The Implications of the Multilateral Trade Negotiations & WTO Rulings on US Agricultural Policy:WTO Agreement (?) & Impacts on US Farm Policy

Larry D. SandersJuly 2006

2

Farm Bill Pressures and Dynamics

Twin Deficits Trade Deficit Federal Budget Deficit

Trade Situation & Policy Political Economy

Domestic International

3

Trade & Trade Deficit:US Trade Balance, 1990-2006($ million)

-900000

-800000

-700000

-600000

-500000

-400000

-300000

-200000

-100000

0

Trade Balance

NOTE:

1991: $31.1 b.

2005: -$725.8 b.

(China: 28%)

2006(projected): -830 b.

1991: -$31 bil.

10/05: $68 bil.

4

US Agricultural Trade Balance ($mil/FY; agricultural product only)*

0

10000

20000

30000

40000

50000

60000

70000

91 92 93 94 95 96 97 98 99 0 1 2 3 4 520

06f

IMPORTS EXPORTS

WTO

NAFTA

*NOTE: If fish & forest product added to ag, trade balance would be -$21.1 b.for fy05.

$64.5 b.

$63.5 b

5

U.S. BUDGET PROJECTIONS,2005-2016 (Deficit or Surplus, $ bil.)

-700

-600

-500

-400

-300

-200

-100

0

100

2005 2007 2009 2011 2013 2015

CBO-status quo

CBO-realistic

Sources: CBO budget baseline, March 2006, and CBO study requested by Rep. Spratt (D, SC)Note: fy05 is actual data; Total, 2007-2016: -$832 billion

6

Expected Additions to Deficit Omitted Items, $ BillionFiscal Year 2007 2007-16

Further Cost of Iraq, Afghan Wars -71 -563

AMT Repair -42 -865

Additional Debt Service -2 -506

Katrina -15 -450

Making Tax Cuts Permanent -18 -2,011

Resulting added Deficit -355 -3,637

7

Agricultural Producer Support By Country

1986-88 and 2001-03

-Percent of Total Farm Receipts from Government-

Source: OECD's database (see www.oecd.org)

12%

33%26%

40%

62%

71%

2%

20% 20%

39%

60% 65%

New Zealand Canada United States EU Japan Korea

0%

20%

40%

60%

80% 1986-1988

2001-2003

8

Trade Distorting Domestic Support

The ‘Big 3’ (US, EU, Japan) expected to take the largest cuts

Reductions in Total Allowable Support Market Price Supports Non-Exempt Direct Support Other: De Minimis, Crop Insurance, Market

Loss Payments

9

Total Allowable Trade Distorting Domestic Support, ‘The Big 3’, 2002

WTO, Trade Policy Review and calculations.

$128

$49 $48

European Union United States Japan$0

$20

$40

$60

$80

$100

$120

$140

Billion $

Includes Amber + Blue Boxes, Product Specific & Non-product Specific De Minimis Each Based on 5% of Total Value of Agricultural Production

10

Trade Distorting Domestic Support Reductions (Doha Work Program)

Year 1 Down Payment: 20% Reduction in Total Allowable TDDS

Subsequent Reductions May Be 40-50% Over a Specified Time Period (t.b.n.)

Likely Some Spending Caps on Boxes $7.6 billion for Amber Box? $23.1 billion for Blue Box?

11

Total Trade Distorting Domestic Support Remaining After Year 1 Down Payment (calculated)

$100.2

$39.2 $38.4

European Union United States Japan$0.0

$20.0

$40.0

$60.0

$80.0

$100.0

$120.0

Billion $

12

The Proposed Modified BoxesAmber New Blue Green

Payments coupled to production & prices

Payments decoupled from production but coupled to prices

Payments decoupled from production and prices

Policies that are trade distorting & targeted for reductions under the URA (price supports, marketing loans, payments based on ac or # of livestock, input subsidies, etc.)

Policies that are trade distorting but exempt from reductions under URA, including direct payments linked to certain production-limiting policies (US counter-cyclical payments, crop deficiency payments, EC compensatory payments, etc.)

Policies that are non-trade distorting & are acceptable under URA, including tax-payer-funded and non-trans-fers from consumers (research, extension, pest/disease control, crop insurance, marketing/ promotion, natural disaster relief, conservation programs, public stockholding, decoupled income support, income safety nets, etc.)

13

Trade Distorting Domestic Support Reductions (DWP continued)

Amber Box: Reduced & Capped Product Specific Caps

Blue Box: Capped at 5% of Production Over a Period To Be Negotiated Flexibility for Countries w/Large Support

Green Box: Criteria Reviewed & Clarified Minimal Distortions, Environment, Rural

Economic Development De Minimis: Reduced by Amount t.b.n.

Current: 5%; US proposal 2.5%

14

Total Trade Distorting Domestic SupportAssuming 50 Percent Reduction

Calculated

$50.1

$19.6 $19.2

European Union United States Japan$0.0

$10.0

$20.0

$30.0

$40.0

$50.0

$60.0 -Billion Dollars-

15

Recent Economic Analysis(see References)

Generally conclude gains from reform unevenly distributed Benefits few competitive exporters (Australia,

NZ, Brazil, Argentina, Thailand) Benefits consumers in developed countries

that liberalize trade (EFTA, Korea, Taiwan, somewhat EU)

Most important benefit: benefits of further market opportunities in services & trade facilitation (reduced trade costs) World income gains 25% from agriculture,

32% from industrial products, 43% from services

Benefits to poorest limited

16

The Next Farm Bill: 2007? 2008? 2011?

Current farm bill: 6-year act (2002-2007) Debate for the “next” farm bill already

engaged Rewrite of FSRIA02 began in 2005

Budget Reconciliation Appropriations Response to WTO Cotton case (Step 2 gone; change

export credit guarantee) New “enabling” legislation in 07-08-11?

2006 & 2008 election anxiety may encourage a 2007 farm bill

Doha Round complications suggest late 07, early 08 or 2011 WTO agreement and new farm bill

TPA expires Jul 07

17

Evolutionary…not Revolutionary Change?Never do today what you can put off ‘til tomorrow. --Matthew Browne

Near term program changes marginal; likely more to come in 2007

But, WTO restrictions likely to coincide with writing of next farm bill; cuts may become dual purpose 20-50% cuts for WTO? $3-$20 billion in cuts for deficit reduction?

Production expenses (fuel, fertilizer, interest rates) will continue to rise faster than commodity prices

Budget deficit/debt solution choices Increase taxes Cut spending Grow economy Do nothing

18

Politics: Political Triangle of Ag & Trade Policy

JUDICIAL

EXECUTIVE

LEGISLATIVE

INTERESTGROUPS

•New committees•Turf battles•Reconciliation•TPA in ’07?•2006, 2008 •Bush Doctrine

•Bush Budget•USDA•Trade talks•2008

•Ag groups one voice?•Non-ag groups•Competitors•Revolving door

WTO

•Doha Agreement?•Dispute settlement•Bilateral alternatives

•COOL

19

Net Farm Income & Direct Government Payments

01020

30405060

708090

net farm income

govt payments

NFI-G

1996 Farm Act$ Billion

*Projected

2002 Farm Act

71.5

22.7

48.8

20

Net Farm Income & Direct Government Payments: Assume 20%-50% cut in Govt Payments 1996-2005

01020

30405060

708090

net farm income

adj NFI (20% cut in G)

adj NFI (50% cut in G)

1996 Farm Act$ Billion 2002 Farm Act

20%: 2-8% reduction in NFI

50%: 5-20% reduction in NFI

21

Medicaid, Medicare Social Security

U.S. Budget Outlays by Program, FY 2004

19%

63%

5%

7%

1% 5%

Defense

Human Resources

Physical Resources

Net Interest

Agriculture

Other

Physical Resources includes: transportation, community and regional development, etc.Source: Budget of the U.S. Government, www.whitehouse.gov/omb/budget/fy2006/pdf/hist.pdf

Medicaid, Medicare Social Security

22

Farm Bill Program Spending by Title

18%

5%

1%

71%

5%

Commodities

Conservation

Trade

Food Programs

Miscell. (Sec 32 & FCIC)

Based on CBO March 2002 Baseline.

Total $248.6 Billion, 2002-07

*$782 Billion 2002-11

Food Stamps, Nutrition,Women, Infants,& Children

23

CCC Net Outlays—2006E:$21.7 billion:How to cut a smaller pie & have more pieces?

Feed Grains(43.2% )Wheat (14.3% )

Cotton (16.6% )

Other (8.5% )

Expenses (2.8% )

Conservation(14.5% )

24

Summary

Twin deficits of trade & Federal budget will overshadow what happens in Washington

Politics will affect ag policy reform and trade policy reform

Coincidence of issues could cause “do nothing” (status quo) to be most likely outcome, but specter of dispute settlement will likely disrupt status quo

25

Summary (continued)

Reform will have mixed impacts Employment adjustment, Lower land prices, Lower

land rents for tenant farmers, DCs/LDCs gain relatively more (especially if tariffs cut), ag/food corps. gain relatively more than producers

The ‘Big Three’ will need to make major reductions in trade distorting domestic support, resulting in benefits to taxpayers and consumers

Possibly large potential gains to producers in Developed Countries

26

Conclusions

Agricultural Reform is at a Critical Crossroads Progress or Protectionism?

TDDS* critical to reform Without a Joint Effort by the ‘Big 3’ to Encourage

Reform & Lead by Example, Failure is Almost Certain WTO failure will likely mean:

less pressure on Federal agricultural policy reform & Federal spending

Continuing trade deficits Continuing WTO dispute settlement challenges to

US ag support

*Trade Distorting Domestic Support

27

APPENDIX

28

Unilateral Reform Initiatives

EU: Reduce CAP Funding to Allow Expansion US: President’s Budget Cuts Ag. Spending 5%,

Congressional Cuts Focus on CRP & Food Program Japan: Redirect Spending to More Productive Farms

Direct Payment Scheme, Moving from Price Support to Income Support

Grains, Oilseeds, Dairy, Fruits/Vegetables May Be Covered Reduce Import Tariffs Promote Environmental Quality & Biomass Promote Healthy Diets by Growing Healthy Farm Products Increase Exports Reduce the Amount of Idle Farmland Increase Food Self-sufficiency to 45% by 2015

29

Proposed Amber/AMS Reductions (%)

Tier US EU G-20

Proposed1.EU 83 70 80

2.Japan & US 60 60 70

3.Other countries 37 50 60

30

Terms De minimis provision:

The total AMS includes a specific commodity support only if it equals more than 5% of its value of production, & non-commodity specific support only if it exceeds 5% of total ag output. The de minimis rule excludes support from the AMS if it does not exceed the 5% threshold.

(USDA-FAS, May 2005)

31

References

Anderson & Martin (World Bank)CEPII (French institute)Copenhagen EconomicsDee & Hanslow (Australian Productivity

Commission)IFPRI (Washington institute)Hertel & Keeney (Purdue)Polaski (Carnegie Institute)Swedish National Board of Trade

32

Thank You! Questions? Larry D. Sanders Department of Agricultural Economics Oklahoma State University Stillwater, OK

74078 E-mail: larry.sanders@okstate.edu Phone: 405.744.9834