United tice was judged to be GATT-legal, the high States has not found it necessary to apply its level of protection and exertion of market Export Enhancement Program to wheat since power over the domestic market that are the 1995 (IATRC 1997). Some of the instances in which export subbasis for these procedures are inconsistent with the spirit of trade liberalization that is a sidy reduction commitments have been exfundamental premise of the General Agree- ceeded can be attributed to fiscal constraints. ment. Thts is also the case for the EU proce- Others may be due to relatively favorable mardures of “inward processing relief’ that have ket conditions and in these instances the poessentially transferred “unused” export sub- tential may exist for export subsidies to be insidy “entitlements” from one dairy product creased to the commitment levels in less category to another, in order to increase export favorable market circumstances.However, the more important issue is that the URA export subsidization of cheese (USDA 1998). New concerns have also arisen relating to subsidy commitments were not that challengthe administration of tariff-rate quotas. If im- ing. Even though the URA prohibits new agports are allocated only to previous exporters ricultural export subsidies, the retention of exor to some specfied suppliers, market access port subsidies for farm products at all is an is denied to other exporters and the principle anomaly in terms of the GAIT prohibition of of non-discrimination in trade, whch is one of Uus practice by other sectors. The continued legitimization, by the the keystones of the GATT system, is confounded. Importation may be controlled by Agreement on Agriculture, of agncultural exstate tradmg organizations that use import li- port subsidies is a major issue for future negocenses, markup policies, or other procedures tiations. The agreement can also be criticized in ways that discriminate against particularex- as sheltering numbers of farm programs that porters or discriminate against particular may considerably distort agricultural producforms of imports. Thus access of domestic tion patterns, as with blue box programs and consumers to the preferred q d t i e s or types as may well be the case for some green box of imported product may be restricted. Con- program^.^ Through the peace clause the cern has been expressed that these sorts of fac- agreement also shelters numbers of trade Qstors may underlie the unfilled tariff-rate quotas torting agricultural practices from challenge that have beenobservedfor some commodities by other members of the World Trade Organization. It is clear that there is considerable in some countries (IATRC 1997). The minimum access commitmentsassoci- room for further reform of the international ated with tanff rate quotas may also be applied trade rules for agriculture. to aggregate groupingsof commodities, rather WHAT ARE THE MAJOR ECONOMIC thanto individual items withna broad product BENEFITS AND CONSEQUENCES TO category grouping, as with the application of CANADA OF UNILATERAL TRADE minimum access commitments for “meat” LIBERALIZATION’? rather than for individual meats, or for “dairy products” rather than for individual dairy It is evident that countries with smaller open economies, such as Canada, and the other products. ’ The URA provisions for agriculture that members of the Cairns group, have a considconstrain export subsidization of agricultural erable interest in pursuing further international products seem to be regarded as successful in negotiationsthat would yield more substantive that, to ths point, these commitments have liberalization of agricultural trade. Unilateral

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trade liberalization is a rational policy for such countries. From the theory of international trade it is clear that unless a nation can influence its international terms of trade, its Mtional income and its economic growth are harmed by less than free trade in goods and services. Trade restrictions directly harm consumers by forcing them to pay unnecessarily higher pnces for consumer goods and services. They directly harm processors by forcing them to pay hgher than necessary prices for protected inputs. Consequently, the costs of the domestic industry will be inflated in a protected economy. There is no evidence that industry efficicncy is enhanced by trade restrictions. In fact, the opposite is believed to be the case. Considerable rent-seeking costs, and higher levels of administrationand transactionscosts an:associated with policies of protection. Why is it that unilateral trade liberabation is not universally pursued by smaller nations? The tendency to avoid unilateral trade liberalization is one reflection of the fact that economic policy decisions are made in the framework of the realities ofpolitical economy.The potential for trade restrictions to provide relati\ ely large gains to inhvidual producers provides them with incentives to lobby politicians and bureaucrats effectively, through industry associations and personal representations. In contrast, consumers face higher costs of organization into lobbying associations, have more fragmentedinterestsand face more problems of free-riding than producer groups. There can be considerable incentives for producer’s associationsto seek rents from protection and a lesser ability for public interest groups to lobby in opposition to protection Multilateral trade negotiations may give small nations an opportunity, through their group action, to exert slightly greater leverage in negotiations with larger economic entities, but the more major benefit for small nations from such negotiations may be to increase the extent of public discussion and awareness of the benefits of trade liberalization. However, some of the language and context of multilateral trade negotiations tend to obscure the benefits of unilateral liberalization.

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The framework and language of multilateral trade negotiations has traditionally involved the offering, by individual nations, of “concessions” that involve reductions in tariffs or increased opportunities for import access, in exchange for similar “concessions” from other tio on^. This mercantilist approach to negotiations ignores the reality that what is being offered as a concession represents a benefit to the liberalizing nation, rather than a cost. The existence of trade protection has costs, not benefits,forthe economy as a whole. Trade liberalization will benefit, rather than harm, the national economies of small M ~ ~ O I I S by making available to them the advantages of access to larger scale markets. The pervasive distortion of information that misrepresents a cost as a benefit, and vice versa, reflects the strength of the rent-seeking policies that have restrained many nations from pursuing the benefits of unilateral trade liberalization.The concept that unilateral liberahation may “give away” the bargaining chps of internationaltrade negotiations, leaving a nation with no means of encouragingothers to make concessions, is an error of reasoning that ignores the benefits to be made from trade liberalization. The misapprehension that only by exchanging “concessions” canone nationobtain access to others’ markets, ignores the possibility of using the trade remedies that are available, through the GATTNTO, in order to counter protectionist practices of other Mtions, including the largest economic powers. There are considerable potential benefits to small nations of further reform of the rulesbased approach to agricultural trade, through strengthening the G A T T W O rules that apply to a g n c u l t d trade and from further improvements in the dispute settlement procedures. Whde thebenefits oftrade liberalizationare well understood by numbers of people, they are not well-reflected in public discussion of trade issues. Hart (1998) has noted that critics ofanopeneconomy have “wrappedtheiranxieties in the Canahan flag” and have become convinced that Canahan identity and nationhood are related to protection and discrimina-

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tion. As he states succinctly “the emotional appeal of special interests to sovereignty and national identity makes good politics but it is not good economics” (Hart 1998).

partial compensation for the deletion of the longstanding farm program of western g m n mil freight subsidies was established with the payment of $1.6 billion to landowners.Applying h s concept to the Canadian supply-managed sectors could facilitate reform and raises questions as to the levels of compensation that would be necessary for farmers to accept reform of this sector. There are other precedents that are of interest in this context. Other sectors of the Canadianeconomy that previously received sign& cant protection feared that the industry as a whole might be unable to make an adjustment to an open economy. These fears were proved wrong when protection for these sectors was removed. Adjustment assistance to enable the Canadian gmpe and wine industry to adjust to freer North American trade in wine proved successful. Other examples of successful adjustment to lower levels of protection by industries that were relatively highly protected are seen in the manufactured products sector (examples include fashion clothing and furniture). Another focus of internal and international contention for Canadian agricultural policy is the single-desk role of the Canadian Wheat Board (CWB) in wheat and barley exports and in the sale of these grains indomestic Canadian food-grain markets. Although there is no agreement, either by farmers or economists, on the costs and benefits of single desk selling, in view of the preoccupation of the United States with the role of export marketingboards and the US-EU intention to place priority on state trading in forthcoming multilateral trade negotiations, it is of interest for Canadiangrain growers to consider what might be gained if they were willing to move to avoluntary CWB. The possibility of trading off the single desk role of the CWB for the phase-out of export subsidies for grains by the US and the EU should be of considerableinterest to grain producers.

WHAT ARE THE IMPLICATIONS FOR FURTHER REFORM OF TRADE POLICY? What are the implications and prospects for further reform of agricultural and resource policy in Canada? The removal of m p o r t subsidies eliminatedmost of Canada’sexport subsides and removed a large component of Canada’s aggregate measure of support, with an associated sipficant reduction in transfers to the farm sector. A very high proportion of agricultural imports now enter Canada duty free. This proportion is higher than for any other OECD country (OECD 1997).However, the levels of tarif€protection afforded the Canadlan supply managed sector are extremely high When these art included, the averagetarIff rate on agncultural imports by Canada is calculated to be about the same as inthe United States. ms was 21% in 1996, accordmg to WTO Secretariat calculations (WTO 1997). The continuing distortions in Canada’s supply-managed sectors are reflected in the existence of 22 different tariff rate quotas. Most of these apply to the supply-managed c~mmodities.~ The fact that the supply managed sectors have escaped meaningful reform can be attributed to the receptivity of regional sensitivities to effective lobbying and the absence of fiscal pressure, as the cost of support forthese is borne mainly by consumers, whose ability to influence farm policy has been minor. These are the areas of policy that require reform. Recognition of the inevitability of reform of the supply-managed sector in the longerterm context of successive rounds of multilateral trade negotiations is now more prevalent thanwasthe casefive yearsago. Earlierreform would have economic benefits and might be facilitatedby somedegree of compensationfor capital losses involved in the devaluation of CONCLUSIONS quota that would occur as supply-management In summary, as a small open economy, Canada systems were phased out. has a considerable interest in the achievement The precedent for a lump-sum payment of of more substantive trade liberalizationfor ag-

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nculture in a multilateral context. Even so, there are clear economic benefits for Canada of unilateral trade liberalization.In the context of Canadian agricultural policy ttus would require a considerable adjustment in Canada’s supply-management systems, in order to reduce levels of protection for these sectors.The benefits of an open economy are often not reflected in public discussions. There is a considerable challenge for the profession of agncultural and applied economists to spell out these benefits more clearly. A related useful focus of research for our profession is to explore the conditions and the nature of compensation that would encourage rapid unilateral trade liberalization.

NOTES ’Thus green box programs are exempted from application of countervail and other WTO challenges, as well as being exempted from expenditure reduchon requirements. Other programs that are subject to reduction may be countervailed, but are exempted from other WTO challenges (i.e., nullificabon and impairment), provided support does not increase from 1992 levels. [Also exempt from expenditure reduction commitments are the “blue box” programs, together with de minimis (threshold) expenditures and certam exemptions for developingfleast developed countries.] 2Thus Canadan pork exporters complain that the application of minimum access commitments for meat in aggregate by the EU, rather than applying these commitments to particular meat categories llke pork or beef, has facilitated the considerable restriction by the EU of pork imports. Dairy exporters can make similar complaints about the specific minimum access commitments provided for individual da~ryproducts by both the US and Canada. ’Green box programs were originally categorized as having no impacts - or only minimal impacts -on production and trade in agricultural products and consequently these were exempted from expenditure reduction commitments. As the number, scope and expenditures of these programs has expanded, there is increasing concern as to whether

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numbers of the programs classified in h s category are in fact trade neutral. Variff rate quotas also apply for cereals, meats and margarine.

REFERENCES Anderson, Kym. 1998. 50 Years: Loolang Buck, Looking Forward. Paper sponsored by Graduate Institute of International Studies, WTO, Geneva, 30 April. Cymbal, W. and Michele Veeman. 1995. Cana&an Agriculture and Article XI: An Economic Analysis of Tanffication for Poultry Products. In World Agriculture in a Post-GA7T Environment: New Rules, New Stmtegies, edited by R. Gray, T. B a k e r and A. S c h t z . Saskatoon: University of Saskatchewan Press. Hart, Michael. 1998. Frf3, Years of Canadian Tradecraji: Canada at the GATT 1947-1997. Ottawa: Centre for Trade Policy and Law. IATRC (International Agricultural Trade Research Consortium). 1997. Bringing Agriculture into the GATT: Implementahon of the Uruguay Round. Agreement on Agriculture and Issues f o r the Next Round ofAgricultum1 Negotiations. October. IATRC Commissioned Paper No. 12. Ingco, M. 1994. How Much Agricultural Liberalization Was Achieved in the Uruguay Round? Paper presented at the Annual Conference of the International Agricultural Trade Research Consortium, Washington, DC. OECD (Organisation for Economic Cooperation and Development). 1997. The Uruguay Round Agreement on Agriculture and processed Agricultural Products. Geneva: OECD. USDA (United States Department of Agriculture). 1998. Agriculture in the WTO. Economic Research Service, Situation and Outlook Series, WRS-984. Veeman, Michele. 1996. Changes in Canadian Agncultural Marketing and Trade Policy: The Impacts of New Trade Rules and New Institutions. Review of Marketing and Agricultuml Economics 64(3): 227-239. WTO (World Trade Organization). 1997. Trade Policy Review: Canada, Report by the Secretariat.(WT/TPR/S/22).