Trade Negotiations Coming Again Soon

June 13, 1999

PAER-1999-07

Philip L. Paarlberg, Associate Professor

This December nations are to begin another round of trade negotiations under the World Trade Organization (WTO). Agricultural issues will again play a prominent role. While it is too early to identify specific issues facing negotiators, at a broad level much of the agenda is known. Mainly these issues reflect perceived deficiencies in the Uruguay Round Agreement. This article identifies those broad areas of discussion.

Market Access

The language of the Uruguay Round Agreement called on nations to con-vert non-tariff trade barriers to tariff equivalents and to reduce these barriers by specified percentages over an implementation period. In some cases the calculated tariff equivalents were known to be prohibitive to trade, so exporting nations argued for and obtained minimum access commitments. These commitments were intended to guarantee that at least 3-5% of a market was open to imports. Tariff-rate quotas (TRQ’s) have frequently been used to implement this agreement. Under a TRQ a nation sets an import quota. Imports below the quota pay a low tariff, while imports above the quota pay a higher tariff.

Actual implementation of the Uruguay Round Agreement market access rules has been unsatisfactory for many exporting nations for a variety of reasons. The next round will address some of these complaints.

In the Uruguay Round nations calculated the level of trade barriers from which the agreed to cuts are applied. Within the rules established by negotiators, nations could deter-mine tariff equivalents much greater than the actual barriers imposed. This is called “dirty tariffication” or “putting water in the tariff.” Countries with “water in their tariff” can, should they choose to, raise the tariff and still satisfy their WTO commitments. For example, the European Union agreed to a maximum tariff on wheat of 231 European Currency Units (ECU) per ton the first year of the implementation period. Over the following six years the tariff binding was to fall to 148 ECU per ton. But the actual equivalent of the Euro-pean Union’s variable levy in the base period was 125 ECU per ton -well below the binding. The Euro-pean Union is not alone in doing this. Much of the proclaimed liberalization of agricultural trade has not occurred. The upcoming negotiations will try to squeeze the water out of tariffs by bringing applied and bound tariffs into closer agreement.

One reason for converting non-tariff barriers to tariff equivalents was to make the impacts of such policies clear to everybody. That is called increasing the transparency of the policy. Tariffs have clear impacts on markets and income distribution, whereas, non-tariff barriers tend to hide these impacts. Adoption of tariff-rate quotas in the Uruguay Round to replace non-tariff barriers did not improve transparency. Indeed, it may have made it worse. Tariff-rate quotas can create windfall gains for those who import before the quota is breached and pay the lower tariff. Consequently, there must be a way to allocate the quota, and several alternative procedures are being used. Different procedures create uncertainty about who gains and who loses. In some cases, the right to import a commodity has been given to individuals with no desire to import, and there is no expansion of trade.

The next round will try to improve the way TRQ’s operate. One item on the agenda will be reductions in above quota tariffs, which are often so high that the new TRQ acts like the old quota it replaced. Also, some effort will be made to raise the quotas to expand the volume of imports subject to lower tariffs. Many exporting nations are unhappy at the multitude of ways quotas are administered, especially when the quotas are administered to block market access. Rules to clarify quota administration will be on the table.

Export Subsidies

The Uruguay Round Agreement imposed quantity and expenditure limits on export subsidies. While that agreement allows some switching between similar commodities, the rules for export subsidies are stronger than those for market access. Two issues linked to export subsidies will be on the agenda.

One issue is that the export subsidy cuts of the Uruguay Round will be expected to be expanded. While the U.S. Export Enhancement Pro-gram remains officially alive, the United States has not used direct export subsidies since the high commodity prices of a few years ago. However, the European Union renewed its use of export subsidies as world prices fell. There will be pressure on the European Union to follow the U.S. example and end export subsidies. Europe will find this difficult to do because it cannot maintain domestic prices above world market levels and dispose of surplus production on world markets without export subsidies.

The other issue concerns the use of export credit guarantees and concessional sales programs. The United States will find this a difficult issue. The Uruguay Round ignored concessional sales programs, but some exporting nations, like Australia and Canada, are displeased with the heavy use of the programs by the United States and European Union. Recent U.S. concessional sales to Indonesia, Korea, and Russia have fueled the issue with other exporters have com-plaining about “unfair” U.S. competition in their “traditional” markets. There will be efforts by other exporting nations to eliminate or limit the use of concessional sales programs.

Domestic Policy

The Uruguay Round put domestic farm policies on the negotiating table for the first time, but little serious progress was made in reducing farm subsidies. Although the agreement called for a 20% cut in the aggregate measure of support, nations paying deficiency payments on 85% of a crop’s normal area or which had a set-aside program were allowed to exclude those payments from the cuts. This meant that most U.S. and European Union farm subsidies were excluded from the subsidy cuts.

Since the Uruguay Round, the United States has passed the FAIR Act which decoupled payments to farmers from crop production. Decoupled payments are fully WTO legal with no limits on their use. Although the European Union is reducing price supports as part of its Agenda 2000, its farm payments continue to be linked to production. The Euro-pean program is like U.S. farm pro-grams from 1985 to 1996. There will be an effort to drop the exclusion for deficiency payments in the presence of supply management, and possibly to further cut the allowed farm subsidies. As with export subsidies, in this round the United States can claim the moral high ground because it has already taken these steps. On the other hand, the European Union will be in an awkward position. The recent farmer protest of proposed support price reductions in Brussels illustrates the difficult situation faced by European negotiators.

State Trading

Another area left unresolved by the previous negotiations concerns the role of state trading enterprises (STE’s) in world trade. State trading enterprises are government or public agencies with exclusive control over trade by a nation. They come in many forms with very different powers. Some examples include the Canadian Wheat Board and the Japanese Food Agency. They are very common in developing nations which fear being disadvantaged in world trade. When the U.S. Export Enhancement Program was active, the United States notified the WTO that the Commodity Credit Corporation was acting as a state trading enterprise through its control on U.S. export prices and volumes. With the Export Enhancement Program suspended, the United States has withdrawn that notification.

Trading rules established by the WTO are designed to control price distortions established by governments. Such barriers are transparent in that the policy is known. State trading enterprises fit poorly into existing WTO rules because import and export decisions are not clear to outsiders. It is hard to play the trade game without knowing the rules beforehand. For example, what barriers face wheat imports into China? This is hard to answer because import decisions are made behind closed doors. This is one reason Chinese and Russian entry into the WTO had been delayed.

Tightened WTO rules on state trading is high on the U.S. agenda for the next round. Some individuals have argued for banning STE’s as a WTO legal business form. The United States sees STE’s as exercising undue influence on world agricultural trade through discriminatory pricing, undercutting prices, and secret trade deals. The U.S. push to put STE’s high on the agenda is very controversial and upsets nations like Canada and Australia which generally share U.S. trade concerns. These nations use marketing boards to export commodities and see marketing boards as legitimate institutions that reflect their historical, cultural, economic, and social experiences. They argue that boards are no more likely to engage in unfair trade practices than the large private exporting firms in the United States.

Technical Barriers and Sanitary and Phytosanitary Barriers

Technical barriers to trade (TBT’s) and sanitary and phytosanitary (SPS) barriers have long existed. So long as traditional trade barriers like quotas and tariffs throttled agricultural trade, TBT’s and SPS barriers remained low on the agenda. As traditional barriers are being reduced, TBT’s and SPS barriers have emerged as major stumbling blocks to further trade liberalization.

Such barriers are WTO legal if used to protect legitimate animal, human, and plant health and safety and not as disguised protection. Separating legitimate health and safety concerns from disguised protection is difficult. The Uruguay Round Agreement attempted to reform the rules on using these barriers by introducing the concepts of scientific basis, acceptable risk, regionalization, and harmonization or equivalence.

Barriers are to have a scientific basis, reflect a risk acceptable to society, to be harmonized or made equivalent across nations, and to allow open trade between disease free regions.

The increase in TBT and SPS trade disputes in recent years illustrates that establishing rules on TBT and SPS barriers will be difficult. Fundamental questions must be addressed before making effective rules. Which nation’s science serves as the standard? What happens when scientists disagree on the evidence? For example, is beef treated with hormones safe for human consumption? The U.S. Government and most American scientists say yes. European governments and many European scientists say no. Are genetically modified corn and soy-beans safe for the environment and people? Current U.S. testing done by companies producing these products says yes. What if the answer later turns out to be no? Do European consumers have the right to know if the product they are consuming contains genetically modified material or is such labeling a trade barrier? What is an acceptable risk? Does it vary by commodity, by society? Is the U.S. zero tolerance law defensible to the WTO? What are equivalent processes? Is chlorine dipped chicken equivalent to chicken treated in other ways?

These are extremely difficult questions to answer, especially in international trade negotiations. Whereas researchers may disagree on the magnitude of impacts from a traditional trade policy like a tariff, the directions are clear. Such is not the case for TBT’s and SPS barriers. By their nature they involve complex and value-laden differences among nations on a case by case basis. Designing workable trade rules will be exceedingly difficult, but they are necessary if nations are to be pre-vented from undoing previous trade liberalization through disguised protection.

Dispute Settlement

The Uruguay Round tried to improve the dispute settlement process. Under the old rules all parties, including the offending nation, had to agree to a dispute panel’s conclusion. Thus, the offending nation could block any decision if it so chose. Now there is a majority rule.

The process has been improved. That more disputes are being taken to the WTO reflects increased confidence in the process. Yet there is dis-satisfaction, and there will be efforts to improve the process further. A major concern is that nations use the procedure to delay dealing with an unfavorable ruling.

From the U.S. viewpoint, two critical tests of the new dispute process have exposed weaknesses. Twice the WTO has ruled against the Euro-pean Union’s ban on import of hormone treated beef and its banana policy. Yet those barriers remain.

In the banana case, the European Union changed its import rules, but the new rules violated the WTO rules. Will new rules satisfy the WTO, or will the process be repeated and repeated year after year? The fear is that other countries will copy this strategy. Following an adverse WTO decision a small policy change will be done, a new complaint and panel will follow. Meanwhile, the violation continues.

On hormones in beef, the United States interpretation was that it won and that the ban would be removed. The European interpretation was that it had not lost. Its scientific evidence was not sufficient to sustain the policy, but neither was the case clear for an end to the ban. The European view was that it would restudy the issue to obtain new evidence while leaving the ban in place. After 11 years and two WTO panels, the United States recently moved to impose penalties on European imports in retaliation.

The precise nature of improvements to the dispute settlement process cannot be foreseen. It would not be surprising to see specific time deadlines for decisions and policy changes considered. In U.S. trade legislation there are specific deadlines for policy recommendations and actions.

Conclusion

The general outline of the agenda for the next trade negotiations can be foreseen. Which issues remain on the table and how they will play out can-not be known. A critical question raised by many in agriculture is whether the Clinton Administration’s lack of fast track negotiating authority is a serious handicap in the upcoming negotiation? The United States would be in a stronger negotiating position if it had the authority to make creditable deals. The lack of fast track authority at the present time is not a serious problem since the negotiations have yet to begin. Because there will be no substantive progress in making deals until fast track authority is granted, such authority will become more urgent as the negotiations proceed.

Tags

Publication Appeared Within:

Latest Articles:

What is the “language” of the farm bill?

January 26, 2023

The 2023 Farm Bill process is sure to produce significant debate, analysis, and opinion. This primer covers some basic “language skills” for tracking farm bill discourse in 2023.

READ MORE

How does the farm bill get made?

January 18, 2023

With current farm legislation expiring in September, we take this opportunity to review the process of writing a new Farm Bill for 2023 against the current timeline and political landscape.

READ MORE

The Outlook for the U.S. Economy in 2023: The Faster Inflation Falls, the Milder the Recession Will Be

January 10, 2023

Professor DeBoer surmises that a recession is likely in 2023, but it may have enough confounding factors (e.g. low unemployment) to make it quite mild.

READ MORE

Delivered right to your inbox

The Purdue Agricultural Economics Report is a quarterly publication written by faculty and staff from the Department Agricultural Economics at Purdue University.

By joining this mailing list, you will receive an email when a new publication is released. This mailing list is kept solely for the purpose of sharing the report and is not used for any other purposes.