Globalization and Agricultural Trade Policy

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GLOBALIZATION AND AGRICULTURAL TRADE POLICY

A project of the

GLOBALIZATION AND AGRICULTURAL TRADE POLICY edited by

Hans J. Michelmann James Rude Jack Stabler Gary Storey

b o u l d e r l o n d o n

Published in the United States of America in 2001 by Lynne Rienner Publishers, Inc. 1800 30th Street, Boulder, Colorado 80301 www.rienner.com and in the United Kingdom by Lynne Rienner Publishers, Inc. 3 Henrietta Street, Covent Garden, London WC2E 8LU © 2001 by Lynne Rienner Publishers, Inc. All rights reserved Library of Congress Cataloging-in-Publication Data Globalization and agricultural trade policy / edited by Hans J. Michelmann ... [et al.]. p. cm. Includes bibliographical references and index. ISBN 1-55587-951-9 (alk. paper) 1. Produce trade—Government policy. 2. Agriculture and state. 3. International economic relations. 4. Globalization. I. Michelmann, Hans J. HD9000.6.G565 2001 382'.41—dc21 00-045986 British Cataloguing in Publication Data A Cataloguing in Publication record for this book is available from the British Library. Printed and bound in the United States of America

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The paper used in this publication meets the requirements of the American National Standard for Permanence of Paper for Printed Library Materials Z39.48-1984. 5

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Contents

Acknowledgments

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Introduction Hans J. Michelmann, James Rude, Jack Stabler, and Gary Storey

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PART 1

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THE ENVIRONMENT AND AGRICULTURAL TRADE

Agricultural Trade and the Environment: Issues and Challenges C. Ford Runge

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Climate Change and the Kyoto Accord: Implications for Agricultural Trade Agreements Richard Gray

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The World Trade Organization and the Environment William A. Kerr

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Agricultural Biotechnology, the Environment, and International Trade Regulation Peter W. B. Phillips and Don Buckingham

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CONTENTS

PART 2

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Implications for State Trading in the Next WTO Negotiations W. M. Miner

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State Trading Enterprises and the WTO: Importing Versus Exporting Philip Abbott and Linda Young

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The Competitive Impacts of State Trading Enterprises Murray Fulton, Bruno Larue, and Michele Veeman

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REGIONAL TRADE AGREEMENTS

Regional Trade Agreements and Agriculture: A Post-Seattle Assessment Tim Josling

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The European Union and Eastern Europe Alan Swinbank and Carolyn Tanner

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APEC and Agriculture: Integrating Liberalization and Capacity-Building Policies John Gilbert, Robert Scollay, and Thomas Wahl

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PART 4

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State Trading Enterprises, Price Discrimination, and the WTO Troy Schmitz and Andrew Schmitz

PART 3

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STATE TRADING ENTERPRISES AND THE WTO

NONTRADE CONCERNS

Multifunctionality: An Examination of the Issues and Remedies James Rude

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Rural Policy Kenneth J. Thomson

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Labeling and Consumer Issues in International Trade Jill E. Hobbs

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CONTENTS

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The WTO Agreement on the Application of Sanitary and Phytosanitary Measures: A Catalyst for Regulatory Reform? Donna Roberts

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CONCLUSION

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The Future of Agricultural Trade Hans J. Michelmann, James Rude, Jack Stabler, and Gary Storey

List of Acronyms Selected References The Contributors Index About the Book

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325 329 335 341 357

Acknowledgments

The stimulus for this volume was a conference held in Saskatoon, Saskatchewan, Canada, in February 2000. The conference was the fourth in a series on agricultural trade organized since 1990 by the University of Saskatchewan’s Department of Agricultural Economics in cooperation with other units in the university as well as public- and private-sector partners. The 2000 conference was held in the aftermath of the failed World Trade Organization (WTO) ministerial round held in Seattle the previous December. At this writing, it is not clear when negotiations on a new WTO round will commence. But what is clear today, and what was clear when planning for the conference began, is that agricultural trade issues remain central to any new round of trade talks. The farmers of the Canadian prairies fear for their livelihoods as world grain prices hover near record low levels, and Canadian federal and provincial governments—cashstrapped and, for better or worse, living up to their international obligations imposed by previous trade talks—provide much lower support payments compared to the U.S. and European public sectors. Yet, it is taxpayers and consumers who must ultimately bear the burden for this public largesse and the inefficiencies in production engendered by support mechanisms in those places where agriculture remains heavily subsidized. The importance of international negotiations on agricultural trade is also evident to those who have followed the controversies over trade in genetically modified food products and in beef produced with the aid of bovine growth hormones, both of which have pitted the European Union against its Canadian and U.S. trade partners. Increasingly, environmental concerns impinge on agricultural trade as a critical public, sensitized by the growing environmental movement, points to damage resulting from intensive agricultural production and as governments subsidize certain agricultural practices for their alleged beneficial effects. In short, trade in food products—itself a

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ACKNOWLEDGMENTS

vital issue for human welfare—is raising issues that concern growing numbers of people. It is thus not surprising that this volume’s editors found willing allies for their conference and publication ventures. Canadian Adaptation and Rural Development Saskatchewan, an agency funded by Agriculture and Agri-Food Canada, provided generous financial assistance, as did the Canadian Agricultural Trade Network, a joint research, training, and public service program of the Universities of Saskatchewan, Guelph, and Laval. The Department of Foreign Affairs and International Trade Canada provided a conference grant. The Office of the President of the University of Saskatchewan declared the conference one of its series of President’s Conferences on Public Policy for the New Millennium and provided financial support. The university’s Colleges of Agriculture and Arts and Science, the home colleges of the conference organizers, demonstrated their support for our ventures with conference grants. Finally, the Estey Centre for Law and Economics in International Trade provided a generous grant to assist in the publication of this volume. We are deeply grateful to all these agencies, offices, and organizations. We also owe a debt of gratitude to our indefatigable conference organizer, Pauline Molder. From the discussions at the earliest organizing meetings, at which the outline of our conference plans was only faintly visible, to the communication with conference participants, to conference advertising, to the negotiation with the hotel at which the conference was held, to troubleshooting at the conference itself, to communicating with authors about their finished manuscripts, Pauline was at the heart of arrangements, and much credit is due her for such efforts. In the conceptualization of the conference and in selecting our speakers we benefited greatly from the advice of our colleagues Richard Gray, Peter Phillips, and William Kerr. Nora Russell prepared the manuscript for publication and did much to contribute to its readability. Finally, we are grateful for the advice and encouragement afforded by Bridget Julian of Lynne Rienner Publishers, as well as the expert editorial work of Shena Redmond.

Introduction HANS J. MICHELMANN, JAMES RUDE, JACK STABLER, AND GARY STOREY

The 1990s were a pivotal decade for agricultural economies, particularly agricultural trade. The Uruguay Round of the General Agreement on Tariffs and Trade (GATT) negotiations culminated in new trade agreements, including the Agreement on Agriculture. In North America, the Canada–United States Free Trade Agreement was broadened to include Mexico under the North America Free Trade Agreement. The World Trade Organization (WTO) supplanted GATT as the institution overseeing the resolution of international trade disputes and providing the organizational framework for new trade negotiations. The effects of the creation of the new institution and the continuing impact of regional trade blocs on agricultural trade received much attention among the affected policy communities. Several important issues began to emerge that would provide much of the impetus for future discussion and negotiation. In the transition months from the twentieth to the twenty-first centuries, an abortive attempt at a new round of WTO negotiations was made at the WTO ministerial meetings in Seattle. Agriculture, again, was at the top of the negotiating agenda. Despite the failure to launch a new comprehensive round, negotiations on the Agreement on Agriculture began in 2000. Many of the bitterly contested issues from the Uruguay Round remain. In addition, new and potentially even more contentious questions have come to the fore: the impact of agriculture on the environment, biotechnology, state-trading enterprises, regional trade agreements, consumer concerns over food quality, rural policy, and sanitary and phytosanitary (SPS) regulations. The Agreement on Agriculture reversed a trend to increase protection and laid the foundation for further liberalization. However, subsidization and protection of agriculture remain contentious issues. Tensions that exist1

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INTRODUCTION

ed between the United States and the European Union (EU) prior to the signing of the Uruguay Round have reemerged. Although both export subsidies and domestic support were addressed in the Agreement on Agriculture, the liberalization is not complete. Although the level of domestic support has been declining in Australia, New Zealand, and Canada, government transfers to the sector remain at very high levels in Japan, the European Union, and the United States. The Agreement on Agriculture also converted nontariff barriers to equivalent tariffs. However, little additional market access has occurred as a result of this process. At the end of the 1990s, declining real agricultural prices brought renewed stress for farmers in developed and developing economies alike. Real agricultural prices had fallen to levels not seen since the 1930s. The 1980s had clearly demonstrated that government intervention was not the solution to providing acceptable agricultural incomes. Subsidies were capitalized into higher land values and other fixed assets. Ironically, these measures contributed to increased farm debt and, eventually, lower farm incomes. In addition, higher price and income support had encouraged greater technological development and, with it, higher productivity. Increased productivity, in turn, contributed to food surpluses and lower prices. The same issues that were the focus of the Uruguay Round negotiations on agricultural trade—export competition, market access, and domestic market support—will again preoccupy the attention of the negotiators in any upcoming round. However, new issues will also demand the negotiators’ attention: biotechnology, the interaction between the environment and trade policy, state trading enterprises, the implications of regional trade agreements on global trade, and nontrade concerns. These new issues were the theme for the conference that provided the first venue for the chapters in the volume—Globalization and New Agricultural Rules for the Twentyfirst Century.

PART 1: THE ENVIRONMENT AND AGRICULTURAL TRADE

The link between international trade and the environment flows in two directions. Environmental policies affect trade flows and trade liberalization affects the environment. This part addresses the extent to which international harmonization of environmental policies is possible. It examines the economic justifications and criticisms for using trade measures to achieve environmental goals. Part 1 further examines these links by examining the Kyoto Accord, attempts by environmental interest groups to place their concerns on the WTO agenda, and the increasing importance of biotechnology in the context of trade and environmental regulation.

INTRODUCTION

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In Chapter 1, C. Ford Runge addresses the conceptual issues and trade policy challenges arising from the interaction between agriculture trade policy reform and the environment. Runge asks two questions: Does trade impose burdens on the environment? and When do the burdens of environmental measures on trade justify their removal or reform? He uses a decision-theoretic framework to develop a set of verifiable criteria to gauge the impact of trade reform on the environment and the impact of environmental regulations on trade flows. The verifiable criteria include finding the damage or burden; assessing alternative forms of trade liberalization and environmental remedies; and the distribution of costs and benefits of the different alternatives. Runge also addresses the relationship between goals and policies when a particular instrument is supported as a solution to multiple problems. The idea that certain policy instruments may yield joint products is the basis of the argument put forward by proponents of multifunctionality. He provides a conceptual framework to examine joint outputs resulting from a single policy input or instrument. Runge examines multifunctionality in the context of subsidizing conventional crops in the European Union as a way of discouraging production of genetically modified organisms. He concludes that this is an example of misguided multifunctionality. In Chapter 2, Richard Gray examines the implications of the Kyoto Accord regarding greenhouse gas (GHG) emissions, where developed countries agreed to specific emission targets to be achieved in the 2008–2012 period. Since the agricultural sector is a significant emitter of GHG, emission policies could affect both agricultural production and trade. Furthermore, there may be pressures to include GHG policies within bilateral, regional, and possibly multilateral trade agreements. The chapter provides background information on the science of GHG and climate change, Canada’s Kyoto commitment and ratification process, as well as the sources of GHG emissions from Canadian agriculture. The chapter also discusses the policy options for climate change put forward by a Canadian consultative, multidisciplinary, multisector group of experts (Agriculture and Agri-Food Table), which filed its Options Report in January 2000. Gray establishes that the Kyoto Accord will have no immediate impact on agricultural trade policy. However, he predicts future pressures for a binding international climate change agreement, which will be tied to international trade agreements. He concludes that GHG agreements could eventually become a part of the WTO, but in the meantime there will only be modest attempts made at GHG abatement while the accumulation of GHG continues. In Chapter 3, William Kerr explores the attempts by environmental interest groups to place their concerns on the WTO agenda. Kerr points out that the role of the WTO is to provide a set of rules for firms wishing to enter international transactions and nothing more. Although there are no

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INTRODUCTION

direct means by which special-interest groups can influence WTO policymaking, they recognize that trade policy is a powerful weapon that can be used to achieve political goals. Therefore, capture of the WTO represents a tempting objective for environmental interests. Kerr points out that accommodating environmental and other interest groups’ concerns would make the rules for international commerce even more complex. If that were to occur, some WTO institutions would have to be redesigned and new ones created. In Chapter 4, Peter Phillips and Don Buckingham address the concerns that have arisen over the perceived risks of diffusion of genetically modified plants, animals, and microbes. Concerns have arisen because there is confusion, distrust, and anxiety about genetically modified products. There is further concern because to date regulatory systems do not provide a method for managing the risks related to organisms created with biotechnology. The authors suggest that by isolating the particularly trenchant trade irritants and environmental risks associated with genetically modified products and resolving them sequentially, progress on the international regulation is possible. When enough individual cases are resolved, multilateral dialogue can proceed. This dialogue, in the various international fora, will provide enough consensus “planks” to build an international platform that can then be developed into a freestanding comprehensive treaty on the treatment of genetically modified products.

PART 2: STATE TRADING ENTERPRISES AND THE WTO

WTO regulation of state trading enterprises (STEs) will be a central theme in the next round of trade negotiations. The primary concern with regard to exports is the potential for STEs to circumvent WTO export subsidy commitments. Some have argued that single-desk sellers have the potential to price exports in noncommercial ways, thereby creating effects equivalent to export subsidies. The chapters in Part 2 consider the relevance of price discrimination as an avenue of export subsidization and trade distortion. On the import side, the concern is protection in excess of bound tariffs and decisions to purchase based on policy rather than commercial considerations. In addition, the chapters consider market structures and conditions of competition that have an impact on trade in markets with both public and private traders. In Chapter 5, W. M. Miner provides an introduction and overview on the subject of state trading. He points out that several countries—the United States foremost among them—intend to seek disciplines on STEs in the next round of WTO negotiations. The issues raised concerning state trading include the potential for single-desk sellers and buyers to circum-

INTRODUCTION

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vent market access and export subsidy commitments, the effect of state trading on international prices, and the implications for competition. He explains that the existing WTO rules governing state trading, found in Article XVII, have their origins in discussions that took place in Havana in 1948, when the foundations of the GATT were laid. Miner outlines the details of Article XVII and provides his views on what is likely to develop in the next WTO negotiations. One possibility is a proposal for an outright ban on state trading, but Miner argues that this extreme position will not be acceptable to the broad membership of the WTO. The other end of the spectrum of possible reforms to Article XVII involves only minor adjustments and clarification of definitions. Troy and Andrew Schmitz, in Chapter 6, focus on export-oriented STEs. Their discussion includes some of the largest among them: the Canadian Wheat Board (CWB), New Zealand Dairy Board, Australian Wheat Board, the Queensland Sugar Corporation, and several lesser STEs. The Schmitzes present an outline of a classification system based on the work of others. The system classifies STEs according to the degree of control they can exercise and their ability to distort trade. The authors narrow the focus to state trading in wheat and barley, in particular the trading practices of the wheat boards in Canada and Australia. They summarize the literature on the extent to which the CWB is able to exercise price discrimination and conclude that the CWB has been effective at price discrimination for both wheat and barley. However, they argue that price discrimination does not violate WTO rules and that the CWB’s activities do not distort trade. They point out that except for wheat and barley there is little empirical evidence about price discrimination by STEs. The authors conclude that any trade distortion associated with price discrimination that does exist is unlikely to be rectified soon. Phillip Abbott and Linda Young, in Chapter 7, explore the rationale for the existence of STEs. They examine how this rationale relates to proposals for STE regulation and reform. Moreover, they examine several of the important institutional innovations accompanying the reform and evolution of agricultural STEs. The authors argue that STEs exist primarily to achieve domestic agricultural policy objectives. Other objectives include exercising or counterbalancing market power. They conclude by arguing that “state trading per se is really not the question that WTO negotiations need to address. The fundamental question is to what extent do WTO disciplines need to be applied to market power in the future, and we need to ensure that market share is not determined in a discriminatory manner regardless of institution.” Chapter 8, by Murray Fulton, Bruno Larue, and Michele Veeman, examines the impact of STEs on competition. The authors first examine whether and the extent to which STEs are subject to competition policy in

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INTRODUCTION

various countries, pointing out that STEs are often exempted from nationalcompetition legislation. They then examine the issue of contestability and state that the key research question in this regard is, Under what conditions are STEs likely to affect prices? An examination of the issue of price discrimination and transparency follows. The authors conclude by proposing a framework for analyzing STEs.

PART 3: REGIONAL TRADE AGREEMENTS

Although the global reduction of trade barriers is beneficial because it directs production to the most efficient sources and allows consumption at the least cost, regional trade agreements can have either positive or negative effects. Even though regional trade agreements can improve resource allocation within a region, they discriminate among members and nonmembers and can have detrimental effects for global resource allocation. Do they create or distort trade? Part 3 examines regional trade agreements in Europe and Asia and considers the impact on trade flows and on global welfare. In Chapter 9, Tim Josling discusses the role of regional trade agreements in the context of the breakdown of the Seattle WTO ministerial meetings in December 1999. This breakdown has raised, once again, the possibility of regional trade agreements becoming the instruments of choice for countries as they seek to reduce trade barriers, encourage investment, and improve transparency in the market for goods and services. If the multilateral process of rulemaking and market opening continues to flounder as a result of a lack of consensus among the WTO membership and external protests, regional bodies may resume their role as the engines of global integration. Whether agriculture would be included in the expansion of regional agreements is an important question for the global trading system. Agriculture is likely to remain protected by domestic and trade policies if it remains outside the coverage of regional trade arrangements. If exporters continue to protect segments of their markets from international competition by exempting the sensitive sector from any trade agreement, then progress on neither regional nor global trade reform can be expected. Alan Swinbank and Carolyn Tanner, in Chapter 10, analyze the global trade impact of an enlargement of the European Union to include Central and Eastern European countries (CEECs). They frame their analysis in the context of the question, Does the formation (and expansion) of regional trade agreements serve the process of agricultural policy reform and trade liberalization in the agricultural sector or not? Swinbank and Tanner outline the most important features of the European Union’s Common Agricultural Policy (CAP), highlight pertinent features of the CEECs’ agricultural

INTRODUCTION

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regimes, and report the findings of prior impact studies on EU enlargement. They discuss the problems that the CEECs will have in adopting the CAP. They also address the question of how the enlargement will affect the European Union’s WTO obligations. Swinbank and Tanner conclude that further reform of the CAP, given EU and CEEC export subsidy commitments, will be required so that the enlarged European Union can meet its WTO obligations. From the authors’ perspective, Agenda 2000 CAP reforms had little to do with preparing for enlargement or the next round of WTO negotiations but rather are directed at meeting the European Union’s existing WTO commitments. Furthermore, the authors are not certain that the European Union will ever bring itself to reform the CAP sufficiently to meet its obligations as an enlarged entity. The prospects for further global agricultural trade liberalization, therefore, are weakened. In Chapter 11, John Gilbert, Robert Scollay, and Thomas Wahl shift the focus to the Asia-Pacific Economic Cooperation (APEC) system. The authors use an applied general equilibrium model to explore how APEC may help to facilitate agricultural reform in the region. The model integrates trade reform with a comprehensive capacity-building scheme. They conclude that further reform, despite the achievements of previous rounds of agricultural trade reform, will produce significant benefits. APEC reforms, even without reciprocal liberalization in the rest of the world, can lead to important gains for the region. The authors’ analysis suggests that it is possible to design a reform program that benefits all APEC members, as well as policies that alleviate the negative effects of reform on the rural population. Finally, their research demonstrates that capacity-building measures in the region’s developing countries can improve overall welfare without major negative implications for developed members.

PART 4: NONTRADE CONCERNS

The WTO overall agreement instructed the world’s agricultural trade negotiators to meet in 1999 to begin to renew the process of “substantial progressive reductions in support and protection.” Negotiators were also requested to take into account so-called nontrade concerns. These have been interpreted differently among the WTO members. The Agreement on Agriculture refers to food security and the need to protect the environment as nontrade concerns. Broader definitions have evolved, including rural development, food safety, labeling, and the idea of protecting public health. Part 4 examines multifunctionality, rural policy, food inspection and labeling, and sanitary and phytosanitary measures. In Chapter 12, James Rude addresses an emerging issue in agricultural trade negotiations: multifunctionality, which is about unpriced spillover

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INTRODUCTION

benefits resulting from agricultural production. The controversy around multifunctionality concerns the appropriate method to induce the spillover benefits. Advocates of multifunctionality espouse domestic subsidies that are tied to agricultural production; critics see a potential for trade distortion. In fact, the Agreement on Agriculture recognizes that domestic subsidies have the potential to distort trade and hence limits their use. The question Rude examines is whether coupled production subsidies are effective in promoting spillover effects. In addressing this question, Rude analyzes the definition of multifunctionality and examines the state of international trade negotiations on the subject. He then identifies three types of multifunctionality and assesses the merits of each type. He concludes that the postulated indirect beneficial effects must be explicitly identified and that the costs and benefits of promoting these effects must be assessed. In most cases, beneficial effects can best be achieved by targeted interventions aimed directly at the spillover. Indirect instruments, such as production subsidies, are blunt instruments that are not particularly effective and may have detrimental side effects. Arguments for multifunctionality are therefore in many cases an unjustifiable rationale for evading domestic support reduction commitments, either because of faulty logic or because of disingenuous attempts to keep in place support measures for political purposes. In Chapter 13, Kenneth Thomson discusses the implications of a potential new WTO round for rural areas in developed countries. He argues, first, that a successful round will accelerate globalization, thereby reinforcing long-term economic and social forces that have operated for many years. Labor and capital from a wider geographical range of sources will become available, and in many instances their output can be sold in wider markets. However, whether these businesses will be located in, or be attracted into, rural areas depends on whether their costs are sufficiently low or their goods and services sufficiently high-priced. Second, as long-standing trade barriers are reduced or eliminated, agriculture faces further global internationalization and specialization. This means there will be still fewer people farming, even in successful farming areas. In farming areas unable to compete in global markets, changes will be more severe, and land transfer to other uses or abandonment must be contemplated. Third, environmental concerns—in rural areas as well as globally—will not be well handled with the WTO. For European and other countries where the countryside is truly multifunctional and subsidized agriculture is considered necessary to preserve valued features and practices, there will be perennial dispute over whether green-box measures in fact distort international trade and, if so, what constraints or compensations should be applied. Jill Hobbs, in Chapter 14, focuses on labeling and consumer issues in international trade. Hobbs identifies three types of labeling: consumerfocused; producer-focused; and social/culture-oriented. Hobbs argues that

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the objective of consumer labeling is to reduce transactions costs and allow the market to operate more efficiently. She describes the role of consumer labeling in the context of the attributes of the good and lists and discusses several different examples of consumer-focused labeling. Hobbs argues that the objective of producer labeling is to protect the interests of producers. However, the distinction between consumer- and producer-focused labeling is often blurred, and this lack of distinction is the root cause of many trade disputes. Social/cultural labeling involves such requirements as bilingual and multilingual labeling. These labels are specific to the social or cultural environment of the country in question. When the regulations are applied equally to domestic and imported goods, the labels do not constitute a trade-distorting measure. Hobbs concludes by examining the economic implications of labeling in terms of allowing consumers to demonstrate their preferences for attributes whether they be process attributes or other characteristics. In Chapter 15, Donna Roberts addresses a topic that has become increasingly prominent in the public discussion about international trade negotiations: sanitary and phytosanitary measures. SPS measures regulate the movement of agricultural products across international borders to protect public health and the environment from pests, diseases, and contaminants. The proper use of SPS measures is generally legitimate, but the measures can become controversial because they have sometimes been misused to unfairly restrict trade. Roberts examines the WTO Agreement on the Application of Sanitary and Phytosanitary Measures (SPS Agreement) established to regulate the choice and design of SPS measures affecting agricultural trade. She focuses on the evidence of the extent to which the agreement has achieved its goal. Does it strike a proper balance between allowing each country the latitude to define protection standards while enabling international market access for agricultural goods? This is done through an examination of the implementation of the SPS Agreement since 1995 by focusing on each area in which regulation was sought: transparency, science-based risk assessment, equivalence, and harmonization. A discussion of dispute settlement based on two cases arising out of the SPS Agreement follows, as does a concluding section in which Roberts assesses challenges that confront the SPS Agreement in the future. The Conclusion addresses the question of whether the emerging issues in agricultural trade negotiations presented in this text are stumbling blocks or stepping-stones for a new agricultural trade agreement. The authors provide their perspectives on the prospects for a successful agreement on agricultural trade, focusing on each of the topics in Parts 1–4 as potential barriers or aids to progress.

PART 1 The Environment and Agricultural Trade

1 Agricultural Trade and the Environment: Issues and Challenges C. FORD RUNGE

The coevolution of environmental and trade policies since the end of the Uruguay Round, as well as their prominence as a new round is set to begin, have left governments and trade negotiators grappling with two central questions. The first question concerns the impacts of trade on the natural environment: When does trade impose such burdens on the natural environment that trade rules must be revised or offsetting interventions be made to protect environmental quality? The second question concerns the impacts of environmental measures on trade: When do the burdens of environmental measures on trade justify their removal or reform? Both of these questions arise from the interaction of trade and environmental measures. 1 There is, of course, a large class of cases in which national environmental problems can be dealt with in ways that do not burden trade flows at all. Conversely, there are many issues of agricultural trade policy that are unrelated to environmental issues. An example of the former might be pollution of inland lakes and waterways requiring changes in agricultural practices in a watershed. An example of the latter might be the choice of a tariff versus a quota affecting imports of a commodity such as dairy products or sugar. But where trade and environmental measures do interact, resolving these issues requires explicit value to be given to environmental costs and benefits, which must then be weighed against the costs and benefits to the trading system. The effect of such explicit evaluation is to grant “standing” to environmental costs and benefits that have often been ignored or discounted in the past (see Runge et al., 1994, pp. 31–33; Arrow et al., 1996). As part of this trend, Annex 2 of the Uruguay Round Agreement designated certain agro-environmental policies as “green box,” meaning that 13

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their impacts on trade were sufficiently small that they received a “green light” and would not be regarded as part of a country’s Aggregate Measure of Support.2 Green-box designations were extended not only to a variety of agro-environmental measures but also to policies affecting food security, crop insurance, and revenue support. In general, as long as a policy had little or no impact on production or prices, it was presumed to have little impact on trade and was thus in the green box. However, the presumption that neutrality respecting prices and production is the best indicator justifying exemption from trade disciplines is dubious. Here I shall be concerned with (1) whether a more general characterization can be given to environmental (or other) policies that are justified even if they negatively affect trade; and (2) the converse question of under what conditions trade policies with negative environmental impacts require discipline. These actions and decisions may occur through consultation, negotiation, or formal rule changes (see Sampson, 1999). First I will set these issues within a decision-theoretic framework, and then I will develop a set of verifiable criteria that help to justify certain policy measures. Although the discussion is conceptual, I consider specific examples. I then analyze the relevance, as well as some limitations, of an approach based on the theory of economic policy known as “targets and instruments,” suggesting a reinterpretation based on the theory of joint production. I end with a critique of the recent enthusiasm for justifying continued agricultural subsidies with purported environmental benefits under the rubric of multifunctionality, using an example from current debates over genetically modified organisms (GMOs). The final section presents a summary and conclusion.

A DECISION FRAMEWORK

How can nations respond to the environmental effects of trade measures? Conversely, how can environmental policies be justified even though they may pose burdens for the trading system? I will consider each question in turn, treating them in a decision-theoretic manner. Trade Effects on the Environment I begin with a description of the impacts of trade measures on the environment (following Runge et al., 1994). Figure 1.1 is a decision tree, in which the first branches result from an “event node,” where one or another outcome may occur (see Raiffa, 1970). In decision analysis, it is customary to assign probabilities to the branches of an event node, reflecting information about the likelihood of alternative outcomes. Clearly, the greater the likeli-

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AGRICULTURAL TRADE AND THE ENVIRONMENT

Figure 1.1

Environmental and Regulatory Implications of Trade Measures In the home market Enforced regulations Environmental damages

■

■ In foreign markets In global commons

No enforced regulations Trade measures may lead to

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No environmental damages ● = event node

■ = decision node

Source: Adapted from Runge et al., 1994, p. 12.

hood that a trade measure may lead to environmental damages, the more scrutiny the trade measure will require.3 If the trade measure itself is not abandoned or altered as a result of such a likelihood, then the environmental damages may lead to some type of regulatory decision (taxes, subsidies, or other measures may clearly be part of this decision). For this reason, the next set of branches are marked as “decision nodes.” The decision tree allows for the possibility that a decision not to enforce regulations can be made. This outcome is especially relevant where the institutional and/or regulatory infrastructure is undeveloped, or where the political system is indifferent to the environmental damages involved, both of which are distinct possibilities in parts of the Organization for Economic Cooperation and Development and in less developed countries (see Runge, 1998). Once a decision to respond to environmental damages has been reached, there are further decisions that must be made over the appropriate venue and jurisdictional boundaries within which to proceed (see Hauer, 1997). For example, even if trade is linked to environmental damages, the damages may occur outside the home market, beyond the reach of domestic

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laws. Such was the case in the tuna-dolphin dispute, when the United States imposed trade embargoes to enforce laws designed to prevent dolphin kills in fishing nets used to catch tuna in foreign waters.4 In such cases, regulation takes on international legal significance, and questions of jurisdiction and sovereignty arise. Whether the trade measure has its primary environmental impact at home, abroad, or in the so-called global commons (such as the atmospheric ozone layer), will thus affect the type of action taken in response (see Bhagwati and Srinivasan, 1997). In summary, Figure 1.1 shows the basic elements of events and decisions where trade affects the environment. A trade measure (for instance, an export ban or market integration process such as the North American Free Trade Agreement, or NAFTA) may or may not lead to environmental damages. If the likelihood of damages is high, offsetting them requires either that the trade measure itself be changed, or it requires a decision in favor of some type of enforced regulatory response. The venue for this implementation and enforcement may be the home market, foreign markets, or even the global commons. The wider the scope of intervention, the more complex issues of jurisdiction and sovereignty become, necessitating greater consultation, negotiations, and rule changes. Effects of Environmental Measures on Trade In contrast to the impacts of trade measures on the environment, measures designed to protect the environment may also affect trade. This sequence of events and choices is shown in Figure 1.2, a decision tree with different features. The first branches describe an event node: environmental measures may lead to burdens by diverting or stopping trade flows, or they may not. Such burdens result from discrimination against foreign goods that is either explicit and rule-based (de jure) or (although neutral prima facie) imposes a differential burden (de facto). If the likelihood of such trade discrimination (whether de facto or de jure) is high, particular scrutiny of the environmental measure is required. If a demonstrable burden is imposed on agents seeking to export or import goods or services, the next question involves a decision. This balancing decision is whether the environmental measure is a form of justifiable environmental protection, or is instead mainly a disguised restriction to trade in which harmful trade effects offset and may outweigh beneficial environmental effects. This decision requires explicit weighing of the costs (to social welfare due to trade distortion) that should be borne in order to achieve environmental benefits. Such questions typically break down into two parts (Hudec and Farber, 1992). First, does the environmental measure create a burden on the trading system? Second, is the burden nonetheless justified by the welfare benefits of internalization of negative environmental externalities?

AGRICULTURAL TRADE AND THE ENVIRONMENT

Figure 1.2

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Trade Implications of Environmental Measures “Necessary” Article XX (a), (b), (d)

Justified Trade burdens ■ or (de facto or de jure) Not justified Environmental measures may lead to

● or No trade burdens

● = event node

Article XX Chapeau: “unjustified ■ discrimination”; “disguised restriction”

“Unnecessary obstacle to trade” Article 2.2 1994 Standards Code Sanitary and Phytosanitary (SPS) Agreement

■ = decision node

Source: Adapted and updated from Runge et al., 1994, p. 16.

From a legal perspective the burden imposed on trade is a gateway concept. If no burden is found, then the trade effects of the environmental measure are not at issue. The finding of a burden (either de jure or de facto) opens the way to further decisions as to a measure’s justification, in which its benefits for the environment are weighed against its harm to trade. This justification depends on specific legal tests applied by the General Agreement on Tariffs and Trade/World Trade Organization (GATT/WTO) in dispute settlement procedures and interpretations of various GATT/WTO codes. These tests all amount to decisions implicitly balancing the environmental benefits of the measure against the harm it does to trade. The first and simplest is the “necessary” test provided for in GATT/WTO Articles XX(a), (b), and (d) and related as well to XX(g). These general exceptions allow measures to be undertaken for domestic reasons even if they impose burdens on trade. Under article XX(b), for example, measures must be “necessary to protect human, animal or plant life or health.” Article XX(g), while not using the word “necessary,” refers to measures “relating to the

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THE ENVIRONMENT

conservation of exhaustible natural resources, if such measures are made effective in conjunction with restrictions on domestic production or consumption.” Necessity, in this context, means that the environmental goal cannot be realistically accomplished by means that are less burdensome to trade. As Robert Hudec argues, whether a burdensome regulation is necessary to achieve a domestic environmental objective “is really an interlocking decision about whether, as compared with the next least restrictive alternative, the extra burden is worth the extra gain.”5 The second version of justification for environmental measures appears in the chapeau, or headnote, to Article XX, relating to “unjustifiable discrimination” or a “disguised restriction” on international trade. These justifications have been developed in light of recent cases before the Appellate Body of the WTO, notably the reformulated gasoline case,6 in which a U.S. claim that a discriminatory regulation had been enacted for a bona fide regulatory purpose was rejected because the United States had alternative measures available that could have accomplished the regulatory objective without employing discrimination. When the discriminatory element of a regulation is found not necessary to the policy objective it is meant to serve, that measure can be classified as “unjustified discrimination” or a “disguised restriction” to international trade (Hudec, 1998, p. 638). The issue also arose in the shrimp-turtle case (see note 4 above). A third basis for justifying environmental measures derives from Article 2.2 of the 1994 Standards Code, which discusses “unnecessary obstacles” to trade. Although the WTO dispute settlement system has not rendered any decisions applying the article, it appears to be especially useful in relation to measures that are neutral on their face (or “origin neutral”) but in which de facto discrimination is alleged, in contrast to de jure discrimination, which could be more readily handled under Article XX (Hudec, 1998, p. 644). A final basis for justifying environmental measures related to food quality and health risks in the food system, with special relevance to new issues of biotechnology and genetically modified organisms, is the sanitary and phytosanitary (SPS) agreements made during the Uruguay Round. The WTO Agreement on the Application of Sanitary and Phytosanitary Measures (SPS Agreement) is itself an explication of Article XX(b). Controversy currently surrounds the application of the SPS Agreement to the risks that may be posed by GMOs and whether measures designed to ban imports of GMOs can be justified by demonstrating that they might promote plant or insect pests, antibiotic resistance, and other threats to human, animal, and plant life and health. In summary, if an environmental measure imposes a burden on trade, then the determination whether the burden is justified can be assessed using several criteria. All appeal to the idea that if feasible alternatives exist that

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19

are less trade-distorting but still protect the environment, then they should be considered in lieu of existing measures.7 In order to establish these desiderata, however, certain types of evidence will be needed. We turn now to three key verifiable criteria required when trade may affect the environment or when environmental measures affect trade.

VERIFIABLE CRITERIA

In this section, a set of general criteria is proposed to help organize the evidence in both of the decision processes outlined above. Its purpose is to offer some tools of interpretation in answering the two questions identified at the outset of this chapter: respecting trade impacts on the environment, and the impacts of environmental regulation on trade. The discussion is largely substantive and is not intended to offer a procedural basis for these decisions, or to specify how the burden of proving certain effects should be distributed among disputants. Notwithstanding these caveats, in either of the two decision processes thus far considered, three types of verifiable criteria can be applied (see Table 1.1). The first of these is an empirical requirement: a finding of damage or burden. In the case of trade-liberalizing measures with damaging effects on the environment, careful documentation, including the use of well-defined environmental indicators, is needed to show how trade expansion is likely to lead to environmental damages.

Table 1.1

Verifiable Criteria

Verifiable Criteria

Trade * Environment (see Figure 1.1)

Environment * Trade (see Figure 1.2)

Empirical finding of damage or burden

Evidence that links trade measure to damages to environment

Evidence that links environmental measure to trade burdens

Opportunity set of alternatives

Evidence that feasible trade policy alternatives (or environmental safeguards) exist

Evidence that feasible environmental policy alternatives exist

$ distribution of burden (costs) and advantages (benefits)

Evidence that trade policies offer widespread benefits and narrow (more easily targeted) environmental costs

Evidence that environmental policies offer widespread benefits and narrow (more easily targeted) costs to the trading system

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THE ENVIRONMENT

This empirical documentation is valuable not only in establishing the linkage but also in designing appropriate policies to offset or mitigate the damages. In the case of environmental measures that may pose burdens for the trading system, the same level of empirical rigor is necessary. If it is alleged that an environmental policy imposes trade burdens, careful documentation will be needed not only in establishing a case but also in designing alternative measures that are less trade distorting. The second verifiable criterion concerns the opportunity set of alternatives available to policymakers, which requires that a specific set of feasible alternatives be identified.8 In the case of trade impacts on the environment, these would include either adjustments in trade policies designed to reduce environmental damages or environmental safeguards introduced to mitigate or offset them. In the case of environmental measures with trade effects, it would include alternative environmental measures that might be less burdensome to trade. What is important is that these alternatives be feasible in practice and not wholly hypothetical. First preference would go to alternatives that are already in practice, obviating a demonstration of feasibility and eliminating hypothetical judgments.9 Feasibility implies that these alternatives, even if not identical in costs, be within the budget set and be capable of implementation and execution. Where such policies do not exist, evidence must be adduced showing that they are affordable and can be implemented in principle. The purpose of this criterion is to show rigorously that alternatives exist that may offer the same degree of trade liberalization with fewer environmental damages or the same level of environmental protection with fewer burdens to trade. This demonstration is logically needed prior to judgments about whether an environmental measure is necessarily the least trade restrictive, or whether a trade measure is least damaging to the environment, since use of least implies that feasible alternatives exist. The test also relates to questions of necessity more generally. A measure is necessary to protect the environment, for example, if and only if no other measure can feasibly accomplish the same goals, thus requiring the examination of actual or hypothetical alternatives. The third verifiable criterion concerns the distribution of costs and benefits of a given measure.10 This arises from the fact that different trade measures may impose different patterns of environmental burdens (costs) in relation to commercial trade advantages (benefits). Conversely, different environmental measures may impose different patterns of trade burdens (costs) in relation to their environmental advantages (benefits). Choices among feasible alternatives are likely to be affected by this distribution of costs and benefits. For example, if an environmental measure restricts trade but imposes more burdens on foreign competitors than domestic producers, and if alternatives exist in which the burden would be more equally shared,

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one may argue in favor of replacing the measure with this alternative.11 In the case of trade policies that pose hazards for the environment, those that offer economywide benefits in relation to narrowly drawn environmental costs (e.g., to a particular geographic area or ecosystem) may be more easily dealt with through a targeted environmental intervention than those in which commercial benefits flow to a narrow set of interests while imposing widespread ecological damages. Similarly, when environmental policies offer widespread benefits, and their costs are borne narrowly by affected parties (such as a sector or firm), it is easier to target this group for direct compensation while retaining the widespread advantages of environmental protection.12 Taken together, the verifiable criteria summarized in Table 1.1 are designed as a tool of interpretation to narrow the search for trade policies that, even if damaging to the environment, may have feasible alternatives that are less damaging or, failing that, in which opportunities exist for narrowly targeted environmental interventions to mitigate or offset such damages. In cases in which environmental policies impose burdens on the free flow of trade, the three criteria are designed to encourage alternatives that have fewer trade effects, as well as those in which benefits are widespread while costs are borne narrowly, accommodating compensation to those burdened. In either case, the purpose is to inform the decision framework where trade and environment intersect so that where this intersection poses either environmental damages or trade burdens these are minimized in relation to trade and/or environmental benefits. In the real world of dispute settlement, it would be useful if GATT/WTO panels charged with evaluating trade-environment interactions would specifically evaluate alternatives by reference to these decision tools.

SOME EXAMPLES

Let us consider a representative case of each decision process, together with the verifiable criteria noted. First, consider the impact of NAFTA on a particular sector, such as the North American beef-feeding industry. This was the subject of an issue study prepared for the NAFTA Effects Project for the North American Commission on Environmental Cooperation (Runge and Fox, 1999). First, empirical evidence was developed showing that trade expansion under NAFTA would contribute to a process of consolidation of beef feeding already under way in the central United States and in the prairie provinces of Canada. Second, the environmental impacts were identified as occurring primarily in the feed-grains sector, and indicators such as atrazine applications and nitrate levels in ground and surface waters were suggested as a basis for monitoring these effects. Since NAFTA’s

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trade benefits are large and widespread in both the cattle and feed-grains sectors, environmental interventions were discussed that focused primarily at the more narrow base of farm practices and feedlots, where specific environmental targets could be most easily met. These environmental safeguards were discussed as appropriate adjuncts to expanded North American trade in agriculture. In the case of environmental measures with trade effects, the U.S.Canada dispute over landing of salmon and herring catch is instructive. In this case Canada demanded that U.S. salmon and herring boats land and have their catch fully counted in Canada before proceeding to canneries and further processing. The United States argued that this policy was not necessary to conserve exhaustible natural resources under Article XX(g), as claimed by Canada, and was an unjustified burden on the commercial conduct of the U.S. fisheries industry. After a series of dispute settlement panels heard the case (under both the U.S.-Canada Free Trade Agreement and the GATT/WTO process), the U.S. position was upheld. This case illustrated a clear line of reasoning from a finding of trade burden to a lack of justification for the burden in terms of environmental protection. It did so by developing an empirical assessment of the need for 100 percent versus partial sampling, a feasible (and nonhypothetical) alternative. Finally, it showed that the landing requirements imposed on the United States would probably not have been undertaken by Canada if the distribution of the burden had been such as to fall wholly on its own (Canadian) nationals. In other words, how genuine the conservation purpose of a measure is, must be determined by whether the government would have been prepared to adopt that measure if its own nationals had to bear the actual costs of the measure.... The issue must be posed in terms of whether Canada would have adopted the landing requirement if that measure had required an equivalent number of Canadian buyers to land and unload elsewhere than at their intended destination.13

TARGETS, INSTRUMENTS, AND JOINT PRODUCTS: “MULTIFUNCTIONALITY” AND AGRICULTURAL SUBSIDIES

We turn now to an issue implicit in much of the preceding discussion: the relationship between goals and policies or, in the language of economic policy, “targets and instruments.” A principle of economic planning developed by economist Jan Tinbergen (1950) is that in general each target of policy merits a separate instrument. Tinbergen derived this prescription from the identification of a set of equations in which a programming problem can be solved only if the number of unknowns equals the number of

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equations (a necessary but not sufficient condition). This principle can be interpreted to mean that environmental targets are generally best met first by environmental policies and trade targets by trade policies (Runge et al., 1994, pp. 28–30). If an appropriately balanced combination of environmental and trade policy measures is found, the result can be welfare gains both from the trade reforms and from improvements in the level of environmental quality. In general, therefore, some combination of trade and environmental policies will be most efficient (Krutilla, 1991). Conversely, the advantages of trade policy reform can be lost if appropriate environmental actions are not undertaken jointly (Anderson, 1992; Repetto, 1993). Yet the problems discussed above already assume that some crossorder effects from trade instruments to environmental targets, and vice versa, are at hand, complicating the neat identification of a single target with a single instrument. Notwithstanding the mathematical rigor of Tinbergen’s argument, the political process is often drawn to solutions in which a particular instrument is supported as a solution to multiple problems. A specific case is the claim, made by European Union (EU), Nordic, and Japanese governments, among others, that agricultural subsidies (and hence continued agricultural protection) are justified in light of the “multifunctional” public benefits they provide. Apart from farm-income support per se, these include landscape preservation as well as more vaguely defined cultural values and food security. Arguments in favor of continued agricultural subsidies, especially in the European Union, are thus motivated by the claim that single instruments succeed in hitting multiple targets, enhancing their value to numerous groups. The political reasoning behind these claims is not only that a single instrument achieves multiple goals but also that multiple constituencies can be enlisted in support of the instrument, each of which contributes its political clout because of its own interest. It thus appears that Tinbergen’s argument, reflecting the logic of indicative social planning, runs counter to the logic of coalition formation in democracies in which multifunctionality has obvious appeal. One way to square the apparent contradiction is to note that certain policy instruments may yield joint products and that these products will adjoin the accomplishment of a particular policy target.14 Such joint products may be positive or negative from the perspective of social welfare. Thus, trade liberalization that reduces or eliminates subsidies in a sector such as fisheries may also lead to environmental benefits in the form of conserving depleted fisheries stocks, whereas the continuation of fleet subsidies perpetuates overfishing (Runge and Jones, 1996). In such cases, environmental interests will form coalitions with free-traders. In agriculture, there is a considerable recent literature supporting the claim that agricultural protectionism is also harmful to the environment (Faeth, 1996).

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These negative joint products of agricultural subsidies must be weighed against claims that emphasize only positive joint products (e.g., landscape preservation). When one policy results in multiple outputs, the result is analogous to the case in which several products are produced jointly from a single production technology. Two or more outputs (e.g., farm-income support and landscape preservation) occur jointly as a result of a single policy of agricultural subsidies x, just as wool and mutton to a farm (or firm) are joint products of sheep production. Following J. Henderson and R. Quandt (1971), such a multiple-output/single-input production function x = h (q1, q2) occurs when outputs are restricted to a combination of (q1, q2), where x is an agricultural subsidy, q1 is farm-income support and q2 is landscape preservation, and the support of q1 carries with it (precludes nonzero production of) q2. A product transformation curve is the locus of q1 and q2 that can be secured from a given input of x: x0 = h (q1, q2), which with neoclassical assumptions yields a characteristic product transformation curve of q1 and q2 that can be secured from a given level of agricultural subsidy (see Figure 1.3).15

Figure 1.3

Illustration of Product Transformation Curve

Source: Henderson and Quandt, 1971, p. 91.

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As shown in Figure 1.3, levels of agricultural subsidy (x3 > x2 > x1) lead to higher levels of both income support and landscape preservation, in a ratio determined by the curvature of the transformation curve. Note that the curvature of the transformation curve may imply a linear expansion path E (as in Figure 1.3) but also may be biased in either direction. Specifically, increasing levels of agricultural subsidy may lead to higher levels of farm income without proportionate gains in landscape preservation or vice versa (see Figure 1.4). Finally, as noted above, the outputs of a given policy may be expressed in terms of goods and bads. If agricultural subsidies continue to support farm income q1 and landscape preservation q2 but also result in pesticide residues q3 where q3 has a negative effect on human or animal welfare, then the function x : x0 = h (q1; q2; Bq3) will result in three joint products. Holding q1 constant, the transformation of landscape preservation q 2 into pesticide residues (Bq 3) may result in a transformation function in which landscape preservation (q2) due to agricultural subsidies (x) can only be achieved with increasing levels of pesticide residues (Bq3) (see Figure 1.5). This captures the fact that negative joint products, or bads, can result and that such effects need to be included in any calculation of the impacts of a particular policy choice. The rate of product transformation given by the slope of the “price lines” R1, R2, and R3 in any of the figures describes

Figure 1.4

Illustration of Unbiased Agricultural Subsidy Effects on Landscape Preservation and Farm Income Support

26 Figure 1.5

THE ENVIRONMENT

Illustration of Biased Agricultural Subsidy Toward Farm Income Support

the trade-offs of income support for landscape preservation or pesticide residues at increasing levels of agricultural subsidy and vice versa. Movements from x3 to x2 to x1 would describe the impacts of agricultural subsidy reduction. With this simple basis, analysis can proceed to empirical estimates of these trade-offs.16 The preceding analysis shows that agricultural protection and its converse, agricultural liberalization, can be described as cases in which joint products typically result. Some of these products may be environmental benefits (goods), whereas others are environmental costs (bads). Whether a policy increases net welfare depends on the sum of these positive and negative products. Arguments in favor of maintaining or expanding agricultural subsidies have recently taken the form that notwithstanding distortions to trade they result in gains not only in farm income but also multifunctional joint products such as landscape preservation. Two main conclusions emerge from this analysis, the first from the discussion of targets and instruments, the second from the analysis of joint products. Both tend to undercut claims in favor of continuing agricultural subsidies in their current form. The first is that there are generally more direct routes from policy instruments to environmental targets than agricultural subsidies, which are oblique and likely to be underspecified and pose

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27

substantial burdens to trade in return for their putative environmental benefits. Using agricultural subsidies to enhance landscape preservation, for example, is less efficient than policies that directly compensate farmers for countryside improvements, without encouraging simultaneous increases in negative externalities such as pesticide overapplication. Second, a full accounting of the environmental impacts of agricultural subsidies must include both positive and negative joint products (e.g., landscape protection and pesticide residues). If empirical analysis shows that both benefits and costs are present, then arguments in favor of agricultural protection due to one cannot ignore the presence of (and trade-offs due to) the other. For example, one team of researchers (Hartmann and Matthews, 1995) reported that fertilizer use in EU countries, responding to high perhectare subsidies in the 1980s, was 275.6 kilograms per hectare (kg/ha) in Belgium-Luxembourg, 216.3 kg/ha in Denmark, 263.1 kg/ha in Germany, 185.6 kg/ha in France, 315.6 kg/ha in the Netherlands, and 133.9 kg/ha in the United Kingdom, compared to 41.1 kg/ha in the United States. Pesticide applications in the European Union were 3.1 kg/ha in Denmark, 4.1 kg/ha in Germany, 10.2 kg/ha in Greece, 3.2 kg/ha in France, 17.3 kg/ha in Italy, 22.2 kg/ha in the Netherlands, and 5.9 kg/ha in the United Kingdom, compared to 1.8 kg/ha in the United States (Hartmann and Matthews, 1995, p. 11). Of course, U.S. land areas are larger and more extensively farmed. As the negotiating positions of many WTO members leading up to the next round of multilateral talks evolve, it will be important to specify rigorously what multifunctionality is and what it can and cannot justify. Specifically, countries asserting the beneficial joint products of agricultural subsidies must be required to demonstrate them empirically. Second, they should not be allowed to pick and choose multifunctional benefits without also acknowledging and demonstrating costs, especially to the environment. Third, it must be shown that agricultural subsidies are the least tradedistorting measures among an opportunity set of feasible alternatives to accomplish these goals. Finally, it will be useful to lay bare who benefits from such subsidies in relation to who loses from their budgetary and environmental costs. In the final analysis, much of what is being justified under the rubric of multifunctionality would be better described as multidysfunctionality, to coin an infelicitous term.

AGRICULTURAL SUBSIDIES AND ENVIRONMENTAL PROTECTION: THE CASE OF GENETICALLY MODIFIED ORGANISMS

A recent example of errors in policy prescriptions based on multifunctional claims arises in the context of the controversy surrounding genetically

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modified organisms. Some researchers (see Sianesi and Ulph, 1998) argue that higher agricultural subsidies should be given to conventional crops rather than genetically modified crops that are resistant to various insect pests. They reason that the consequence of adopting insect-resistant GMO crops will be to eliminate many insects on which birds depend, and to thereby seriously threaten the survival of many farmland bird species. Accordingly, subsidies should be paid to nonmodified crops “and then should be raised over time so as to choke off the demand for further crop modification” (p. 3). A collateral result of this exercise is that research and development (via the relative price effect) into genetically modified crops will fall. The irony of this result (which is based on a modeling exercise without empirical support) is that the evidence of bird-species losses (prevention of which is the purported environmental target) is drawn from data on pesticide uses on conventional crops (Campbell et al., 1997). Hence, further subsidization of these crops, unless accompanied by severe restrictions on pesticide use and land conversion generally, would be expected to aggravate current bird-species losses, not alleviate them. Moreover, the assumption that genetically modified, insect-resistant crops will lead to the elimination of insect species assumes that some insects have no biological niches other than these crops, which cannot be true in evolutionary terms, as modern cropping is a very recent development. It also assumes that insect resistance will spread across plant species from modified crops to all of the other plants upon which these insects depend, a highly debatable conjecture.17 In fact, since the introduction of herbicide-tolerant soybeans and insect-resistant corn and cotton in the United States (roughly 50 percent of soybeans, 30 percent of corn, and 20 percent of cotton), herbicide and pesticide sales have fallen by about 30 percent on these crops (Hayenga, 1998; The Economist, 1999). Indeed, the primary challenge to the use of genetically modified crops is not only or even primarily insect elimination; rather it is the same dilemma faced by conventional pesticides used on conventional crops: insect resistance. Decisive steps to manage resistance of genetically modified crops to a wide range of insects has now led Monsanto and Novartis, two key sales agents, to require that as much as 25–50 percent of corn or cotton be retained in conventional cropping so as to preserve nonresistant insect pest populations (Benbrook, 1999, p. 23). In January 2000 the U.S. Environmental Protection Agency reinforced these requirements, although it is notable that the requirements emerged first not from government actions but from private incentives to retain markets for insect-resistant varieties. Drawing on the verifiable criteria and discussion of joint products above yields several observations about such ill-conceived arguments.

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First, defense of agricultural protection of conventional crops in the name of preservation of bird species fails the first verifiable criterion developed above: there is little empirical evidence supporting the claim that the burdens to trade are justified by environmental benefits to bird species. Indeed, the evidence is to the contrary: both EU and U.S. subsidies are associated with widespread loss of bird habitat and populations; neither are such subsidies necessary to the preservation of such species. Second, when feasible alternatives such as wildlife refuges or habitat protection exist (such as the Conservation Reserve Program in the United States), there is evidence of direct effects on protection of bird species (Allen, 1993). The lesser effects on trade of such refuges are accompanied by proportionately greater environmental benefits. Third, agricultural subsidies paid to farmers in the name of saving bird species involve highly concentrated benefits to farmers and highly diffused (if any) environmental damage reductions in the form of species preservation. Far better would be to remove subsidies for conventional crops, utilizing funds for direct programs of habitat protection and support for alternative cropping methods such as integrated pest management and conservation tillage, both of which have been proven effective in protecting a variety of bird species (see Altieri, 1995; Ervin et al., 1998; Fernandez-Cornejo et al., 1998). In the final analysis, continuing agricultural subsidies in support of species preservation appears, based on the verifiable criteria developed above, to be a highly contrived argument, especially because other more feasible instruments are at hand. Moreover, when all of the joint products of such subsidies are considered, including land conversion and pesticide use, the argument appears to promote the continued destruction of species and habitat in the name of farm-income support. To the extent that such support is rationalized as a form of environmental protection, approaching green-box status, it should be critically examined using the verifiable criteria and joint products analysis developed in the conceptual framework above.

CONCLUSION

This chapter has developed a conceptual framework for cases in which either trade affects the environment, or those in which environmental measures affect trade. It began with a theoretical justification for linking environmental damage reductions to trade and trade damage reductions to the environment. It then characterized the key choices involved and developed a set of verifiable criteria to guide such choices. These criteria help inform decisions about trade-environment interactions by demanding empirical rigor, careful evaluation of feasible alternatives, and assessment of the

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resulting distribution of gains and losses. Although the focus is on agriculture, these decision trees and verifiable criteria are applicable to other sectors as well. I also looked at the policy challenges posed by multifunctionality, using the theory of joint products to show that the full range of costs and benefits resulting from agricultural subsidies must be counted in any balanced assessment. Finally, a recent argument in favor of subsidizing conventional crops in the European Union, as a way of driving out GMOs, was shown as an example of misguided multifunctionality.

NOTES This chapter was originally prepared as a paper presented to the conference on globalization and agricultural trade, University of Saskatchewan, Saskatoon, Saskatchewan, Canada, February 12–14, 2000. It is based on an article appearing in the Journal of World Trade 33(6) (December 1999). Thanks to Judy Berdahl for manuscript preparation and to Steve Charnovitz, Thomas Cottier, David Ervin, Bob Hudec, Lee Ann Jackson, Wilfrid Legg, Donna Roberts, Pamm Smith, and Peter Walkenhorst for comments, contributions, and suggestions. The views and opinions expressed are the sole responsibility of the author. 1. In this chapter, trade measures encompass both liberalizing and restricting measures, although most of the discussion focuses on liberalizing measures that may have negative environmental impacts. Environmental measures include a wide array of environmental policies, especially those in agriculture, including regulations, restrictions on chemical use, and land conservation programs. They may also include taxes and subsidies. 2. The intuition was that of triage, in that some policies with questionable trade impacts would be designated as “yellow” and those that clearly distorted trade were “red.” In moving from green to yellow and yellow to red, the presumption in favor of including them in the AMS increased. It should be noted that “green box” does not use “green” in the sense of environmentalism. However, agricultural program payments with environmental objectives were granted green-box status under two conditions in Annex 2 of the Uruguay Round Agreement. First, eligibility for the payments “shall be determined as part of a clearly-defined government environmental or conservation program and be dependent on the fulfillment of specific conditions under the government program, including conditions related to production methods or inputs.” Second, the payment amount “shall be limited to the extra costs or loss of income involved in complying with the government program.” For a discussion, see Ervin (1999). 3. In scrutinizing trade measures, an important question is whether trade is the primary cause of environmental damages. Experience with NAFTA shows that it is often difficult to isolate the pure effects of trade on the environment, although quantitative and qualitative judgments can be made. In a case study of the North American cattle feedlot industry (Runge and Fox, 1999), for example, linkages from NAFTA to various shifts in cattle production, and their environmental implications, were clearly identified. Judgments must then be made concerning an appropriate regulatory response. Striking a balance between trade and the environment requires a careful assessment of the cost of minimizing environmental damages and the fact that additional environmental regulations are not free. Fundamentally, this

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is a matter of offsetting damages linked to trade by choosing the best in a set of regulatory alternatives, including changes in economic incentives though taxes, subsidies, or fees. 4. “United States—Restrictions on Imports of Tuna,” GATT Doc. No. DS21/R (September 3, 1991). This U.S. action was challenged by Mexico and several other GATT contracting parties as an unwarranted reach into the commerce of the embargoed nations, or extrajurisdictionality. In this case (Tuna-Dolphin I), neither the United States nor Mexico asked the GATT Council to adopt the decision, which found the United States in violation of the GATT articles, in part because delicate NAFTA negotiations were under way. Subsequently, the European Economic Community requested a second dispute resolution panel (Tuna-Dolphin II) to review again the U.S. restrictions on tuna imports from countries failing to meet provisions of the U.S. Marine Mammal Protection Act (MMPA). On May 20, 1994, the panel found that the U.S. embargo violated GATT prohibitions on quantitative restrictions and did not fall under any of the exceptions to the GATT’s general obligations. However, as some environmental commentators noted, there are “significant differences between the analytical paths taken in the two decisions” (CIEL, 1994). Similar issues of extrajurisdictionality arose prominently in the shrimp-turtle case, in which the United States banned the importation of shrimp and shrimp products from countries found to be in violation of Section 609 of U.S. Public Law 101–162, which authorizes such bans if sea turtles are caught and adversely affected incidental to shrimp fishing. In a report of a panel formed under challenge to the U.S. action, the ban was found in violation of GATT Article XI.1 and was not justified as an exception under Article XX. The WTO Appellate Body reversed the finding concerning the application of Article XX and found that Article XX(g), “relating to the conservation of exhaustible natural resources,” did in fact apply but that the U.S. measure nonetheless failed to meet the requirements of the chapeau to Article XX. 5. Robert Hudec, personal communication. For a recent exposition of these issues, see Hudec (1998). 6. Charnovitz (1998) provides a summary and critique of the case. 7. Ervin (1999) has proposed an additional set of justifications to “GATTproof” agroenvironmental measures in the form of a Code of Good Process. These justifications overlap substantially with those described above. They include: specifying clear environmental objectives for the programs; clarifying property rights in environmental payments; preferring the least trade-distorting instrument; establishing scientific linkage between the environmental objective and the program instrument; implementing monitoring and evaluation to document program efficacy; applying equal treatment for domestic products and imports; and ensuring the transparency of agroenvironmental measures. 8. This discussion echoes Samuelson’s (1950) analysis of feasibility constraints and social welfare. 9. This point relates to the rejection of compensation schemes that are only hypothetical in nature, consistent with a rejection of “potential” compensation (see Samuelson, 1950). 10. Motivation for this criterion arises in part from conclusory arguments developed in the U.S.-Canada case respecting salmon and herring catch requirements imposed by Canada on the U.S. fishing fleet. For a further discussion of the salmon-herring case, see Runge et al. (1994), pp. 80–87, and the fourth section of this chapter. 11. This was, in fact, the argument made in connection with landing rights for

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salmon and herring fished off the western coast of Canada in U.S.-Canada Binational Panel Final Report, ITRD, vol. 12 (October 16, 1989), pp. 1026–1044. The report read in part: “The issue must be posed in terms of whether Canada would have adopted the landing requirement if that measure had required an equivalent number of Canadian buyers to land and unload elsewhere than their intended destination” (para. 7.09–7.10, pp. 1036–1037). 12. The economic logic underpinning this argument arises from both the calculation of net welfare benefits and the theory of public choice. If each individual or firm is granted similar weight in calculating a sum of net benefits, and the benefits received are approximately equal (and issues of extreme intensity of preferences are disregarded [see Gorman, 1953]), then the more widely distributed are net benefits, the more likely is the maximization of welfare benefits—an approximate restatement of Jeremy Bentham’s argument for the “greatest good for the greatest number.” Public-choice theory (see Meuller, 1997) predicts that trade protection is most likely to arise from narrow interests through rent-seeking, whereas environmental protection (a public good) is likely to fall short of full provision because its benefits are widespread and costs more narrowly distributed. 13. U.S.-Canada Binational Panel Final Report, para. 7.09–7.10, pp. 1036–1037. 14. I am indebted to David Ervin for the suggestion that the theory of joint products be applied to this issue. For another recent exposition, see Ian Hodge (1999). 15. The slope of the tangent to a point on a product transformation curve is the rate at which q2 must be sacrificed to obtain more q1 (or q1 sacrificed to obtain more q2) without varying the input of x. The negative of the slope is defined at the rate of product transformation (RPT): RPT = Bdq2/dq1 Taking the total differential dx = h1 dq1 + h2 dq2 Since dx = 0 for movements along a product transformation curve, RPT = Bdq2/dq1 = h1/h2 The RPT at a point on a product transformation curve equals the ratio of the marginal cost of q1 in terms of x to the marginal cost of q2 in terms of x at that point (Henderson and Quandt, 1971, p. 90). 16. For a recent empirical assessment of pesticide use in agriculture, see Fernandez-Cornejo et al. (1998). Following the empirical literature on multiple output technologies, the flexible functional form developed by Christensen et al. (1973), Diewert (1971), and Lau (1978), the translog (transcendental logarithm) function, can express a cost or (dual) profit function and would allow for estimation of the trade-offs discussed above, assuming accurate measures of joint products were available in relation to levels of agricultural subsidies. 17. Sianesi and Ulph (1998) acknowledge that the assumption that nonmodified cropping technology “entailed no loss of species nor any other form of externalities” is “unrealistic” but that “one may still want to assume that the genetically modified crop has a greater impact on species loss.” They further assert that “the widespread cultivation of modified crops would thus entail a drastic reduction in invertebrates on a much larger scale both spatially and temporally” (p. 25). Rather than unrealistic, a more accurate term for their assumption is false. The relative impact of modified and conventional cropping on bird species is still unknown, but evidence from the United States establishes that conventional cropping has had dev-

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astating impacts on these species (see Sampson and Knopf, 1994; Gerard, 1995; Graber and Graber, 1983). This is also the conclusion of the studies cited by Sianesi and Ulph (1998, p. 2), in which “severe and widespread declines in the breeding populations of many farmland bird species (e.g., Marchant et al., 1990; Campbell, et al., 1997, table 2.1) coincide with radical changes in farming practice that include increases in the use of agrichemicals to control weed and insect pests.”

BIBLIOGRAPHY Allen, A. W. November 1993. Regional and State Perspectives on Conservation Reserve Program (CRP) Contributions to Wildlife Habitat. Federal Aid in Wildlife Restoration Program Report, U.S. Fish and Wildlife Service. Altieri, M. A., et al. 1995. Agroecology: The Science of Sustainable Agriculture. Boulder: Westview. Anderson, Kym. 1992. “The Standard Welfare Economics of Policies Affecting Trade and the Environment,” in Kym Anderson and Richard Blackhurst, eds., The Greening of World Trade Issues. Ann Arbor: University of Michigan Press. Arrow, Kenneth, Maureen Cropper, George Eads, Robert Hahn, Lester Lave, Roger Noll, Paul Portney, Milton Russell, Richard Schmalensee, Kerry Smith, and Robert Stavins. 1996. “Is There a Role for Benefit-Cost Analysis in Environmental, Health, and Safety Regulation?” Science, no. 272 (April 12): 221–222. Benbrook, Charles M. January 27, 1999. “World Food System Challenges and Opportunities: GMOs, Biodiversity, and Lessons from America’s Heartland.” Paper presented to the Illinois World Food and Sustainable Agriculture Program, University of Illinois–Urbana-Champaign. Bhagwati, J., and T. N. Srinivasan. 1997. “Trade and the Environment: Does Environmental Diversity Detract from the Case for Free Trade?” In J. Bhagwati and Robert E. Hudec, eds., Fair Trade and Harmonization: Prerequisites for Free Trade? Volume 1: Economic Analysis. Cambridge: MIT Press. Campbell, L., A. Evans, J. Wilson, P. Donald, M. Avery, and R. Green. 1997. A Review of the Indirect Effects of Pesticides on Birds. Joint Nature Conservation Committee. Peterborough, U.K. JNCC Report 227. Center for International Environmental Law (CIEL). June 1994. “GATT TunaDolphin II: Environmental Protection Continues to Clash with Free Trade.” CIEL Brief No. 2 (Goldberg) [CCB94-2]. Washington, D.C. Charnovitz, Steve. 1998. “Environment and Health Under WTO Dispute Settlement.” International Lawyer 32: 901–921. Christensen, L., D. W. Jorgenson, and L. J. Lau. 1973. “Transcendental Logarithmic Production Frontiers.” Review of Economics and Statistics 55, no. 1 (February): 28–45. Diewert, W. E. 1971. “An Application of the Shephard Duality Theorem: A Generalized Leontief Production Function.” Journal of Political Economy 79, no. 3 (May-June): 481–507. The Economist. 1999. “Who’s Afraid?” and “Food for Thought.” June 19, pp. 15–16; 19–21. Ervin, David E., C. Ford Runge, Elisabeth A. Graffy, Willis E. Anthony, Sandra S. Batie, Paul Faeth, Tim Penny, and Tim Warman. 1998. “Agriculture and the

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Environment: A New Strategic Vision.” Environment 40, no. 6 (July/ August). Ervin, David. April 1999. “Toward GATT—Proofing Environmental Programs for Agriculture.” Journal of World Trade. Kluwar Law International. Faeth, Paul. 1996. Make It or Break It: Sustainability and the U.S. Agricultural Sector. Washington, D.C.: World Resources Institute. Fernandez-Cornejo, J., S. Jans, and M. Smith. 1998. “Issues in the Economics of Pesticide Use in Agriculture: A Review of the Empirical Evidence.” Review of Agricultural Economics 20, no. 2 (Fall-Winter): 462–488. Gerard, Philip W. June 1995. Agricultural Practices, Farm Policy, and the Conservation of Biological Diversity. Biological Science Report 4. U.S. Department of the Interior. National Biological Service. Washington, D.C. Gorman, W. M. 1953. “Community Preference Fields.” Econometrica 21 (January): 63–80. Graber, J., and R. Graber. 1983. “The Declining Grassland Birds.” Illinois Natural History Survey Reports, no. 227: 1–2. Harrod, R. F. 1938. “Scope and Method of Economics.” Economic Journal 48 (September): 383–412. Hartmann, Monika, and Alan Matthews. 1995. “Food Versus Environment: Europe’s Green Field.” Forum for Applied Research and Public Policy 10 (Winter 1995): 76–79. Hauer, Grant, and C. Ford Runge. 1999. “Trade-Environment Linkages in the Resolution of Transboundary Externalities.” World Economy 22, no. 1 (January): 25–39. Hauer, Grant Kenneth. 1997. “International Pollution Externalities: Public Bads with Multiple Jurisdictions.” Ph.D. diss. University of Minnesota, Department of Applied Economics. Hayenga, Marvin. 1998. “Structural Change in the Biotech Seed and Chemical Industrial Complex.” Ag Bio Forum 1, no. 2 (Fall): 43–55. Henderson, J. M., and R. E. Quant. 1971. Microeconomic Theory: A Mathematical Approach. 2d ed. New York: McGraw-Hill. Hodge, Ian. 1999. “Agri-Environmental Relationships and the Choice of Policy Mechanisms.” In review, World Economy. Hudec, Robert. 1998. “GATT/WTO Constraints on National Regulation: Requiem for an ‘Aims and Effects’ Test.” International Lawyer 32: 619–649. Hudec, Robert, and Daniel Farber. November 17, 1992. “Distinguishing Environmental Measures from Trade Barriers.” Paper prepared for Workshop in International Economic Policy, University of Minnesota. Krutilla, Kerry. 1991. “Environmental Regulation in an Open Economy.” Journal of Environmental Economics and Management, vol. 20: 127–142. Lau, L. J. 1978. “Applications of Profit Functions.” In M. Fuss and D. L. McFadden, eds., Production Economics: A Dual Approach to Theory and Applications, vol. 1. Amsterdam: North-Holland. Marchant, J. H., R. Hudson, S. P. Carter, and P. Whittington. 1990. Population Trends in British Breeding Birds. Thetford, U.K.: British Trust for Ornithology. Meuller, Dennis C. 1997. Perspectives on Public Choice: A Handbook. New York: Cambridge University Press. Nadiri, M. I. 1991. “Causes of Joint Production.” In J. Eatwell, M. Milgate, and P. Newman, eds., The New Palgrave: A Dictionary of Economics. London: Macmillan. Raiffa, Howard. 1970. Decision Analysis: Introductory Lectures on Choice Under Uncertainty. Reading, Mass.: Addison-Wesley.

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Repetto, Robert. 1993. Trade and Environmental Policies: Achieving Complementarities and Avoiding Conflicts. Washington, D.C.: World Resources Institute. Roberts, Donna. 1998. “Implementation of the WTO Agreement on the Application of Sanitary and Phytosanitary Measures: The First Two Years.” International Agricultural Trade Research Consortium. Working Paper 98–4. Runge, C. Ford. October 26–27, 1998. “Emerging Issues in Agricultural Trade and the Environment.” Paper presented at Organization for Economic Cooperation and Development Workshop on Emerging Trade Issues in Agriculture. COM/AGR/CA/TD/TC/WS(98)103. Session IIc. Paris. Runge, C. Ford, and Glenn Fox. 1999. “Issue Study 2: Feedlot Production of Cattle in the United States and Canada: Some Environmental Implications of the North American Free Trade Agreement (NAFTA).” In Assessing Environmental Effects of the North American Free Trade Agreement (NAFTA): An Analytic Framework (Phase II) and Issue Studies. Montreal: Communications and Public Outreach Department of the CEC Secretariat. Runge, C. Ford, and Tom Jones. 1996. “Subsidies, Tax Incentives, and the Environment: An Overview and Synthesis.” In OECD Documents. Subsidies and the Environment: Exploring the Linkages. Paris: Organization for Economic Cooperation and Development, chap. 1. Runge, C. Ford, François Ortalo-Magné, and Philip Vande Kamp. 1994. Freer Trade, Protected Environment: Balancing Trade Liberalization and Environmental Interests. New York: Council on Foreign Relations. Sampson, F., and F. Knopf. 1994. “Prairie Conservation in North America.” BioScience 44, no. 6: 418–421. Sampson, Gary P. February 1999. “Trade, Environment, and the WTO: A Framework for Moving Forward.” Washington, D.C.: Overseas Development Council Policy Paper. Samuelson, Paul A. 1950. “Evaluation of Real National Income.” Oxford Economic Papers. N.S., no. 1 (January): 1–29. Sianesi, Barbara, and David Ulph. April 1998. “Species Loss Through the Genetic Modification of Crops—A Policy Framework.” London: ESRC Center for Economic Learning and Social Evolution, University College. Tinbergen, Jan. 1950. On the Theory of Economic Policy. Amsterdam: Elsevier, North-Holland. U.S.-Canada Binational Panel Final Report, ITRD. Vol. 12 (October 16, 1989).

2 Climate Change and the Kyoto Accord: Implications for Agricultural Trade Agreements RICHARD GRAY

Climate change associated with the accumulation of greenhouse gases (GHGs) in the global atmosphere is seen as a major threat to the long-term sustainability of human population on the earth. The GHG problem gained international recognition when the United Nations Bruntland Commission published Our Common Future in 1987. Human activity has increased emissions of GHG into the atmosphere. Greenhouse gases act to trap longwave radiation emitted from the earth’s surface, increasing the warming of the atmosphere and influencing climate patterns. As GHGs accumulate, they could adversely affect the global climate, increasing natural disasters and threatening global food supplies. International environmental treaties have been created in response to this threat. In 1992 in Rio de Janeiro, many countries agreed to stabilize GHG emissions and so created the United Nations Framework Convention on Climate Change (UNFCC). Despite the agreement, emissions continued to grow. In 1997, the parties to the UNFCC met again in Kyoto and made further commitments to limit and reduce GHG emissions. In the Kyoto Accord, the developed countries of the world agreed to specific emission targets to be achieved during the 2008–2012 period, relative to a 1990 baseline year. The agricultural sector is a significant emitter of GHGs. If countries are to achieve the targeted GHG reductions, agriculture could be asked to play a role. The domestic policies used to reduce agricultural GHG emissions are likely to affect production and trade in the sector. Given that GHG abatement is likely to require resources, the countries in compliance with the accord may demand some form of reciprocity from their trading part37

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ners. This will create pressures to include GHG policies within bilateral and regional trade agreements. In the long term, the global GHG problem may become part of global trade agreements. My objective in this chapter is to describe the potential linkages between GHG emissions, the Kyoto Accord, and future agricultural trade agreements. I begin with an overview of the science behind the concern over GHGs and climate change. Next, I will describe Canada’s Kyoto commitment and the ratification process, followed by a section on the sources of current GHG emissions from Canadian agriculture. Then I describe the policy options put forward by the Agriculture and Agri-Food Table for climate change, concluding with a discussion of future GHG policies and the implications such policies may have for trade and trade policy. The material presented in the limited space available should be considered only as a starting point for understanding a complex set of issues that will have important long-term implications for trade and trade agreements.

GREENHOUSE GASES AND GLOBAL CLIMATE CHANGE

The temperature of the earth’s atmosphere is maintained in part through phenomena known as the greenhouse effect. Sunlight is converted to longer-wave radiation as it heats the surface of the earth. Longer-wave radiation (such as infrared) does not reflect directly back to outer space; rather, the greenhouse gases in the atmosphere absorb this radiation and reflect some of it back toward the earth’s surface. The result is warmer temperatures on earth’s surface—similar to a typical glass greenhouse, hence the name “greenhouse” gases. There are many different GHGs in the atmosphere. Carbon dioxide (CO2) is the most abundant. Methane (CH4) and nitrous oxide (N2O) are also important not because of volume but because they are much more potent in terms of heat capture. According to the Intergovernmental Panel on Climate Change (IPCC), over a 100-year period the thermal potential of a tonne of methane is equivalent to 21 tonnes of CO2 and a tonne of nitrous oxide is equivalent to 310 tonnes of CO2. To correct for this potency effect, it has become convention to express these gases in CO 2 equivalents. Despite the potency of the other gases, the sheer volume of CO2 makes it responsible for 80 percent of the global warming effect, followed by methane and nitrous oxide (IPCC, 1995). The concern over global warming has arisen because of the measurable change in the concentration of GHGs in the atmosphere and the theoretical relationship between increased GHGs and climate change. By analyzing bubbles trapped in glaciers, a longtime series of these

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concentrations is available. There has been an accelerating accumulation of these gases in the atmosphere during the last 250 years. The increase can be attributed to the burning of fossil fuels, increases in livestock numbers, and loss of soil carbon to the atmosphere. These anthropogenic sources are expected to increase as human population and incomes continue to grow. It is also important to note that reducing GHG emissions to 1990 levels will not stop the accumulation of GHG in the atmosphere; rather, it would serve to slow the rate of accumulation and the resultant climate change. Although there is a growing consensus that there is already some evidence of global warming occurring (IPCC, 1996b), most of the concern comes from the forecast of climate models that have incorporated the projected increases in GHGs. The Canadian Climate Change Model forecasts that by 2040 many of the temperate climates will see an increase in annual mean temperature of up to four degrees Celsius. Climatologists have also forecast melting of the polar ice caps, a rise in sea levels, an increase in the severity of storms, and a change in rainfall patterns. The Bruntland Commission (1987) indicated that these climate changes could put world food production in jeopardy and threaten sustainable development on the planet. Although there is little consensus of how climate change due to global warming will manifest itself in specific locations, there is growing recognition that such changes could have serious negative consequences for the future welfare of the global population. Although there is concern over the global implications of climate change, the distribution of the effects is far less clear. Canadian citizens may wish to do their part in reducing GHG emissions and slowing climate change, yet it is less apparent that Canadians will be made worse off by climate change. Warmer temperatures might be welcomed by many Canadians. The effect on the agricultural sector is also ambiguous. Climate change may reduce Canadian production of food, but reduced global food supplies could result in higher food prices that could more than offset these effects. If this were to occur, some producers could benefit substantially from climate change. Although many of these effects are still unknown, the government of Canada signed the Kyoto Accord believing it is in the best interest of Canadians to participate in an international process to reduce GHG emissions.

THE KYOTO ACCORD

In 1992, Canada signed the international Framework Convention on Climate Change in Rio de Janeiro, where many countries agreed to stabilize

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GHG emissions. Despite the agreement, emissions continued to grow. In 1997, the parties to this earlier agreement met again in Kyoto to promise to reduce GHG emissions. In the Kyoto Accord, Canada committed to a reduction in GHG emissions to a level 6 percent less than 1990 emissions. The United States and European Union offered 7 percent and 8 percent reductions respectively; Australia offered to limit emission to a 8 percent increase over 1990 levels. The Kyoto Accord requires that each signatory take discernable action toward achieving the reduction targets set forth in the agreement (UNFCC, 1997). The Kyoto Accord is an incomplete agreement. First, the developing countries of the world, including the very populous India and China, are not signatories to the accord. Many features are vaguely described, such as joint implementation and clean development mechanisms, and emission trading mechanisms have yet to be defined. Many definitions and measurements have yet to be agreed upon (e.g., the definition of a managed versus an unmanaged forest). Although agricultural soils have been defined as a source of CO2 in the accord, they are not included as a sink. Similarly, the use of agricultural and forest crops in building products are not yet included as sinks. Importantly for trade, there are no agreed-upon penalties for noncompliance within the Kyoto Accord. Despite the current incompleteness, the greatest limitation at this point is that the accord is yet to be ratified as a binding agreement. The Kyoto Accord does not come into effect until countries that make up 55 percent of GHG emissions have ratified the agreement. In other words, if Canada were to ratify the agreement by having Parliament commit to the 6 percent reduction, this commitment would not be binding until enough other countries did likewise. This ratification process has introduced great uncertainty for the signatories, because there is a good chance the accord will not have sufficient ratification to come into effect. At this point, the U.S. Congress has not given presidential fast-track approval to negotiate the Kyoto Accord. Without such approval, Congress would be able to vote on and accept particular parts of the accord while rejecting other parts. As has been shown with previous trade agreements, under these conditions other countries will be very reluctant to ratify the accord. Furthermore, given that the United States makes up 35 percent of total GHG emissions, U.S. ratification is likely pivotal to the overall agreement. Given this obstacle, and the apparent protectionist mood of the U.S. public, the ratification of the Kyoto Accord seems somewhat unlikely in the near future. However, as public awareness and concern over climate change grow, future agreements are more likely to be ratified. In the meantime, many of the signatory countries to the accord are likely to introduce some domestic policies designed to curb the growth of GHG emissions.

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Canada’s Kyoto commitment (6 percent below 1990 levels) represents a significant reduction. This commitment represents a reduction of 25 percent from the projected business-as-usual emissions. If Canada were to meet this commitment, it would require significant adjustments in many sectors of the economy. The challenge to policymakers is to design policies to encourage adjustment to take place in a least-cost manner. In the agricultural sector, such policies have to be created within an environment of scientific and policy uncertainty. In response to Kyoto, Canada’s first ministers asked the environment and energy ministers to develop a comprehensive national strategy to reduce Canadian GHG emissions. The ministers created the National Climate Change Secretariat. This secretariat established sixteen Issue Tables to examine options for reducing GHG emissions. Members of the Issue Tables included representatives of federal and provincial governments, stakeholder groups, and experts. The Issue Tables that dealt with specific sectors in the economy produced two reports: a Foundation Paper and an Options Report. In their Foundation Papers, the Issue Tables identified the GHG emission sources and the opportunities for GHG reduction in their sectors. In their Options Reports, the Issue Tables identified, analyzed, and evaluated policy options for GHG reduction in their sectors. (Further information on the National Climate Change Process and the sectoral Issues Tables can be found on the National Climate Change Secretariat website. .)

GREENHOUSE GAS EMISSIONS AND CANADIAN AGRICULTURE

The estimates of 1991 GHG emissions for Canada and those associated with Canadian agriculture are shown in Table 2.1. There are several points worth noting. First, direct and indirect emissions from agriculture make up 14 percent of total Canadian GHG emissions, and so agriculture is nationally important. Direct emissions from agriculture are dominated by N2O and CH 4, and all three gases including CO 2 are important for indirect emissions. Although nonagricultural Canadian emissions are dominated by CO2, overall agricultural emissions have a large component of N2O and CH4. The large CO2/carbon cycle within agricultural production systems is not apparent in these net emission figures because the cycle is nearly in balance. Agricultural crops use the energy in sunlight to combine CO2, water, and other nutrients to produce organic matter. Each year agricultural crops in Canada use photosynthesis to convert approximately 500 million tonnes

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Table 2.1

Canadian Total and Agricultural Anthropogenic GHG Emissions, 1991 (in million tonnes of CO2 equivalent) All Sources Direct Ag. Indirect Ag.

CO2 Methane Nitrous Oxide Total

452 70 51 575

5 20 24 49

15 9 10 34

Total Ag.

% Ag.

20 29 34 83

4 41 66 14

Source: Janzen et al., 1999.

of CO2 from the atmosphere into plant material—roughly equivalent to the total Canadian net emissions of GHGs (Desjardins, 1999). As shown in Figure 2.1, most of this material is harvested in crops and returned to the atmosphere as soon as it is digested by animals or humans. A significant portion of the carbon is retained in the soil or as crop residue for short periods. A small portion of the crop residue becomes part of the soil organic matter, where it can be stored for long periods before being returned to the atmosphere as CO2. The large amount of carbon/CO2 in the agricultural system creates significant scope for management that could sequester carbon and reduce atmospheric CO2. Figure 2.2 illustrates the carbon stock in agricultural soils over the past fifty years. As can be seen from this figure, there has been a significant loss of soil carbon in the past, which began to level out by 1990. More recently, soil organic matter has begun to accumulate in many soils largely due to the adoption of zero tillage/continuous cropping systems. These increases in the organic matter in the soil reduce the stock of carbon in the atmosphere. Activities that use crop material to replace fossil fuels leave the fossil fuels in the ground and thereby contribute to GHG emission reduction. Overall, the management of the carbon cycle provides some of the greatest scope for reducing GHG emissions from agriculture. Nitrous oxide is the GHG producing the largest net CO2-equivalent emissions from agriculture. About half of the agricultural nitrous oxide emissions are created primarily from the nitrogen cycle occurring within agricultural soils. During the processes of nitrification and denitrification, N2O is released into the atmosphere. The amount of nitrogen released is dependent on many factors, including moisture levels, carbon and nitrogen availability, and temperature. These N2O releases occur with both natural forms of nitrogen (i.e., manure and legumes) and from manufactured forms of nitrogen (i.e., nitrogen fertilizer). The release of nitrous oxide tends to be very episodic, with large quantities released in very short periods. The

CLIMATE CHANGE AND THE KYOTO ACCORD

Figure 2.1

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Net Annual Exchange of CO2 by Crops (metric tonnes)

Source: Desjardins, 1999.

other sources of nitrous oxide emissions are from the decomposition of manure during storage and application and from the release of nitrous oxide during the manufacture of fertilizer and other agricultural inputs. The estimates of the emissions of nitrous oxide from Canadian agriculture are very preliminary and will be the focus of study and measurement for the next several years. Methane is the other important GHG for agriculture. Methane is released during anaerobic decomposition of organic matter. By far the largest source of CH4 emissions within agriculture is from the enteric fermentation within the rumen of beef and dairy cattle, accounting for 80 per-

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Figure 2.2

Change in Organic C Content in Agricultural Soils (0–30 cm)

5,000

Soil Organic Carbon (Gg)

3,325 3,300

4,500

3,275 4,000

3,250

1975

1985

1995

2005

3,500

3,000 1910

1930

1950

Year

1970

1990

2010

Source: Desjardins, 1999.

cent of all agricultural methane emissions. Most of the remaining 20 percent comes from the decomposition of all forms of livestock and poultry manure during storage and handling. The biological nature of most agricultural emissions has made their measurement and management a significant challenge. At this point, there is a great deal unknown about current emission levels and the best technologies to employ to reduce emissions. Although CO 2 emissions are understood and have been measured for some time, the emissions of methane and nitrous oxide have not been studied extensively. Current estimates of these emissions are based on very little data and should be viewed with a large confidence interval in mind. There is even less information available about how different farming systems will affect net emissions. These information gaps have made the development of a specific plan to reduce emissions from agriculture somewhat difficult.

POLICY OPTIONS FOR REDUCING GHG EMISSIONS FROM CANADIAN AGRICULTURE

As a part of the national process, the Agriculture and Agri-Food Climate Change Table met over a period of sixteen months to review the policy options for GHG reduction in Canadian agriculture and filed an Options Report in January 2000. A portion of the executive summary of the Options

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Report outlines the Issue Table’s assessment of the measures available to reduce emissions and makes eleven recommendations for policy: The extensive and systematic search for GHG-reducing technologies identified only a few that with certainty could significantly reduce GHG emissions from agriculture at a low cost. In most cases, little was known about the effect of alternative technologies or about the economic costs of the technologies. It became abundantly clear that more research was required to evaluate these technologies and to discover other technologies that could be even more effective in reducing GHG emissions. The technologies that showed some verifiable low-cost reduction in GHG emissions involved carbon sinks which are currently not part of the Kyoto Protocol. Increased zero tillage, reduced summer fallow, improved grazing strategies, and conversion of cropland to wetland and wildlife habitats showed promise for net emission reduction as soil sinks. Agroforestry and shelterbelts showed promise as forest sinks. Strawboard and other fiber manufacture showed promise for net emission reduction as industrial sinks. If Canada is committed to GHG reduction regardless of Kyoto acceptance, these technologies are well enough known to be promoted actively. However, further investments in research and development are needed to develop and to scale up internationally acceptable measurement and verification systems to the national level. Other areas showed promise to reduce GHG emissions including crop nutrient management, livestock nutrient management, manure management and biofuels. While some aspects of the technologies are documented, in each of these areas there was uncertainty about the effects of specific technologies or, more important, the best technologies to employ. This uncertainty suggests more basic and applied research is required before specific technologies are promoted. The research directed toward GHG reduction in agriculture is still in a very preliminary phase—this is a brand new problem. Not enough is known about the effects of the many technologies that are in use today. The technologies must be studied as part of farming systems, which are part of larger systems. This study will lead to a better understanding of processes and will allow the refinement of the best current technologies toward even more efficient technologies in the future. There are also outstanding issues about the best private and public institutions to achieve cost-effective GHG reduction, and hence a need for continued policy development. Despite significant knowledge gaps, the Table concluded that agriculture has a large potential to reduce net GHG emissions. The agricultural sector has adopted technologies that have reduced GHG emissions for other environmental and economic reasons. If the agricultural sector has the incentive to reduce net GHG emissions, history would suggest that the sector will respond, find and adopt technologies that further reduce net GHG emissions. There is potential for these gains to come from the use of better technologies to reduce direct GHG emissions and to increase the quantity of carbon sinks in soils, forests and agro-industrial products such as strawboard. To reduce GHG emissions cost effectively, the Table recognized that policies cannot require monitoring and verification of individual actions,

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nor can they involve large increases in the cost of production. The sheer number of farmers and the complexity of the systems make the monitoring and verification of individual actions very difficult and expensive. In general, Canadian agriculture operates in global markets with very narrow margins and with little ability to pass additional costs on to consumers. Given these limitations, our Table concluded that the most viable means of achieving reduction in agricultural net GHG emissions is to create and to promote technologies that increase profitability and that can be voluntarily adopted. While some technologies that increase profits and reduce GHG emissions do exist, part of the adoption strategy must be to discover and to develop new cost-effective GHG-reducing technologies. This research and development strategy must recognize the various development stages in the process and the appropriate role for the private and public sectors. Some of the already proven low-cost technologies should proceed through extension and incentive programs while further research is undertaken to estimate more precisely their GHG impacts. The recommendations contained in this report suggest how government can create an environment to foster net GHG reduction in the agricultural sector at a minimal economic cost to the sector and to the Canadian economy as a whole. These recommendations are supported in the body of the report with a description of the analytic approach of the Table and the scientific and economic rationale the Table used to develop them. GHG emission reduction will require both government and industry action. Some research and development resources provided by the government can create the potential for the industry to benefit from adopting better technologies. An informed industry will also recognize that given the importance of the environment in international markets, and the potential to trade emission reductions, developing an industry with low GHG emissions may be good business. Finally, the government should reiterate its commitment to the reduction targets and infer that any sector that does not find ways to contribute to GHG reduction could face compulsory measures at some point in the future. The recommendations that follow represent the output from a 16month process of research and deliberation by the Table. They provide a framework for the national strategy for the cost-effective reduction of net GHG emissions from agriculture. The human and social capital base embodied in this Table is a considerable resource that could be consulted in the further refinement and operation of the GHG strategies. Many of the recommendations must be initiated immediately and simultaneously to have a real impact by the 2008–2012 commitment period. Research takes time. The sooner research commences the sooner results will be produced. The same timing issue exists with extension programs—the process of adoption takes time. This timing is especially critical for those individuals in those parts of the agricultural sectors that are expanding and investing in the technology that they will use in 2008. The early action items encourage the technologies which are clearly costeffective and should be pursued as soon as possible. The urgency to commence work on many fronts suggests the need for an immediate commitment of resources and the need for an immediate and concerted effort to create the institutions and policies to allocate these resources. This would require significant consultation with the primary stakeholders.

CLIMATE CHANGE AND THE KYOTO ACCORD

The [Agriculture and Agri-Food Climate Change Table] offers eleven recommendations: Recommendation 1. Governments should provide resources to assist the extension of knowledge required to foster the adoption of proven technologies. For example, governments should work with the industry to encourage the adoption of improved grazing management systems, feeding strategies, and zero tillage cropping systems. Recommendation 2. In recognition of the public benefits where costeffective technologies are well known, and an economic incentive is required for their adoption, governments should provide public incentives for the adoption of GHG-reducing technologies. These public incentives would stay in place until markets for emission reductions in the agricultural sector are established. For example, governments should work with the industry to develop financial incentives for the planting of shelterbelts. Recommendation 3. The federal government should continue to insist on the inclusion of soil, forestry and industrial sinks in the international protocol and to ensure that the guidelines of the Intergovernmental Panel on Climate Change ... reflect Canadian conditions. Recommendation 4. Governments should create research funds managed by the agricultural sector to assist in research and development of applied technologies for GHG reduction. Recommendation 5. Governments should provide public resources to support basic research activities for net GHG reduction particularly in the areas of crop nutrient management, livestock nutrient management, manure management, carbon sequestration, and biofuels. Recommendation 6. As part of a national strategy, governments should work with the agricultural sector to refine national inventory, measurement and verification systems for net GHG emissions and to reflect improvements in technology. Monitoring should include the collection of more accurate raw data and the refinement of analytical models that can be used to manage and to assess the effectiveness of GHG-reduction policies. Recommendation 7. As part of the national process, where possible, GHG emission trends in all sectors of agriculture in all provinces should be monitored and published. Recommendation 8. Governments should work with the agricultural sector to develop targets for the reduction of GHG emissions along with incentives for meeting the targets. Recommendation 9. Governments should assist the agricultural sector in the development and refinement of best management practices for the reduction of GHG emissions. Recommendation 10. Governments should provide resources to assist policy research, market research, legal research and other public infrastructure to facilitate the development of trading mechanisms that reward reductions in net agricultural GHG emissions. Recommendation 11. Governments should co-operate with private sector partners to develop a strategy that will enhance the agricultural sector’s ability to adapt to climate change using sustainable farming systems. (Executive Summary, options report of the Agriculture and Agri-Food Climate Change Table, January 2000.)

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These policy recommendations of the Issues Table have yet to be implemented by industry, the provincial governments, and the federal government. The recommendations do, however, reflect expert and industry opinion on what policy measures are appropriate given the existing state of knowledge. The recommendations of the options report suggest little action to implement specific technologies now. Rather, the report suggests a lowercost, longer-term strategy of research, education, and modest incentives to induce change in the sector. Much of the rationale for this go-slow approach is the scientific uncertainty surrounding the best GHG emission reduction strategies and policy uncertainty regarding the content and the timing of a global GHG agreement.

THE IMPLICATIONS OF CLIMATE CHANGE AGREEMENTS FOR AGRICULTURAL TRADE POLICY

There are no apparent immediate impacts of the Kyoto Accord on agricultural trade policy. The accord has not been ratified, and GHG abatement policies are still in the process of being established. In the absence of an agreement, abatement policies are likely to remain voluntary and be primarily based on research and extension activities. Given the limited shortrun impacts of these GHG abatement policies, they are unlikely to become the source of trade disputes or the topic of trade negotiations in the near future. Eventually there will be great pressure for a binding international climate change agreement. Climate change is not currently on the scope as an important public issue in many countries, including the United States. However, GHGs are accumulating at an increasing rate in the atmosphere. As climate change becomes more apparent, the public concern over potential adverse effects will grow. When the domestic pressure for agreements becomes large enough, it may then be possible to have multinational ratification of climate change agreements. There are at least two reasons to believe that a binding international GHG abatement agreement will be tied to an international trade agreement. The first reason is that enforcement of an international GHG agreement may require rewards and penalties for compliance and noncompliance. In the absence of war, trade policy is one of the few avenues of influence between sovereign countries. The second reason is that the nature of the GHG abatement policy can affect an industry’s competitive advantage. The impact of abatement policies on production and trade levels in a sector will depend very much on the nature of both the domestic and international

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policies used for abatement. Abatement policies can either increase or reduce production costs in a sector. If a sector is regulated to change or faces taxes for emissions, the abatement policies will increase the cost of production. If, however, the sector is encouraged to use new technologies through publicly funded research and development or through subsidies for new technology, then the GHG abatement policy can reduce the cost of production in the sector. For example, a tax credit to build new manure storage facilities may encourage the construction of new hog barns and the expansion of the industry. Those sectors where costs increase with abatement policies will be at a comparative disadvantage to those in other countries where costs do not increase as much. They will be at a severe disadvantage to producers in countries where GHG abatement policies have reduced the cost of production. The potentially uneven playing field created by the form of abatement policies will lead to trade disputes. In the long run, dealing with the environmental problem without distorting the patterns of trade will require a closer link between environmental and trade agreements. Policies for significant GHG emission abatement will affect virtually every sector of the economy. Significant abatement will require changes in capital and will carry resource costs. Given the pervasiveness of the impacts, such policies will invariably affect trade in some sector of the economy. The link between environmental policy and trade will draw these policies into the trade agreements. Given the evolutionary time schedule for trade agreements, the merging of international agreements for both GHG and trade could take several decades to complete.

CONCLUSION

Atmospheric GHGs are accumulating at an increasing rate. There is growing scientific evidence that this accumulation will cause significant climate change and threaten the sustainable development of mankind. The leaders of the world’s developed countries have drafted agreements to reduce GHG emissions. The Kyoto Accord, signed in December 1997, is the latest attempt at an international agreement but has yet to be ratified. Although ratification of this accord seems somewhat unlikely in the near future, there may be an enforceable environmental agreement when it becomes in the domestic interest of the United States to do so. When there is an agreement, enforcement can come only through trade sanctions. Eventually, GHG agreements could become a part of the World Trade Organization. In the meantime, there will be only modest attempts at GHG abatement while the accumulation of GHG continues.

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BIBLIOGRAPHY Agriculture and Agri-Food Climate Change Table. 2000. “Options for Reducing GHG Emission from Canadian Agriculture.” A report prepared for the Government of Canada. . Brundtland, Gro Harlem. 1987. World Commission on Environment and Development: Our Common Future. Oxford: Oxford University Press. Cleary J. 1999. “Identification of the Environmental and Health Impacts of GHC Mitigation Options Considered by the Agriculture and Agri-Food Climate Change Issues Table.” In Reducing Greenhouse Gas Emissions from Canadian Agriculture. . Desjardins, Ray. October 1999. Presentation to the Agriculture and Agri-Food Climate Change Table, Montreal. Grant, R. F., M. Nyborg, and J. Laidlaw. 1993. “Evolution of Nitrous Oxide from Soil: l. Model Development.” Soil Science, no. 156: 259–265. Intergovernmental Panel on Climate Change (IPCC). 1995. In J. T. Houghton et al., eds., The Science of Climate Change: Contribution of Working Group I to the Second Assessment of the Intergovernmental Panel on Climate Change. Cambridge: Cambridge University Press. ———. 1996a. “Summary of Policy Makers.” In IPCC Second Assessment Report: Climate Change, 1995. Geneva: IPCC. . ———. 1996b. “IPCC Second Assessment Synthesis of Scientific-Technical Information Relevant to Interpreting Article 2 of the UN Framework Convention on Climate Change.” Geneva: IPCC. . IPCC/OECD/IEA. 1997 “Revised 1996 IPCC Guidelines for National Greenhouse Gas Inventories” Edited by J. T. Houghton et al. . Janzen, H. H., R. L. Desjardins, J.M.R. Asselin, and B. Grace. 1999. “The Health of Our Air: Toward Sustainable Agriculture in Canada.” Publication No. 1981/E. Ottawa, Ontario: Agriculture and Agri-Food Canada, Research Branch. . Junkins, B., S. Kulshreshtha, P. Thomassin, A. Weersink, K. Parton, R. Desjardins, M. Boehm, R. Gill, and C. Dauncey. 2000. “Analysis of Strategies for Reducing Greenhouse Gas Emissions from Canadian Agriculture.” Technical report to the Agriculture and Agri-Food Table, Policy Branch. Ottawa, Ontario: AAFC. Levelton Engineering Ltd. August 1999. “Assessment of Net Emissions of Greenhouse Gases from Ethanol-Gasoline Blends in Southern Ontario.” Li, C., and T. A. Frolking. 1992. “A Model of Nitrous Oxide Evolution from Soil Driven by Rainfall Events: Model Structure and Sensitivity.” Journal of Geophysical Research 97: 9759–9776. Parton, W. J., D. W. Anderson, C. V. Cole, and J.W.B. Steward. 1983. “Simulation of Soil Organic Matter Formation and Mineralization in Semiarid Agroecosystems.” In R. R. Lowrance, R. L. Todd, L.-E. Asmussen, and R. A. Leonard, eds., Nutrient Cycling in Agricultural Ecosystems. Special Publication No. 23. Athens: University of Georgia, College of Agriculture Experiment Stations. Prairie Farm Rehabilitation Administration. December 1998. “Shelterbelts as a Carbon Reservoir.” Paper presented to the Agriculture and Agri-Food Climate Change Table meeting, Montreal.

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Serecon Management Consulting Inc. 1999. “Consensus-Based Prairie Agriculture and Agri-Food Scenarios to 2005.” Edmonton, Alberta. United Nations Framework Convention on Climate Change. 1997. The Kyoto Protocol. .

3 The World Trade Organization and the Environment WILLIAM A. KERR

It is sometimes forgotten in the swirl of media, high-level meetings, political posturing, and brinkmanship that accompanies the public aspects of the World Trade Organization’s (WTO) work that its fundamental role is to provide a set of rules for firms wishing to enter into international transactions—nothing more. It is not an organization responsible for promoting international development, although it should not hinder it. It is not charged with the task of protecting labor from exploitation. It is not the world’s environmental policeman. Trade policy, however, is often perceived as a powerful weapon that can be used to achieve political goals. As a result, because of the preeminent role the WTO has in establishing the limits under which trade policy can be used by countries, other interests would like to harness the WTO to help achieve their political agendas. Some of those who have strong preferences for protecting the environment, in all its facets, wish that the WTO would take a more active role in helping them achieve their goals. The fact that the international trading system can, at least in part, be captured by those with nontrade agendas is not without precedent. Policymakers responsible for the evolution of the WTO should be aware of both the appeal of the WTO as a target for vested interests and what can be lost if the rules for international commerce become ever more complex as new interests have to be accommodated. The predecessor of the WTO, the General Agreement on Tariffs and Trade (GATT), was negotiated as part of the New World Order that the victors of World War II created to reduce international conflicts. The new institutions created included the United Nations (to reduce political conflicts), the International Monetary Fund (to limit the strategic use of devaluation), and the World Bank (to transfer resources from rich to poor coun53

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tries). A fourth organization was envisioned and negotiated, the International Trade Organization (ITO), which was to reduce the conflicts arising from international trade. The ITO was not ratified by the U.S. Congress and was stillborn. Part of the ITO—the GATT—dealing with rules for trade in goods was ratified and became the premier international trade organization, largely by default. The GATT, and subsequently the WTO, is not a legal system. It is a political compromise between the need for policymakers, at times, to extend protection from foreign competition to domestic producers and the need for a secure business environment for firms wishing to engage in international commerce. As engaging in international commerce often requires substantial investment, the ability of politicians to capriciously use trade policy to interrupt international commerce greatly increases the risks associated with investing in those activities and inhibits international trade. The right to extend protection to domestic vested interests, however, has been closely guarded by politicians. Hence, it is always possible to break WTO commitments. The entire history of the GATT/WTO can be seen as a long and gradual process of raising the cost of choosing to break the rules that have been voluntarily agreed upon. One of the ways of raising that cost is to extend WTO disciplines into new areas. The removal of the waivers that had been granted for the use of export subsidies, nontariff barriers, and domestic support for agriculture is one example of the gradual raising of costs of having, at least in principle, the general WTO rules apply to agriculture—after an unspecified transition period. The major cost associated with breaking WTO commitments is that countries have agreed either to pay compensation to other WTO members whose trade is injured when the commitment is broken or to accept retaliation. Accepted retaliation is one of the central principles of the WTO and means that a country has agreed to injured WTO members imposing trade barriers and that it forgoes the right to re-retaliate (Kerr and Perdikis, 1995). This prevents the beggar-thy-neighbor trade wars that characterized the era prior to World War II, during which there were no international rules for trade. The cost of ignoring commitments is further raised by the central WTO principles of nondiscrimination and transparency. Nondiscrimination means that if commitments are broken they must be broken for all WTO members. This prevents strategic breaking of commitments by targeting weak trading partners and increases the number of countries that have the option of retaliating. Transparency means there can be no secret deals and, hence, supports nondiscrimination. The threat of retaliation is supposed to be a sufficient incentive to induce countries to live by the rules they have voluntarily agreed to follow. This provides businesses wishing to invest in international commerce sufficient surety to make their investments. Although not perfectly transparent,

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the contingency protection measures—antisurge, antidumping, and countervail—whereby trade measures can be imposed in certain circumstances, also provide a set of rules that inform businesses when their investments in trade-related activities could be at risk. When retaliation is used, however, it is up to the retaliating country to choose the commodities it wishes to impose trade barriers upon. Any product can be strategically selected. From the point of view of investors, this unpredictable process is potentially one of the riskiest aspects of engaging in international commerce. Although retaliation has often been threatened, it has seldom been used in cases involving trade in goods. As a result, risks have been kept within acceptable limits, and international commerce has not been inhibited significantly. What is important is that retaliation through the imposition of trade measures was enshrined in the GATT. It is a well-accepted principle. The GATT was primarily an agreement to convert nontariff barriers into tariffs, to limit the arbitrary changing of tariff levels (by having them bound), and to provide a forum where tariffs could be negotiated down. In the absence of the ITO, the GATT was charged over time with a widening array of tasks, but by the end of the 1980s it was clearly in need of a major institutional overhaul. In particular, even though services had become the major growth area in most economies, the GATT’s mandate was limited to trade in goods. Developed countries saw the need for a set of rules governing trade in services. The GATT’s consensus-based dispute settlement system was also found wanting. As a result, it was decided at the Uruguay Round of GATT negotiations (1986–1993) that a new General Agreement on Trade in Services (GATS) was needed. A new World Trade Organization was created to administer the GATT and the GATS. The WTO was also given a much strengthened and improved dispute settlement system that would be used for both agreements. Something else was agreed at the Uruguay Round and is the central point of this detailed introduction and historical overview. At the Uruguay Round, the Agreement on Trade Related Aspects of Intellectual Property (TRIPS Agreement) was also negotiated and included in the WTO’s administrative mandate. Despite the term trade related in the title, the TRIPS has little to do with trade. It is primarily an agreement about the domestic enforcement of foreign intellectual property rights. It arose out of developed countries’ frustration with the lack of intellectual property laws and enforcement of intellectual property rights in developing countries. The proportion of the value of goods represented by intellectual property had been rising, largely due to the computer and biotechnology revolutions. The absence of intellectual property protection reduced the profitability of developing new intellectual property for private firms and, as a country’s relative economic performance is believed to be strongly corre-

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lated with the ability to develop intellectual property, there was a strong private vested and public interest in improving the international protection of intellectual property. Until the TRIPS, intellectual property protection was regulated by several voluntary international conventions and agreements administered by the World Intellectual Property Organization (WIPO). The WIPO, however, had no means of coercing countries either to put intellectual property laws in place or to enforce them. By bundling the TRIPS with the GATT and GATS, developed countries could be denied GATT benefits if they did not agree to put intellectual property laws in place—a country could not have a GATT membership separate from TRIPS. Further, one of the central principles of the WTO is cross-agreement retaliation (Yampoin and Kerr, 1998). This means that retaliatory trade measures can be imposed on goods through the GATT for violations of TRIPS commitments. The WTO thus has, in addition to its role as administrator and arbitrator of the rules for trade, a role as the world’s intellectual property policeman. The method of coercion is the use of trade sanctions. It means that countries can strategically select products for the imposition of trade barriers when TRIPS commitments are ignored—products that have nothing to do with the intellectual property violated. This adds a considerable degree of risk for those investing in international commercial activities. Given the precedent established by the inclusion of the TRIPS in the WTO structure, the fact that others with an interest in the coercive power of trade measures have set their sights on capturing the WTO should not be a surprise. If the WTO can be given the role of global intellectual property policeman, why not global labor-standards policeman or global environmental policeman? One of the most obvious things to come out of the Seattle WTO ministerial meeting in November 1999 was frustration among environmental nongovernmental organizations (NGOs) with their inability to have direct access to WTO deliberations. The government-to-government nature of the WTO has made the organization difficult for NGOs to influence, much less capture. Given the promises for more direct access by the civil society to the WTO extracted around the Seattle proceedings, environmental NGOs may have achieved more than meets the eye. Environmental groups well understand how capturing international organizations that are designed for other purposes can be useful in achieving their ends. One has only to look at the example of the International Whaling Commission, which was captured and changed from an organization regulating commercial whaling to one with the sole objective of conservation (Gordon et al., 2001). They also have had considerable influence over the design and implementation of multilateral environment agreements (MEAs). Existing MEAs have no dispute settlement system and no coercive ability beyond moral suasion. Hence, there can be no greater interna-

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tional prize available for capture than the WTO, with its strong dispute settlement system and its accepted use of trade measures as a means of coercion. It is against this background that the future evolution of the WTO and, in particular, the role of its Committee on Trade and Environment (CTE), must be placed.

ENVIRONMENTAL INTERESTS AND THE WTO

Four distinct groups that would like the WTO to have a stronger role in environmental policy can be identified. Although each group is distinct, their aims and proposed policy measures are often commingled or mutually compatible. This sometimes leads to what appear to be unholy alliances when they seek to influence the WTO. The four groups can be characterized as: (1) those wishing to use trade measures proactively as a means of coercing governments or private firms into altering their environmental policies or practices—the coercive interests; (2) those who wish to use trade measures to correct market failures surrounding the environment— the market-failure interests; (3) those who seek protection from international competition on the basis of lower environmental standards—the traditional producer-protectionist interests; and (4) those who seek protection from goods or services associated with environmental practices they consider unacceptable—the new environmentalist-protectionist interests. Coercive Interests Trade sanctions are a time-honored method of international coercion. They are used in attempts to induce governments to change behaviors that are deemed to be unacceptable. They have been used against the apartheid regime in South Africa, the Cuban regime of Fidel Castro, Saddam Hussein in Iraq, and Slobodan Milosevic in Serbia. Trade sanctions lie in the middle ground of coercion between military action and diplomacy (in economists’ terms, moral suasion). Although trade sanctions may actually create economic incentives that assist in perpetuating the behaviors they are attempting to change (Kerr and Gaisford, 1994) and their efficacy is questionable in a world of increasingly integrated markets (Gordon et al., 2001), they remain a coveted policy tool for those who have strongly held preferences, including many environmentalists. Environmental activists in developed countries have strongly held preferences. Through their NGOs they are formidable lobbyists in their own countries. They are often frustrated, however, by their inability to influence the behavior of foreign governments on environmental issues. As suggested above, MEAs work strictly at the level of moral suasion. As a

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result, they are dependent on consensus and have no binding dispute settlement mechanisms. On a whole range of issues—dolphin-unfriendly tuna harvesting, rainforest clearing, greenhouse gas emissions, and the like— some NGOs would like the ability to use trade sanctions to force foreign governments and firms to improve their environmental policies and practices. Sometimes they have been able to have the use of trade sanctions incorporated into domestic environmental legislation. For example, several U.S. laws pertaining to whales, fish, and other marine life mandate the use of trade sanctions against countries who do not behave to U.S. domestic standards in their practices in the international marine commons (Gordon et al., 2001). The most well known of this legislation is the Marine Mammal Protection Act (MMPA), which sets dolphin-protection standards for the domestic fishing fleet and for non-U.S. fishing boats in the eastern tropical Pacific Ocean. Dolphins and tuna often swim together. The MMPA requires all nations exporting to the United States to have adopted a dolphin-conservation program comparable to that of the United States and to document that the incidental dolphin take rate on their tuna boats be no higher than 125 percent of the U.S. take rate. The MMPA also bans imports of tuna from countries that import tuna from nations that are under embargo from the United States. Mexico did not comply with the U.S. regulations, was under embargo, yet exported to the European Union (EU). Thus, EU tuna exports to the United States were also embargoed. The EU took the case to the WTO. The WTO panel ruled that the U.S. boycott was illegal because the GATT does not allow trade bans based on production methods (Krissoff et al., 1996). This technicality-based judgment infuriated environmental NGOs and soured the perception of the WTO by some organizations that now dismiss it as being environmentally unfriendly. The precedent applies to other U.S. laws, such as those governing sea turtles. This led to the televised images of turtle-costumed protestors at Seattle. In fact, the WTO did not rule against the United States on the larger issue relating to its rights to impose extraterritorial measures (Krissoff et al., 1996). What this case points out is that some environmental NGOs are advocates of using trade sanctions to achieve environmental ends. Although developing countries often characterize this coercion as thinly disguised neocolonialism and a direct violation of their sovereignty, many environmental NGOs remain convinced of the morality of using sanctions as coercive measures. At least seventeen MEAs contain trade measures. Not all of these measures are coercive, but some are. This may suggest that environmental NGOs have been more successful in influencing (or capturing) domestic environmental ministries than they have been in influencing trade ministries.

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As yet, the use of trade sanctions for political reasons not directly related to trade has been administered outside the GATT/WTO. Given the legitimacy with which the coercive use of trade sanctions is regarded by some environmental NGOs, and given the recent TRIPS example, the WTO (with its long-standing coercive tradition and strong dispute settlement mechanism) remains a tempting target for environmental NGOs. One should give less credence to the statements of those organizations that reject the WTO as environmentally unfriendly (if you are not with us—e.g., over dolphins—then you are against us and should be stripped of your power) than those who want more direct access to WTO decisionmaking. Market-Failure Interests Trade measures are almost always a suboptimal method of achieving policy goals (Leger et al., 1999). Trade policy measures such as tariffs, however, may have a role to play in correcting environment-based market failures such as transboundary externalities (Krissoff et al., 1996). This is particularly the case when the negatively impacted country is unable to reach an agreement with the other country to correct the market failure using more direct means such as the other country’s regulations, subsidies, or tax regime. The use of trade measures in these circumstances is different than in the coercive case discussed above because it does not seek to change the foreign country’s behavior but rather to correct the externality directly. Some MEAs allow the use of trade measures for this reason. However, such use of trade measures is unlikely to be extensive because of their inherent inefficiency. Alternatives to trade measures include financial transfers from those who benefit from pollution abatement to those who pollute, internationally traded pollution permits, and incentive schemes to protect natural resources (Krissoff et al., 1996). Well-designed environmental policy alternatives to trade measures will mean that the global economy can achieve its environmental goals with less welfare loss. Traditional Producer-Protectionist Interests Domestic firms seeking protection from foreign competition, even though they may lose some battles, are never vanquished. During the second half of the twentieth century, traditional protectionist arguments were systematically discredited intellectually, and protection, when it is still granted, is most often directly identified with the special interest that requests it (Kerr and Perdikis, 1995). This makes protectionist policies more difficult to defend. Protectionists greatly covet the mantle of intellectual legitimacy. Recently, vested protectionist interests have begun to argue that unfair foreign competition arises due to less stringent (and hence less costly for for-

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eign competitors) environmental regulations and/or enforcement of those regulations (Clement et al., 1999). Similar arguments are being made regarding lower labor standards in developing countries. These arguments were endowed with a measure of legitimacy by the inclusion of side agreements on the environment and labor standards in the North American Free Trade Agreement. It also seems clear that references to such arguments made by then–U.S. President Bill Clinton at the WTO ministerial meeting in Seattle were one of the major reasons why developing countries would not agree to a new round of negotiations. Although these traditional, but newly dressed up, protectionist arguments have been able to gain some credence on the political front, they have yet to gain intellectual credibility. Economists argue that environmental regulations and the quantity of resources dedicated to their enforcement tend to reflect the underlying social preferences of a society. Developing countries simply weight protection of the environment less heavily than do rich countries. As with lower wages, in part this simply reflects a lower level of economic development. As a result, the lower costs associated with complying with environmental regulations is simply part of a country’s comparative advantage. “Economists see little justification for trade measures designed to correct for these cost differences, especially if these differences reflect underlying contrasts in social preferences, resource endowments, and environmental conditions” (Krissoff et al., 1996, p. 30). New Environmentalist-Protectionist Interests The last group seeking environmental protection is represented by individuals, most of them living in developed countries, who hold strong preferences for protection of the environment. Their strongly held preferences become manifested in a desire to be environmentally friendly in personal consumption and social choices. They may ask that imports be labeled so that they can make informed choices on the basis of either product characteristics (tropical timber) or production methods (dolphin-friendly tuna). They may want exporters to take responsibility for packaging materials. They may also wish to impose their preferences on others. They may lobby their politicians to ban imports of furs caught using leg-hold traps or to keep imports of genetically modified organisms out of their environment. It is naive to think that granting protection in those areas can be confined to creating conditions where consumers can make an informed choice, then letting the market decide. This is the intellectual equivalent of suggesting that if consumers wish U.S. automobile manufacturers to survive they simply will not buy Japanese cars. These arguments did not prevent politicians from providing protection to U.S. automobile manufacturers, and it will not prevent the extension of protection in response to environmental lobbying.

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The WTO is buffeted directly (or indirectly through national delegations) by all of these interests. Its point of contact is the Committee on Trade and Environment, although other bodies of the organization are often dragged into the fray. It is to the activities of the CTE that we now turn to discern how the WTO deals with these interests.

THE COMMITTEE ON TRADE AND ENVIRONMENT

Provision for the creation of the CTE was made at the time the WTO was established; the CTE was constituted in 1995. It is primarily a forum for discussion and the provision of information. Although it can suggest areas that should receive the attention of WTO members, it is not the forum where negotiations take place. Like all WTO committees, it is a creature of the member states’ governments and has no provision for direct input from NGOs. It is probably not surprising that it has been roundly criticized by those environmental groups who would like the WTO to be an agency for coercion. Cynics see it simply as a sop to the environmental movement—a forum at which the ire of interest groups can be directed and a lot of highsounding talk can be generated but from which no real action can be expected. Trade ministries sometimes perceive it as a shield behind which the real work of the WTO can be conducted. There are some elements of truth in all of these characterizations. It is fair to say that most trade ministries do not want the WTO to become the global environmental policeman and actively work to prevent it from being captured by environmental interests. Although they might not want the WTO to acknowledge that trade has environmental aspects at all, they realize the political reality and the current form of the CTE serves them well. Yet the CTE has been working hard to address some of the substantive issues relating to trade and the environment. Such work, however, has been concentrated in the narrow areas of trade law and institutional reform rather than substantive issues. In fact, the CTE has worked hard at eschewing any claims to competency in environmental problems. It has consistently put forth the position that MEAs are the appropriate forum to address global environmental problems. It is ironic that this is the antithesis of the powerhungry, aggrandizing body it is often portrayed as by environmental groups (Sampson, 1999). In the narrower area of trade law, the CTE has not been able to formulate a policy regarding the relationship between MEAs and the WTO. Although it is accepted that countries can forgo their WTO rights and include trade measures, even discriminatory trade measures, to help enforce MEA provisions, several complex issues have not been resolved (e.g., which convention should take precedence when the trade provisions of an

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MEA conflict with WTO principles and when memberships in an MEA and the WTO do not overlap). The WTO is very cognizant of its role as facilitator of international commerce. If MEAs put in place trade rules that are not founded upon WTO principles, it becomes much more difficult for firms engaging in international commerce to make rational investment decisions; this increases their risk and defeats the primary purpose of having international rules for trade. The CTE has made a considerable effort to inform those negotiating and administering MEAs of WTO principles, tried to ensure that they are observers at CTE and other WTO deliberations and that they seek the input of the WTO when structuring their trade provisions. The CTE has spent considerable effort attempting to identify mutually beneficial areas for improving the environment through trade liberalization. Often, these initiatives do not require changes in WTO rules. For example, fisheries subsidies distort trade and encourage overfishing. Removal of fisheries subsidies could be mutually beneficial. Agriculture is another area where, in certain circumstances, reduction in export subsidies could bring forth environmental benefits. One of the areas of contention that the CTE has not been forced to address is the status of one of the environmental movement’s sacred cows—the precautionary principle. Environmentalists have been able to have it enshrined in EU environmental policy, the declaration of the UN Conference on Environment and Development, and, most important, the UN Conventions on Climate Change and Biodiversity (O’Riordan, 1999). They would like it enshrined as a principle for the WTO Agreement on the Application of Sanitary and Phytosanitary Measures (SPS Agreement). This matter is soon going to come to a head over agricultural biotechnology, an area where scientific information is incomplete and environmental effects could be large. The precautionary principle tends to concentrate on potential costs. In the case of biotechnology, the potential gains are also large and unknown. In such a case the precautionary principle could be misused, Luddite-like, to stifle the technology. Although the precautionary principle uses a worst-case premise in the face of incomplete information, it is not supposed to paralyze activity: It is always possible to construct a story in which the worst case environmental costs approach infinity for any policy, but such a construction would not only paralyze all activity, it would fail utterly to discriminate between different policies. Since it has to be believable enough to command the attention of decision makers an operational “worst case” must be something else. (Perrings, 1991, p. 160)

The biotechnology experience, however, suggests just the opposite, with the worst case trotted out under the precautionary principle as being the one that would halt technology in its tracks. The WTO, with its experience-based suspicion of economic principles that are open to capture and

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abuse, has tried to avoid becoming the arbiter of disputes related to the precautionary principle. It is probably wise to stay away from ideas such as the precautionary principle, which, when operationalized, contain large subjective elements. For example, one researcher describes decisionmaking under the precautionary principle as follows: To each future state they [decision makers] attach a measure of the potential surprise that they imagine they would experience if that state actually occurred.… The set of choice options—in this case the set of policies available to the decision maker—is ordered by an attractiveness function that registers the power of each outcome to command the attention of the decision maker.… Outcomes will generally attract greater attention, the smaller the potential surprise they involve and the extent of damage they imply. (Perrings, 1991, p. 161)

Environmental groups have had the precautionary principle adopted in some MEAs, but having a concept in which economic content is far from fully developed enshrined as a guiding principle in international agreements seems unwise. If there is any lesson from the GATT/WTO experience, it is that bad economics, once part of an agreement, are difficult if not impossible to remove. Agricultural biotechnology, however, may force the WTO into the precautionary-principle debate. Of all the environmental interests, the WTO struggles most with the new environmentalist protectionists. For the most part, the CTE has been forced into addressing the problem as a consumer issue under the Agreement on Technical Barriers to Trade (TBT) and, to a lesser extent, the SPS. Unfortunately, these are mechanisms that are ill-designed to deal with environmentalists seeking protection. The TBT was put in place to prevent technical barriers from being abused to protect domestic producers. Barriers are allowed to be put in place only on the basis of product characteristics, not processes. Many of the issues environmental protectionists are interested in, however, are processed-based (e.g., leg-hold traps, fishing methods, biotechnology, packaging, chemicals, etc.). The SPS was negotiated to prevent health, sanitary, and phytosanitary regulations from being manipulated to protect domestic producers. The chosen method was to require a scientific basis for trade regulations. The arguments of environmentalists relating to biotechnology are based on the absence of scientific information on the potential threat to the environment. Although the SPS does allow trade barriers to be put in place when there is insufficient scientific information, this was not the circumstance envisioned. The basic underlying problem is that the WTO recognizes only one source of protection: producers. The entire system is constructed to deal with that problem alone (Perdikis and Kerr, 1999). Increasingly, other groups are asking their politicians for policies that have trade-distorting

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THE ENVIRONMENT

effects or are explicitly protectionist. This creates two problems. First, the WTO is forced to use inappropriate mechanisms to address the problem. Second, in attempting to restructure the existing institutions to deal with nonproducer protectionist concerns, mechanisms designed to address traditional producer-based protectionism may be weakened. It would seem that a more rewarding avenue for institutional development would be to explicitly recognize that other sources of protectionism (e.g., environmentalists and consumers) exist and try to deal with them directly under separate GATT subagreements (Perdikis and Kerr, 1999). Of course, these new subagreements would have to be carefully designed if for no other reason than to prevent them from being captured by traditional protectionist interests. The CTE has yet to consider this direction for institutional development. The CTE has taken a two-pronged approach to claims that it is not directly responsive to the concerns of environmental NGOs. First, it is providing additional access to documents and organizing information sessions and participatory forums for environmental NGOs. This is an attempt to show NGOs the positive aspects of the WTO, particularly as to sustainable development. G. Sampson (1999) catalogs these activities. Second, the CTE has been trying to find ways in which NGOs can participate in the WTO, particularly as a way of helping it acquire better information upon which to make decisions. As yet no formal role in the WTO proceedings is envisioned, and countries have been careful to keep any official role within the sole purview of official government delegations. Trade ministries are well aware of the potential for capture. The extremely vocal expressions of frustration by some NGOs at Seattle regarding the absence of direct input into the proceedings have raised awareness of, and some sympathy for, their position. One suspects, however, that the end result of the mayhem at Seattle will be stiffened resolve to continue to exclude NGOs—even if the official line is different.

CONCLUSION

Although it may appear that the WTO is taking a relatively passive role regarding the environment—eschewing any expertise and deferring to MEAs—there are several environmental interests that seek input into trade policy. There is no direct means by which they can influence WTO policymaking, yet they are relatively effective at lobbying domestic policymakers. Domestic policymakers’ responses can be in contravention of WTO commitments and/or create situations where the WTO is forced into an adjudication role. Multilateral environmental agreements also include trade measures, and important questions remain regarding the relationship

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between MEAs and the WTO. Further, as the WTO can sanction the use of trade measures and has a strong dispute settlement mechanism, its capture represents a worthy objective for environmental interests. The issues surrounding trade and the environment are extremely complex. They will form a major component of future trade negotiations. Some WTO institutions may have to be redesigned and new ones created. Getting those changes right will be a major challenge for the WTO.

BIBLIOGRAPHY Clement, N. C., G. del Castillo Vera, G. Gerber, W. A. Kerr, A. J. MacFayden, S. Shedd, E. Zepeda, and D. Alarcon. 1999. North American Economic Integration: Theory and Practice. Cheltenham, U.K.: Edward Elgar. Gordon, D. V., R. Hannesson, and W. A. Kerr. 2001. “Of Fish and Whales: The Credibility of Threats in International Trade.” Journal of Policy Modeling (forthcoming). Kerr, W. A., and J. D. Gaisford. 1994. “A Note on Increasing the Effectiveness of Sanctions.” Journal of World Trade 28, no. 6: 169–176. Kerr, W. A., and N. Perdikis. 1995. The Economics of International Business. London: Chapman and Hall. Krissoff, B., N. Ballenger, J. Dunmore, and D. Gray. 1996. Exploiting Linkages Among Agriculture, Trade, and the Environment: Issues for the Next Century. Agricultural Economics Report No. 738. Washington, D.C.: Natural Resources and Environment Division, ERS/USDA. Leger, L., J. D. Gaiford, and W. A. Kerr. 1999. “Labour Market Adjustments to International Trade Shocks.” In S. B. Dahiya, ed., The Current State of Economic Science, vol. 4. Rohtak: Spellbound, pp. 2011–2034. O’Riordan, T. 1999. “Precautionary Principle.” In D. E. Alexander and R. W. Fairbridge, eds., Encyclopedia of Environmental Science. Dordrecht: Kluwer Academic Publishers, pp. 492–493. Perdikis, N., and W. A. Kerr. 1999. “Can Consumer-Based Demands for Protection Be Incorporated in the WTO? The Case of Genetically Modified Foods.” Canadian Journal of Agricultural Economics 47, no. 4: 457–465. Perrings, C. 1991. “Reserved Rationality and the Precautionary Principle: Technological Change, Time, and Uncertainty in Environmental Decision Making.” In R. Constanza, ed., Ecological Economics. New York: Columbia University Press, pp. 153–166. Sampson, G. P. 1999. Trade, the Environment, and the WTO: A Policy Agenda. ODC Policy Paper. Washington, D.C.: Overseas Development Council. . Yampoin, R., and W. A. Kerr. 1998. “Can Trade Measures Induce Compliance with TRIPS?” Journal of the Asia Pacific Economy 3, no. 2: 165–182.

4 Agricultural Biotechnology, the Environment, and International Trade Regulation PETER W.B. PHILLIPS AND DON BUCKINGHAM

The international agricultural system now is producing or using a vast array of crops, animals, and microbes that have been developed using new biotechnology methods or involve input or output attributes through genetic modification. By the end of 1999 more than forty genetic modifications related to thirteen different crops were approved and produced in one of thirteen countries and to varying degrees were available to other countries through international trade. Several countries have also approved release of one or more varieties of genetically modified (GM) fish (e.g., salmon), trees (e.g., poplar), microbes, drugs (e.g., rBST), and various vaccines for animals. Many organisms with new modifications await regulatory approval in various countries involved in the international food trade. The introduction of these products into the global agricultural and food system has generated significant debate about two major issues: the safety of the foods made from these products, and their effect on the environment. In this chapter we examine the environmental risks and the efforts to manage those risks through domestic regulation and international cooperation, although the debate around genetically modified foods often conflates the issues of food safety and environmental risk. The primary focus of this analysis is on crops for three reasons. First, biotechnologically based crops are currently more extensively produced and traded than either genetically modified animals or microbes. Second, GM crops may pose higher risks to the environment compared to GM animals because of the potential gene escape and propagation outside the commercial food chain. Third, current trade disputes concerning biotechnology only involve market access for GM crops. 67

68

THE ENVIRONMENT

In the second section we examine the scientific basis for the issue; in section 3 we outline the current diffusion of this crop technology in global production and trade; in section 4 we examine the domestic regulatory capacity and efforts to manage the environmental impacts of these products; in section 5 we discuss the current efforts to develop an international system to manage the environmental risks; and in section 6 we discuss five possible ways in which the international regulatory system could evolve.

THE SCIENCE OF BIOTECHNOLOGY

Agricultural activities have always involved efforts to improve the productive capacity of crops and/or animals. These attempts developed into sophisticated techniques of plant and animal breeding, with the result that a relatively small number of highly specialized crops and animals were developed to meet a diverse range of human needs and ecological conditions and form the basis for the modern agrifood system. Most of the world’s population depends on only twelve plant species for the majority of its caloric intake (Food and Agriculture Organization [FAO], 1995, p. 1.7). These traditionally bred plants and animals were released into the environment and dispersed around the world without much oversight or deliberation, often with profound impacts on host ecosystems. Well before the advent of biotechnology, citizens and governments worldwide decided that any deliberate introduction and transfers of new varieties of plants and animals between ecosystems should be reviewed for their environmental impacts. Biotechnology is the latest and, perhaps, most fundamental innovation in this sector. The array of new tools called biotechnology—including genomics, tissue culture, micropropagation, cloning, marker-assisted breeding, gene splicing, and transgenes—now allow breeders to selectively modify plants and animals at the molecular level. Although many of these techniques simply accelerate the development of new varieties and increase the precision of breeding efforts, the capacity to transfer genetic material between species is new. In nature, plants and animals generally require the same number of chromosomes to breed sexually. The transgenic techniques of recombinant DNA (rDNA) allow scientists to modify elements in an organism’s DNA by cutting and pasting genes or pieces of DNA from one organism to another, thereby circumventing the sexual compatibility limitation (Cape, 1986). This new technology has generated significant debate. Regulators, scientists, and public-interest groups have raised several concerns about the environmental impacts of this new technology. Some believe that the transgenic traits in these new crops and animals are superior to natural traits and

AGRICULTURAL BIOTECHNOLOGY

69

will make the host crops/animals superorganisms that could dominate and destabilize other ecosystems. Others are concerned that outcrosses between genetically modified organisms (GMOs) and other domesticated or wild organisms will create long-range environmental and health problems. There is also some evidence that nontarget species could be affected by some of the technologies (e.g., monarch butterfly larvae might be killed by eating pollen from Bt corn) and that pollen flow within and between species could jeopardize organic and other specialty crop production (Daniell, 1999a). Conversely, some argue that the increased precision of biotechnology and transgenic modification has lower risks than traditional plant-breeding techniques because only selected genes rather than the entire genome are involved (van den Daele, Puhler, and Sukopp, 1997). In addition, many believe that the traits involved so far—herbicide tolerance, insect and viral resistance, delayed ripening, and modified nutrition—would not be superior when located in nontarget organisms. There is the possibility that many of the concerns about biotechnologically modified crops could be overcome by the further advancements in science (Daniell, 1999b). Hybrids and genetically introduced male sterility are already being used to reduce or eliminate the possibility of transgenes propagating outside their intended areas of cultivation. Efforts are also under way to limit the diffusion of transgenes through genetic use restriction technologies (GURTs, or “terminator” genes to turn off reproduction for either transgenic varieties or traits). Recently there has also been an effort to reduce the risk of biotechnology crops by engineering foreign genes via the chloroplast instead of the nuclear genome. Such recombinants would express the new traits only in selected parts of the plant rather than in the whole plant. Hence, any pollen drift would not include the transgenes. Regardless of who is right about the science, the accelerating development of new varieties engineered for a wide range of ecosystems increases the challenge of managing the introduction of new varieties.

THE DIFFUSION OF BIOTECHNOLOGY

Although the first unconfined release of a biotechnologically modified crop was tobacco in China in the late 1980s, the main effort to commercialize GM crops began around 1995. During that year a small number of acres of GM varieties of tomatoes, corn (maize), cotton, canola, and soybeans were produced in Canada, the United States, and Argentina. Since then seven more modified crops have entered the market—flaxseed, potato, squash, papaya, potatoes, rice, and melons. C. James (2000) estimates that global production grew to approximately 109 million acres in 2000. Furthermore,

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thirteen countries produced commercial quantities of at least one crop that year (in addition, there are reports that Brazilian farmers planted Roundup Ready soybeans in 2000 even though they were not approved by the Brazilian government). Table 4.1 shows which countries had approved which crops by the end of 1999. Even with relatively limited diffusion of this technology, it has already been introduced onto all six continents and in a wide variety of ecosystems. Although there are more than forty different genetic modifications involving thirteen different GM crops and thirteen countries, the activity is concentrated in a few areas. James (2000) estimates that the United States planted 68 percent of the global area for transgenic crops in 2000, Argentina planted 23 percent, Canada 7 percent, China 1 percent, and the other nine countries planted only small areas, together accounting for less than 1 percent of total area. Soybeans accounted for 58 percent of the global acreage, corn 23 percent, cotton 12 percent, canola 6 percent, and the other crops less than 1 percent in total. Herbicide-tolerant crops accounted for 74 percent of the acreage, insect resistance (Bt) for 19 percent, stacked herbicide tolerance and insect resistance for 7 percent, and all the other traits (e.g., viral resistance, nutrition, and delayed ripening) for less than 1 percent combined. See Table 4.1. Although production of biotechnologically modified crops is limited to a handful of countries, modified seeds are distributed widely around the world through international trade (Table 4.2). Given that none of the countries producing GM varieties has completely effective crop segregation systems in place (except for GM flaxseed in Canada), even small amounts of GM production could commingle with the general commodity stream and lead to diffusion of the seed through international exports. Although a maximum of eight countries produce and export any one of the genetically modified commodities, this production is concentrated in countries that dominate both world production and world trade in those products. For example, although GM canola is produced commercially in only two countries (Canada and the United States), together they produce approximately 23 percent of global production and account for 50 percent of global exports. GM corn (maize) is produced in countries that account for half of global production and 85 percent of global exports. Similar shares are true for rice, soybeans, tomatoes, and flaxseed. In contrast, several of the GM crops are either not extensively produced, or else countries with GM varieties of those crops are not exporters. As noted in Table 4.2, up to 177 countries import some quantities of the thirteen crops that have been modified. In practice, however, the diffusion of GM crops is much smaller. More detailed data show that not every country imports from countries with GM crops. Table 4.3 illustrates that Canada, for instance, exports to a select number of countries at any one

x x

x x x x

x x x x

x x

x

China

x

x

France

x

x

x

x

Mexico

x

x

x

Portugal Romania S. Africa

x

x

Spain

x

Ukraine

x

x x x x x x x x x x x

U.S.

Source: James (2000); OECD Biotechnology Regulatory Affairs website. Note: A number of these and other countries (e.g., Japan) have approved other GM varieties for cultivation, but there are no available records to show that they are actually growing GM varieties of those crops.

x

x

x

Argentina Australia Canada

Countries Allowing Production of Biotechnologically Modified Crops, 1999

Canola Cotton Flaxseed Maize (corn) Melon Papaya Potato Rice Soybeans Squash Sugar Beet Tobacco Tomato

Table 4.1

71

Canola Flaxseed Maize Melon Papaya Potato Rice Soybeans Squash Sugar Beet Tobacco Tomato

35,869 2,697 613,227 709 5,084 298,541 575,938 157,744 14,788 259,646 6,881 90,896

2 2 8 0 1 4 1 6 1 1 3 5

8,367 1,251 322,565 — 18 42,551 8,530 127,738 23 29,580 2,474 33,449 23 46 53 0 0 14 1 81 0 11 36 37 40 41 90 11 49 101 59 69 34 23 111 97

8,717 1,027 75,022 65 128 7,874 2,182 38,019 586 34 1,915 3,664

World Total 2 2 8 0 1 4 1 6 0 1 3 5

4,364 837 64,060 — 6 938 1,745 33,496 — 6 176 1,982

50 81 85 0 5 12 80 88 0 19 9 54

# of Countries From with GMGM GM Producing Percent Total Crops Countries

Exports

68 74 168 13 56 177 82 114 32 26 154 140

# of Countries

Imports

Sources: Author’s calculations using data from Table 4.1 and FAOSTAT. Note: Comparable statistics for cotton are not available. Although GM flaxseed is approved for production in both Canada and the United States, only small amounts of identity-preserved production is undertaken in Canada; as a result, none of the flaxseed market was actually affected in 1998. a.Indicates thousands of tonnes.

51 46 158 17 47 148 114 83 83 52 128 159

Commodity

GM Percent # of Total Countries

Production in Countries with GM Production

Volume # of Volume (1,000 t)a Countries (1,000 t)

Total Production

Distribution of Production and Trade in Genetically Modified Crops, 1998

# of Countries

Table 4.2

72

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AGRICULTURAL BIOTECHNOLOGY

Table 4.3

Canadian Exports of Living Seed for Selected Products, 1993–1998 Number of Countries Importing Canadian Seed for All Purposes

Canola Flaxseed Maize Potato Rice Soybeans Tobacco Tomato

Number of Countries Importing Canadian Seed for Propagation

1998

1994–1998

1995–1996

1993–1996

21 32 6 15 3 37 11 4

38 48 24 32 11 60 24 23

6 7 13 — — 11 11 4

15 16 22 — — 16 24 23

Sources: Strategis (2000); Canadian Seed Trade Association (1995–1996).

time. It is possible—indeed likely—that many nations import from markets without GM varieties. More important, the vast majority of the GM seeds or fruits exported annually are either processed or eaten. As a result, none of those seeds or fruits is propagated in the importing country. Theoretically any exports of living seeds (i.e., those that can reproduce) could be propagated, but in practice that is not the intent or the experience, as many of the GM varieties are inappropriate for production in the importing country. Table 4.3 illustrates that Canada exports seeds for propagation to a much smaller number of countries. Many of those countries import seeds as part of a breeding program that will undertake further breeding and environmental assessment work before releasing the seeds into the environment, further reducing the environmental risks. The seriousness of the problem, therefore, is in the eye of the beholder. At one extreme, if one assumes exports translate into diffusion, then virtually all countries and ecosystems on six continents face potential risks of new biotechnologically modified varieties. At the other extreme, if the only risk is transboundary movements of seeds for deliberate propagation, then potential risks are minimal. The domestic and international regulatory systems are grappling with how to handle this range of risks.

DOMESTIC REGULATORY SYSTEMS

Domestic regulatory systems currently provide the foundation for regulating the introduction of genetically modified varieties of crops. The capacity

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and operation of these systems vary considerably. There are two key elements. Most countries have some form of domestic regulation in the agrifood sector that predates the arrival of biotechnology in the global production and trade system (for a review of the Canadian system, see Fuller and Buckingham, 1999, pp. 141–172). With varying degrees of success, these systems handle some of the environmental risks of new biotechnologically modified varieties. In addition, several of the more advanced economies have either specifically modified their base systems to accommodate and handle these new products or have developed new, purpose-built systems (for a review of the Canadian system, see Churchill, 1998). In many cases it is these new targeted systems that pose the greatest challenge to international trade. Most countries have at least a basic structure for regulating introduction of new plant varieties into their countries. The Food and Agriculture Organization (FAO, 1998) reports that 75 percent of the countries in the world and almost all of those that are likely targets for deliberate commercial release of foreign or genetically modified plants or animals have national quarantine rules. Almost three-quarters of those countries (103) are members of the International Plant Protection Convention (IPPC), and their quarantine rules conform to the IPPC. Furthermore, more than 68 percent of the countries in the world have some form of controls on the seeds industry; most countries regulate the seed quality, and the rest certify new seeds before they are allowed to enter the market. See Table 4.4. In spite of regulations, however, many of these countries have limited technical capacity to undertake the scientific work to assess risks. Although approximately three-quarters of the counties in the world have some type of domestic crop production program and most countries have a genebank, most developing countries have only basic or developing research programs. In contrast, most developed countries have advanced breeding programs. Furthermore, about 75 percent of countries with national research programs were also active members of a subregional research network, with the opportunity to access a wider level of technological support (FAO, 1998, pp. 455–462). In many cases, however, this effort does not translate into effective capacity. Two researchers, for example, undertook a study (see Wafula and Falconi, 1998) of Kenya’s biotechnology research capacity and concluded that even though the Kenya Agricultural Research Institute was using more advanced biotechnology techniques Kenya was still in the first stages of development. Most organizations in Kenya had low ratios of technical support to researchers and high manager-researcher ratios, impeding their capacity to undertake an effective program. Those countries at the greatest risk of indiscriminate or inadvertent genetic introductions are the poorest and least developed nations, especially those in Central Asia and Africa. Nevertheless, the vast majority of coun-

Source: FAO (1998), appendix 1.

22 21 30 48 37 36 194

# of States

20 19 21 46 31 34 171 88

Signed CBD 18 13 22 33 25 35 146 75

17 11 14 17 12 22 93 48

Seed Quarantine Certification Rules Systems 0 8 2 16 7 5 38 20

Seed Quality

National Legislation

National and International Undertakings on Genetic Resources

Western Europe Eastern Europe Near East Africa Asia/Pacific Americas Total Percent total

Table 4.4

0 0 3 8 5 10 26 13

Basic 0 13 16 23 9 13 74 38

17 4 2 2 7 9 41 21

Developing Advanced

National Research Capacity

16 19 20 37 29 27 148 76

With Genebank

75

76

THE ENVIRONMENT

tries and regions that are likely to be deliberate markets for new crops have the basic mechanisms to protect their ecosystems. Meanwhile, a handful of mostly developed countries have built new or modified existing regulatory systems to handle their specific concerns about biotechnology. Two divergent regulatory approaches have evolved (see Table 4.5). In North America the regulatory system follows a rulesbased legalistic approach, whereas in Europe it pursues a political-control approach (Woolcock, 1998). The North American legalistic approach prescribes government regulatory intervention to ensure market efficiency or effectiveness rather than to replace the market (Majone, 1990). Discretionary decisionmaking power wielded by regulators is kept in check through the “transparency and openness of the decision-making process” (Woolcock, 1998), which both provides public scrutiny and limits the influence of populist politics and day-to-day public interests on the regulatory system. Some researchers (see Isaac and Phillips, 1999) argue that with respect to modern biotechnology the North American model of regulations supports rapid commercialization of biotechnology products. Although these systems are often triggered by the use of biotechnology processes, they evaluate the risks of the resulting varieties based on the specific resulting novel traits. By basing the review on product attributes, these countries can, for the most part, use existing or modified vertical (or sectoral) regulatory agencies or authorities. The focus on products also facilitates review of new varieties, with those that are “essentially equivalent” subject to streamlined investigation. This approach forms the basis for the biotechnology

Table 4.5

Competing Regulatory Approaches for Agricultural Biotechnology North American Approach

Orientation Supply push Tradition Legalistic Features of regulatory system Trigger Novel product attributes Regulatory base Precautionary principle Access to system Labeling

EU Approach Demand pull Accountability

Use of biotechnology processes Vertical through existing Horizontal through new regulations and agencies regulations and agencies Essential equivalency Certainty Closed to interest groups Open to interest groups Discretionary Mandatory

Source: Isaac and Phillips (1999).

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regulatory systems currently operating in the United States, Canada, Australia, New Zealand, and Mexico. The European approach to government regulatory intervention, in contrast, is dominated by concerns over the democratic accountability of the discretionary decisionmaking power of regulators (Majone, 1994). Combined with a lack of public confidence in both the new technology and the traditional government regulators, this has led to the development of new horizontal regulatory systems to handle the perceived risks of the new technology. The regulatory system, reflecting consumer and citizen concerns, demands “certainty” about the safety of new products, withholding approval from those where all risks (i.e., actual, hypothetical, and speculative) have not been resolved. Regulatory decisionmaking resides with elected public officials to ensure accountability, with the result that any regulatory intervention is very much subject to the day-to-day public interests that dominate the concerns of elected officials. Although eighteen products were reviewed and approved for release in the European Union (EU) before 1997, since then there has been a series of national and EU moratoriums on release of new varieties. As a result of the incomplete and often conflicting domestic regulatory systems in both exporting and importing countries, the regulation of the environmental impacts of biotechnology products has become an international issue. There has been extensive effort on several fronts to try to resolve the looming impasse over the regulation and trade of genetically modified products.

INTERNATIONAL REGULATORY BODIES

Currently, there is no internationally harmonized regulatory system or international institution specifically charged with devising rules for trade in biotechnologically modified crops. Nevertheless, there was a big push in the late 1990s to introduce new trade rules for managing international trade in products that have environmental impacts. This has focused on two main institutions: the World Trade Organization (WTO) and the BioSafety Protocol (BSP). In many ways, this has been an effort to compensate for the limited domestic regulation in many countries. There are currently several international bodies active in fields affecting the coordination and regulation of products of biotechnology (see Buckingham et al., 1999, for more details). This section examines five—the International Plant Protection Convention, the Organization for Economic Cooperation and Development (OECD), several regional initiatives, the World Trade Organization, and the BioSafety Protocol—which are attempt-

78 Table 4.6

Institution

THE ENVIRONMENT

The Current Array of Institutions Regulating International Trade in GM Crops Date

Coverage

Member States DSM

Orientation

International 1952 Plant Protection Convention

Pests and pathogens of plants and plant products

107

Nonbinding; International sets WTO standard for plant standards measures involving quarantines

OECD

Harmonization of international regulatory requirements, standards, and policies

29

None

1969

Consensus documents

Regional 1990s Harmonization initiatives of the science (TEP, ECTI) of regulation

Bilateral None

Regional side agreements, MOU, MRA, formal dialogues, and joint research projects

WTO/ GATT

1947/ 1995

Trade in all goods and most services

139

Binding

Establish rules for transparency and dispute settlement through TBT and SPS agreements

BioSafety Protocol

2000

Transboundary movements of genetically modified organisms

Min. 50

None

Requires 50 countries to ratify before it becomes operational

ing to “grow into” the task of regulating products of biotechnology. Two other organizations—the Codex Alimentarius Commission (Codex) and the International Office of Epizootics (known by its French acronym, OIE)— are involved in regulating aspects of biotechnology but are excluded from this analysis. Codex is actively examining the food safety and labeling aspects of GM foods but has formally declined to consider developing new standards for regulating international trade that involves environmental aspects. The OIE, with programming similar in many ways to the IPPC, is specifically focused on animal health, which currently involves biotechno-

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logically developed veterinary biologics. However, the OIE does not directly address any issues relevant to the international regulation of trade of biotechnologically modified crops. The ordering of the institutions examined below is somewhat arbitrary, but conceptually there is a progression from institutions that are largely science-based (IPPC) to ones that have broader objectives like trade facilitation, environmental protection, and other social and political goals (OECD, regional initiatives, WTO, and BSP). For each, we offer a short account of the current initiatives of the institution affecting products of biotechnology. International Plant Protection Convention The IPPC is a multilateral treaty that seeks to protect natural flora, cultivated plants, and plant products by harmonizing international rules to prevent the international spread and introduction of pests and pathogens. Currently with 107 member countries, the IPPC had its beginnings in 1952 and is administered under the auspices of the Food and Agriculture Organization of the United Nations. The Convention Secretariat, in collaboration with both regional and national plant-protection organizations, provides a forum for international cooperation, harmonization, and technical exchange of plant-protection information. (The OIE, in operation since 1924 with 152 current members, undertakes similar functions to control the spread of infectious animal diseases.) The IPPC has addressed the international regulation of GM crops through several International Standards for Phytosanitary Measures (ISPMs). Member countries are expected to adhere to the ISPMs, but standards developed and adopted are not legally binding. The IPPC, however, plays a vital role in international trade, as it is the institution recognized by the WTO under its Agreement on the Application of Sanitary and Phytosanitary Measures (SPS Agreement) as the source for ISPMs affecting trade in plant products. National measures that are based on ISPMs will generally not be open to challenge under the WTO dispute resolution process. Both agreements are distinct in their scope, purpose, and membership—neither agreement is supplementary to the other. The IPPC includes provisions affecting trade by ensuring that phytosanitary measures have a scientific basis and are not used as unjustifiable barriers to international trade. Likewise, the WTO’s SPS Agreement reemphasizes states’ ability to enact national rules for plant protection as long as they have a scientific basis and are based on a proper risk assessment. The IPPC also has dispute avoidance and dispute settlement provisions applicable when measures are challenged as unjustifiable barriers to trade. With respect to dispute avoidance, the IPPC provides guidance, support,

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and information to governments concerning phytosanitary measures and facilitates the exchange of information between governments with respect to regulatory requirements and pest status. The dispute settlement process provides a neutral forum for a technical dialogue on a dispute. Countries first consult bilaterally with the aim of resolving the problem. If further action is deemed necessary, the disputing parties can request that the FAO director-general form an expert panel to review the situation and recommend a course of action. Although the dispute settlement process of the IPPC is nonbinding, the results of the process can be expected to have substantial influence in disputes that may be raised at the WTO. Under the SPS Agreement, the IPPC Secretariat both nominates experts for WTO dispute panels and provides technical background information to the panel. As disputes brought to the WTO result in binding and enforceable decisions, which can have far-reaching economic and political consequences, the influence of the IPPC in the WTO context should not be underestimated. Organization for Economic Cooperation and Development The OECD, created in 1961 and now with twenty-nine member countries, provides governments of advanced industrial economies a forum in which to develop economic and social policy. Representatives from member countries discuss relevant issues and work to coordinate domestic and international policies. The OECD has been actively involved in activities intended to assist in the harmonization of international regulatory requirements, standards, and policies related to the discipline of biotechnology since 1995. The OECD biosafety harmonization projects, in particular, assist countries in efforts to ensure safety; to make regulatory processes more transparent and efficient; to facilitate trade in the products derived through biotechnology; and to provide information exchange and dialogue with non-OECD countries. This program is designed to assist member states in developing effective approaches to safety regulation that will not contribute to unnecessary barriers to trade. The OECD Working Group has two main initiatives. First, the group is developing so-called consensus documents, which are scientific biology-background documents mutually recognized by member states. These documents set out the biology of the crop plant, introduced trait, or gene product and provide a common base to be used in a regulatory assessment of an agricultural or food product derived through modern biotechnology. By August 2000, fourteen consensus documents had been published by the OECD. The Working Group has stressed the need for flexibility in the drafting of consensus documents so that they can be readily updated to take into account new knowledge on

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the topic. Several other consensus documents are currently in preparation. The Working Group outreach activities to nonmember countries are becoming more important. They are designed to integrate input from nonmember countries into consensus documents and to disseminate the results of the work as widely as possible in an effort to ensure that OECD’s work on harmonization will develop within the context of other related international activities. Regional Initiatives Several bilateral or multilateral regional institutional initiatives have played, and will increasingly play, an important role in the regulation of trade in goods and services. Three merit some discussion. The Transatlantic Economic Partnership (TEP), established under the New Transatlantic Agenda in 1995, is the most significant regional institution that directly addresses issues surrounding biotechnology and is not solely internal in scope. The TEP states the United States and European Union will seek “to strengthen co-operation in the field of human, plant and animal health issues, including biotechnology, while recognising the importance of continuing to improve respective regulatory processes and scientific co-operation.” Some instruments identified to achieve their shared objectives are: mutual recognition of testing and approval procedures; progressive realignment or adoption of the same standards, regulatory requirements, and procedures; adopting internationally agreed standards; and intensification of dialogue between scientific and other expert advisers in standards-setting bodies and regulatory agencies. Under section 3.1.3 (Alignment of Standards and Regulatory Requirements), the United States and European Union agree to assess existing work in the field of international standardization to determine ways to develop closer EU/U.S. cooperation to overcome difficulties and to better serve EU and U.S. health, safety, quality, and environmental needs. The European Union also has trade liberalization initiatives with other important trading partners. For example, the Agreement for Scientific and Technological Cooperation between Canada and the European Commission came into effect in February 1996. Pursuant to section 4.2 of the Joint Canada-EU Action Plan, the two parties agree to build on this agreement and to “co-operate in the field of bio-technology and encourage regulatory co-operation, including with respect to genetically modified organisms.” Another example is the various cooperation initiatives between the European Union and Japan. Canada and the United States are also engaged in bilateral negotiations on agricultural biotechnology. This effort, begun in 1998 between the

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Canadian Food Inspection Agency and the U.S. Department of Agriculture’s Animal and Plant Health Inspection Service, seeks to study, compare, and harmonize where possible the molecular genetic characterization components of the regulatory review process for transgenic plants. Some essential elements of agreement have already been achieved, although no formal binding bilateral agreement has yet been concluded. The formation of regional institutions that directly relate to the regulation of biotechnology is well under way among important players in the international trade regime. These regional institutions are flexible enough to allow regulatory harmonization to proceed at a pace determined by country-specific domestic concerns. Regional side agreements, memoranda of understanding, mutual recognition agreements, formal dialogues, and joint research projects are mechanisms that can be used to decrease regulatory barriers to trade in biotechnology products. The ability to choose between these institutions endows individual nations with the flexibility to achieve the greatest trade liberalization that is possible at a given point in time. When a critical mass of regions has achieved sufficient levels of liberalization, the regional agreements can then be incorporated (relatively easily) into institutions of the multilateral international trade regime. In this way regional trade agreements have come to be recognized as complementary, if not preliminary, to the WTO/GATT process. The World Trade Organization On January 1, 1995, the WTO came into being, replacing the Contracting Parties of the General Agreement on Tariffs and Trade (GATT) of 1947. Rules found in the WTO agreement are designed to achieve several objectives: reduce tariffs, prevent discrimination in trade, improve market access through limitations on the use of nontariff barriers, require transparency, and resolve disputes. WTO rules seeking to achieve any of these objectives can have an impact on trade in products of biotechnology. However, it is likely that the most frequent conflict to surface under WTO rules affecting trade in products of biotechnology will be the scrutiny of national measures that restrict market access for GM products. Justification for such measures will likely flow from a member state’s desire to protect human, animal, and plant life and health or the environment. Nothing under GATT 1947 prohibited environmental or health regulations as long as they were in accordance with GATT rules concerning nondiscrimination in Article I (most-favored-nation treatment) and in Article III (national treatment). As well, several of the GATT 1947 (now GATT 1994) articles specifically permit regulations for setting out national “standards or regulations for the classification, grading or marketing of commodities in international trade” (Article XI), and the adoption or

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enforcement of measures necessary to protect human, animal, or plant life or health (Article XX[b]). To be consistent with Article XX(b), measures could not, however, be applied so as to cause arbitrary or unjustifiable discrimination between countries or to be disguised restrictions on trade. Under the WTO’s SPS Agreement, countries agree to minimum standards for determining the WTO-compatibility of SPS measures. The SPS Agreement outlines the following basic principles: (1) SPS measures cannot offend either branch of the principle of nondiscrimination; (2) SPS standards that conform to international standards developed by international organizations such as Codex, the OIE, and the bodies formed pursuant to the IPPC are presumed to be consistent with the obligations outlined in the SPS Agreement; (3) where a country implements national standards that are in excess of established international standards or where no international standards exist, those standards must be based on scientific principles and the completion of a risk assessment study; and (4) sanitary and phytosanitary measures shall not be applied in a manner that would constitute a disguised restriction on international trade. The WTO currently offers a more effective dispute settlement system than the old GATT system. The General Council sits as the Dispute Settlement Body (DSB), although most of its work is delegated to panels of three trade experts who sit and decide trade disputes that come before the WTO. If WTO member states fail to resolve a trade dispute through negotiation, the dispute is referred by the DSB to a panel. The panel process is somewhat different than a domestic court action. Parties present their case through both written and oral argument. After the case has been heard, the panel completes a preliminary report that summarizes the facts and issues of the case and any preliminary findings of the panel. The parties are then given the opportunity to present clarifications of their case before the panel issues its final report. The final panel report is then issued and approved by the General Council unless there is unanimous consent not to adopt it or one of the disputing parties appeals the panel decision to the seven-person Appellate Body whose decision is final. Appeals can only be taken on points of law. Normally, the whole panel process must be concluded within nine months (or twelve months if the panel report is appealed). In urgent cases, disputes can be resolved even more quickly. Private parties are almost never permitted to attend or provide evidence at the panel hearing unless the panel itself requests assistance in the form of expert reports. To date, WTO panels have decided three cases concerning the validity of national SPS measures: the EU hormones case, the Australian salmon case, and the Japanese agricultural products case. In all three cases the contested domestic SPS measure was struck down on the basis that there was no risk assessment completed to support the SPS measure, or the risk

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assessment was improperly done. This recognition of the pivotal importance of a proper risk assessment is noteworthy. The salmon-case decision set out three criteria for a proper risk assessment: (1) It must identify the diseases whose entry, establishment, or spread a member wants to prevent within its territory, as well as the potential biological and economic consequences associated with the entry or spread of these diseases; (2) it must evaluate the likelihood of the entry, establishment, or spread of these diseases, as well as the potential biological and economic consequences of failing to prevent introduction; and (3) it must evaluate the likelihood of the entry or spread of these diseases according to the SPS measures that might be applied (WTO, 1998b, para. 121). If the risk assessment does not even refer to the SPS measure, it is doomed to failure before a WTO panel. The WTO does not claim to be a venue for international environmental regulatory coordination for products of biotechnology, but its effectiveness as a viable international institution makes it very attractive for states wanting an international institution to fill that role. The WTO offers attractive mechanisms for consensual dialogue as well as for quasi-judicial dispute settlement. With respect to mechanisms for consensual dialogue, the WTO has three committees, which do not yet—but could—address issues of the regulation of products of biotechnology. First there is the Committee on SPS Measures. Fed by the information and expertise of the IPPC, the OIE, and Codex, the Committee on SPS Measures could examine the issue of trade in products of biotechnology, especially with respect to whether measures denying market access to such products are legitimate SPS measures. Furthermore, the WTO’s Committee on Trade and Environment could be a venue for discussions about how to rationalize trade interests and environmental concerns that arise from products of biotechnology. The WTO, through its Dispute Settlement Body (discussion above), also offers binding and enforceable dispute resolution and an appeal process. Thus, if the issue of regulatory coordination has a trade-related aspect, such as the restriction of market access to products of biotechnology, the WTO will become the international regulator by default. Cases like those involving hormones, salmon, and agricultural products demonstrate that the WTO does not shy away from deciding SPS cases. The same is likely to be the case for issues involving environmental concerns raised by trade in GM products. If the international community does not decide on another forum, the WTO likely will be requested by some of its members to make determinations relating to trade in products of biotechnology. In those cases, the WTO is likely to side with the science-based approach to resolving cases involving biotechnology products as it has done with SPS disputes. Panels have consistently held that the scientific basis of a challenged SPS measure will be necessary to ground the measure both under Article 2.2 (basic obligations) and Article 5.1 (proper risk assessment).

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The WTO has as its raison d’être the reduction and elimination of trade barriers, and thus it has an institutional bias to do just that. WTO dispute cases show that the organization is likely to value unrestricted trade and scientific proof above other factors such as environmental protection or socioeconomic considerations. As currently interpreted, the SPS Agreement does not permit nonscience concerns such as consumer preference, animal welfare, or nonmeasurable environmental risks to be considered in the determination of whether an SPS measure is based on science and supported by a proper risk assessment. There is risk, however, in relying too heavily on the WTO to resolve the question of the appropriate balance to be struck in the regulation of trade in GM products. There is increasing concern among many observers that the WTO is too pro–free trade to be unbiased in setting such a standard. The danger is that rushing into the question of regulating trade in products of biotechnology may topple the WTO panel process and the WTO as a whole. Demonstrations in Seattle showed that the WTO is no longer, if it ever was, “the public’s darling.” Thus, WTO decisions, if taken in very controversial matters such as trade in products of biotechnology, may be rejected by member states, thereby jeopardizing the other operations of the WTO in trade liberalization. The BioSafety Protocol The BSP represents an effort to provide a comprehensive international regulatory approach to the protection of biodiversity. The Cartagena Protocol, concluded in negotiations in Montreal on January 29, 2000, establishes rules to manage the environmental risks of transboundary movements of genetically modified living organisms. Although the BSP is driven from the environmental side, it has significant potential trade implications. The preamble to the protocol acknowledges this and emphasizes that it “shall not be interpreted” as changing the rights and obligations of countries under other international pacts, such as the World Trade Organization. Traditionally, environmental protection has been a predominantly domestic policy issue. Trade agreements maintained the separation between domestic and trade policies through the rigid application of four principles: (1) the focus on products rather than production and processing methods (PPMs); (2) the national treatment provisions (e.g., GATT 1994, Article I, which states that foreign products must be treated like domestic products); (3) the most-favored-nation principle (e.g., GATT 1994, Article III, which states that all contracting parties must receive the same treatment domestically as the most-favored nation receives domestically); and (4) the common exemption of environmental and natural resource issues under GATT 1994, Article XX (general exemptions). However, agricultural biotechnolo-

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gy, which is fundamentally about PPMs, makes it difficult to sustain this division. This creates a fundamental challenge for the BioSafety Protocol, which attempts to balance environmental objectives and trade objectives, which can be in concert or in conflict. In the event of conflict between trade and environmental objectives, it is not clear which ones should dominate. The BSP was negotiated between 1996 and 2000 by 138 countries under the auspices of the 1992 Convention on BioDiversity (CBD) of the United Nations Environment Program (UNEP). The agreement, which must be ratified by at least fifty countries before it comes into force, provides rules for transboundary movements of GM organisms intended for environmental release and for those destined for the food chain. For living GM organisms (e.g., seeds for propagation, seedlings, fish for release), exporters will be required to obtain approval from importing countries. Within fifteen days of approving a new GM variety, a country would notify a BioSafety Clearing House with information about the traits and evaluations. The first time that new GM variety is to be exported as seed, the exporting country would notify the importing country. The importing country would then decide whether to approve the shipment or decline the shipment because of risks identified through a science-based risk assessment. This process is called “advanced informed agreement” (AIA). Although this seems straightforward, the protocol includes two features that may raise conflict in coming years. First, the text indicates that countries may in their reviews of GMOs consider “socioeconomic factors” (i.e., the impact on local farmers), provided they respect their other international obligations. Second, the protocol includes a so-called precautionary principle, whereby countries do not have to have complete scientific certainty to block imports of a GMO that they fear could be harmful to biological diversity. Although it is unclear how the negotiating parties expect the two exemptions to operate, it is likely, given the reference in the preamble to other international obligations, that any import bans that are not based on scientific risk assessments will be constrained. As with the SPS Agreement under the WTO, temporary bans may be permitted, but it is likely that countries will need to make real efforts to undertake the scientific research to validate (or refute) the concern. Framers of the protocol have attempted to focus it tightly on environmental risks. To that end, transboundary movements of GMOs intended for food, feed, and processing (i.e., commodities) will be exempt from the AIA provisions. Nevertheless, exporters must label shipments with GM varieties as “may contain” GMOs and countries can decide whether to import those commodities based on a scientific risk assessment. Furthermore, GMOs intended for “contained use” (e.g., national breeding programs and research) and GMOs in transit through other countries will not require AIAs.

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Although the BSP is not explicitly intended to be a trade agreement, the fact that its scope includes export and import activities makes it an implicit, or de facto, trade agreement associated with the international trade of GM products. Successful completion of the BSP has the potential to encourage international trade in three significant ways. First, increased trade transparency according to the use of the AIA principle should remove friction in the market. Second, the scientific risk assessment procedures should increase trade fairness by ensuring that risks to biodiversity from genetically modified products, whether domestic or foreign, are assessed consistently using credible scientific risk assessment procedures. Third, the protocol should overcome the lack of domestic regulations in those countries with little or no experience with regulating genetically modified products (Mulongoy, 1997). In this sense, the successful negotiation of the BSP can be interpreted as a potential win-win outcome. The global benefit, shared by all countries, is the overall conservation and protection of biodiversity. From an industry perspective, successful completion of the BSP has potential benefits for further research and development, adoption, and commercial use of genetically modified products because it would potentially increase predictability of market access. It is perhaps too early to make a confident evaluation of the BSP. In the first weeks after the agreement, almost all participants in the talks—developed and developing country governments, agricultural producers, biotechnology companies, and public-interest groups—expressed optimism that the protocol will protect the environment without unduly impeding international trade. Representatives from the so-called Miami Group of countries—Canada, the United States, Australia, Argentina, Chile, and Uruguay—applauded the agreement as providing sustained market access and protecting WTO rights and obligations. The European Union and the Third World Network pointed to the “precautionary principle” as a key innovation. Producers and biotechnology companies cautiously supported the narrow focus on varieties for intended release, and the public-interest groups were pleased with the precautionary principle and the provisions for socioeconomic factors in the decisions. Nevertheless, the BSP will not resolve all concerns in the marketplace. First, the United States, which is the single largest producer of GM crops, has not ratified the 1992 CBD, which means that although it may abide by the BSP it will not be a party to it. Second, most of the developing countries in the world have little or no experience with domestic biosafety regulation, and the Cartagena Protocol provides only limited protection against any adverse impact of agricultural biotechnology. The BSP does not cover research and development, transfer, handling, testing, use, and disposal of all GM products; those responsibilities will continue to fall on national governments. Third, the BSP has not handled all of the socioeconomic, eth-

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ical, and consumer concerns, as many had hoped. Those concerns remain unanswered in any international agreement. Finally, there are likely to be disputes that arise from the agreement, but it is not clear from the information available how the BSP will handle them. The economic and trade impact of the BSP depends on how it is implemented. A recent study of the potential impact of the BSP (Isaac and Phillips, 1999) concluded that the trade impact for canola could be as small as 0.5 percent of total exports, equal to an estimated $6 million annually (with the scope limited to first-time shipments of GMOs intended for deliberate release). This impact would increase if countries designate some commodity shipments as potential seed for release. In addition, the impact could rise depending on how the mandatory labeling of commodity shipments influences market access. It is possible that some countries may reject shipments not based on scientific assessments but could cause delay because of the large volume of new varieties to consider. The same study (Isaac and Phillips, 1999) suggests that as many as 408 new GM varieties of canola, involving fifty-four novel traits, could be introduced in Canada by 2005. Combined with the flow of new traits in other crops, many countries with limited regulatory capacity could be swamped. If segregated production and marketing systems are not possible, then all the production from a country must be considered as GM if approval for the unconfined production of even one GM variety has been granted. In the short term, participants in the Canadian grains and oilseeds industry insist that the current Canadian distribution system makes it 100 percent logistically and economically impossible to segregate GM product from non-GM product (Hart, Vincent, and Bubber, 1997; Smyth and Phillips, 2000), a view shared by both U.S. and European industry participants. The few systems that were tried in Canada cost an estimated CDN$33–41/tonne in incremental handling costs (Manitoba Pool Elevators, 1997). More recently, several U.S. grain merchants have introduced producer contracts for GM-free deliveries, but it is not clear yet whether they will pay a premium adequate to pay for the incremental costs. This could effectively impede international market access for biotechnology products.

POSSIBLE REGULATORY OR NEGOTIATING APPROACHES

The diversity of issues and interests has so far impeded development of a comprehensive international approach to the regulation of the products of biotechnology. Each of the key institutions presents a unique facet for such regulation. The IPPC is an appropriate institution to develop standards for plant safety. The WTO is the best forum to investigate and reduce barriers to trade. Other institutions may need to be charged with developing the

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environmental and socioeconomic consensus on the regulation of biotechnology. Once there is a broad-based consensus on these more difficult issues, then narrowly mandated institutions like the WTO and IPPC would have to recognize and adopt such international standards in their operation. There are precedents where the WTO has permitted trade-restricting measures that have broad international consensus. Examples include traderestricting measures required by the UN Security Council (trade embargoes on Iraq), by international environmental treaties such as the Montreal Protocol (prohibition of trade in chlorofluorocarbons) and the Convention on the Illicit Trade in Endangered Species (i.e., prohibition of trade in ivory), and even by the WTO itself with respect to measures prohibiting the trade in products produced by prison labor (GATT 1994, Article XX[e]). Thus, the international community for the time being must tolerate a decentralized, or “patchwork,” approach to the regulation of products of biotechnology, with national systems providing basic but different environmental standards and international bodies setting minimum standards for different aspects of the regulation of the environmental impacts of biotechnology. The predominantly scientific and product focus of the existing operating regulatory systems makes them effective but limits their ability to address some of the socioeconomic concerns that drove many of those seeking a BioSafety Protocol. There appears to be a vast chasm between those international institutions (and national regulatory systems, for that matter) involved in the regulation of products of biotechnology based on the “product” versus “process” basis. Trade institutions have vehemently denied the importance of any process basis for raising market access barriers. If the product is dangerous to health, life, or the environment, access can be denied under the SPS Agreement. However, without explicit recognition by an international agreement (usually an environmental one) the processes by which products are produced are beyond the scope of international trade institutions. The reason for this distinction is that products cross international boundaries, not the processes that create them. The processes represent choices within the sovereign discretion of each nation. A conclusion that can be drawn from this product-versus-process dichotomy is that trade, trade-related, and trade-supporting institutions rightly appear very leery about expanding their mandates to permit measures that are based on process concerns to impede international trade. Any regulation of products of biotechnology within these institutions, therefore, will not generally be sympathetic to process concerns. Process concerns and the forming of international consensus about them will have to be addressed in another forum. The institutions examined differ in their orientation and manner in which decisions are taken. From a legal perspective, the majority of the

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institutions make their decisions by consensus. Consensual decisionmaking is generally slow and requires extensive dialogue. If there are one or more dissenting or reluctant partners to an innovation, the consensus model will bog down. The lesson from the OECD is that the consensus model can work when the nature of the consensus sought is very specific and when the number of parties involved is small. Implementation of the consensusbased decision is relatively straightforward, as all parties have already signed off on the new measure. Given these general observations, there would appear to be five alternative approaches to developing an international regulatory system to manage the environmental risks of GM crops: comprehensive negotiations; case-by-case approach; industry-regulated model; detailed scientific review and consensus approach; and/or issues-based negotiations. Comprehensive Negotiations Many countries still hope that comprehensive negotiations will produce a comprehensive package of measures that protects the international environment without overly distorting international trade. There is a fair degree of evidence that this would provide the greatest certainty for both the environment and for trading nations. In the absence of a deal, uneven and incomplete international regulations could force exporters to comply with a wide range of different standards, increasing their costs but not necessarily reducing environmental risks. Conversely, the tentative BioSafety Protocol, with the precautionary principle, might enable countries to reject international trade in GM crops due to local ethical, socioeconomic, or political concerns without any recourse to a dispute settlement system. Exporters are rightly concerned that this might simply institutionalize strategic trade policies. Central to the adoption and operation of any regulatory scheme for products of biotechnology is the ability of countries to enforce and comply with regulatory requirements. It is far from evident that this capacity is currently available to all states. Any comprehensive negotiation may require efforts to develop domestic regulatory schemes and capacity before countries will be in a position to participate and to discuss their contribution to the international regulatory process. If comprehensive negotiations are sought, some consideration should be given to developing regulatory and science capacity at the ecosystem level rather than at the national level. The twelve international commodity research centers, together with the International Plant Genetic Resources Institute, the International Food Policy Research Institute, and the International Service for National Agricultural Research, are informally united via the Consultative Group for

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International Agricultural Research and could provide the scientific base and technical support for regional regulatory systems to develop. This would be a logical extension of the current efforts of those centers. Perhaps the strongest reason to attempt this approach is that it is the only available option that involves and addresses the concerns of publicinterest groups. There is such a level of confusion, distrust, and anxiety surrounding GM products that even if governments provided open access to markets many consumers might simply refuse to buy them. Somehow, domestically or internationally, consumer and citizen concerns need to be addressed. The risk of failure to achieve a comprehensive agreement is high and the complexity of negotiations obvious. This might suggest that countries should consider a portfolio of negotiations, even if only as a plan B to a comprehensive approach. Case-by-Case Approach The minimalist strategy would be to let case law at the WTO and IPPC sort out the system. The processes for handling trade disputes are, for the most part, already in place at the WTO. The benefit of this approach for countries exporting GM crops is that it would not require further negotiations, and it would likely deliver protrade science and rules-based decisions. Yet the case-by-case approach has certain drawbacks. The IPPC has not yet decided any cases. Although the WTO has not been afraid to adjudicate cases, it has not had enough time to develop adequate case law in the SPS and environmental areas to provide clear direction to governments. Neither is it clear that making decisions in such a controversial area as the regulation of trade in the products of biotechnology is in the best long-term interests of the WTO. In addition, there is the problem of unequal resources between developed and developing countries to bring a case (or several of them) before the WTO. Furthermore, it might take years, depending on the issues that member states would want to take forward to the dispute settlement system, to develop a body of law sufficient to regulate trade in GM products. Finally, even when decisions are clear and complete, states do not always comply with the WTO’s binding decisions. The Meat and Meat Products (Beef Hormones) case is simply one case in point. At the end of the day, a losing party can sidestep the consequences of a negative decision by paying compensation to the successful party. If such compensation is not forthcoming, the successful party can obtain an authorized suspension of trade benefits toward the losing party. But in the end, the importing country can block the exporter’s product and trade is not enhanced.

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Industry-Regulated Model When the international regulatory system evolves too slowly to meet industry needs, industry may itself develop a model for self-regulation and coordination. Thus, one possible outcome might be for companies or sectors of the biotechnology industry to implement self-regulation to maintain market access. There are several cases where sectors of the agrifood industry have developed systems to deliver products with higher standards than domestic or even international minimum standards. The red-meat industry in Australia, the canola industry in Canada (Gray, Malla, and Phillips, 1999; Smyth and Phillips, 2001), and the corn industry in the United States have all adopted private standards at one time or another in recent years. Over time, private standards, supplemented by Hazard Analysis Critical Control Point protocols or ISO ratings (particularly the 9000 and 14000 series) could supplement or replace public regulation. In order to address market demands, traceability, and/or separability, a new physical and organizational infrastructure might be required. Detailed Scientific Review and Consensus Approach A somewhat more proactive, government-driven strategy would be to continue active participation in consensus-based regulatory harmonization processes in an effort to establish harmonized, science-based international standards that could be recognized by the WTO. Many of the processes that could achieve this—OIE, IPPC, Codex, OECD, and bilateral initiatives— are in place and might yet achieve success. Science and rules-based processes are likely to suit exporting nations. The OECD consensus documents are wonderful examples of how progress can be made incrementally in the development of a regulatory scheme for crops. Industry standards could also be put forward as starting points for international standards. Other standards from Codex, the OIE, and the IPPC could also be used to build up a basic agreed text of acceptable measures. Bilateral talks between major producer/consumer nations are vital to arriving at standards, which can then be put forward as international standards for harmonization. Harmonization of risk assessment may in fact be illusory, but the harmonization of minimum standards and data requirements may be something that such processes could develop and then feed into the WTO. It would then be prudent for the WTO to acknowledge and respect internationally developed standards or consensus documents that regulate products of biotechnology. This, of course, already occurs with standards that come from Codex, the OIE, and the IPPC. What is not yet clear is whether the WTO will acknowledge and defer to other standards that will come from environmental or other socioeconomic initiatives from international bodies such as the BSP.

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This approach is risky. One of the biggest challenges in the current harmonization processes is the simple lack of scientific data upon which to base new standards. Furthermore, this approach depends on the negotiating countries having domestic regulations and systems. As discussed, these are often missing in many importing countries, which would limit this approach to the handful of nations with operating regulatory systems. Issues-Based Negotiations Approach Perhaps it is time to return to the past and adopt a time-tested approach to this new technology. In the early rounds of GATT negotiations the process was predominantly one of reciprocal negotiating related to key issues and key markets. A country made bids and offers with key traders to liberalize specific areas; once bilateral agreements were set, they were multilateralized through the most-favored-nation principle. In this way the negotiations focused on those trade issues that had the greatest commercial importance. This strategy would entail the three countries producing and exporting the bulk of the GM crops (the United States, Argentina, and Canada) engaging in narrowly based negotiations with the importers (the European Union and Japan) related to a handful of GM crops (soybeans, corn, cotton, and canola). The strong reciprocity of interests in continued international trade in those products among those countries should improve the likelihood of success. The main risk, which is not unique to this approach, is that issuesbased negotiations tend to focus on older issues and not on breaking concerns; trade distortions and disputes are likely. Furthermore, this approach will isolate many of the recently mobilized developing nations, which could put pressure on other forums.

CONCLUSION

The simple conclusion is that the scale of diffusion of biotechnologically modified crops is so large that governments throughout the world must consider how to more effectively regulate production and trade in GM crops. A portfolio of approaches will be needed to comprehensively address the challenges of managing the environmental effects of GM crops. Even with the successful conclusion of the BioSafety Protocol negotiations, there is not a comprehensive regulatory system to manage the environmental risks of GM organisms. Furthermore, none of the institutions has yet found an effective way of handling the concerns of public-interest groups.

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Easy answers are not apparent. Although comprehensive approaches like the BSP are tempting, they are difficult to conclude in one fell swoop. The WTO’s Dispute Settlement Body may be asked to deal with the issue of trade in GM products and thereby conclude part of the international regulatory puzzle by default, even at the risk of bringing its own credibility into question. However, by isolating the particularly trenchant trade irritants and environmental risks associated with GM products and resolving them one after another, progress on the international regulation of GM products is possible. When enough individual questions are resolved, then multilateral dialogue in the various international fora will have available a sufficient number of consensus “planks” to build an international platform that can then be developed into a free-standing, comprehensive treaty on the treatment of genetically modified products.

NOTES The authors would like to acknowledge that parts of the fifth section of this chapter represent condensed versions of the more detailed examination of the international institutions completed in Buckingham et al., 1999. We would also like to thank our research assistant, Jillian Gustafson, for her assistance in gathering data.

BIBLIOGRAPHY Buckingham, D., et al. June 1999. “The International Co-ordination of Regulatory Approaches to Products of Biotechnology.” Submitted to Agriculture and AgriFood Canada. Canadian Seed Trade Association. July 1995/June 1996. “Seed Import/Export Statistics.” Photocopy. Cape, R. E. 1986. “Future Prospects in Biotechnology: A Challenge to the United States Leadership.” In J. G. Perpich, ed., Biotechnology in Society: Private Initiatives and Public Oversight. New York: Pergamon. Churchill, Jane. 1998. “The Regulation of Agricultural Biotechnology in Canada.” Occasional Paper No. 5. Saskatoon: Center for the Studies in Agriculture, Law, and the Environment. Daniell, H. 1999a. “GM Crops: Public Perceptions and Scientific Solutions.” Trends in Plant Science 4, no. 12: 467–469. ———. 1999b. “Environmentally Friendly Approaches to Genetic Engineering.” Plant 35: 361–368. Food and Agriculture Organization (FAO). 1995. Sustainability Issues in Agricultural and Rural Development Policies, vol. 1. Rome: FAO. ———. 1998. State of the World’s Plant Genetic Resources for Food and Agriculture. Rome: FAO, appendix 1. ———. 2000. Various data collections. .

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Fuller, Robert, and Donald Buckingham. 1999. Agriculture Law in Canada. Toronto: Butterworths, chap. 7, “Government Intervention in the Production and Marketing of Agricultural Goods.” Gray, R., S. Malla, and P. Phillips. June 1999. “Transition in Agbiotech: Economics of Strategy and Policy.” Paper presented to the NEC-165 Conference, Washington, D.C., June 24–25. Hart, Frank, Bernard Vincent, and Jess Bubber. 1997. “Industry Perspectives on the UN Biosafety Discussions: Agricultural Commodities Issues.” Discussion paper prepared for the Industrial Biotechnology Association of Canada, Canadian Seed Trade Association, Canola Council of Canada, Saskatchewan Wheat Pool, Ag-West Biotech. Isaac, G., and P.W.B. Phillips. March 1999. “The Potential Impact of the Biosafety Protocol: The Agricultural Commodities Case.” Final report for the Biotechnology Unit of the Canadian Food Inspection Agency. Ottawa: CFIA Biotechnology Unit. James, C. 2000. “Global Status of Commercialized Transgenic Crops: 2000.” ISAAA Brief no. 21-2000. . Majone, G. 1990. Deregulation vs. Reregulation: Regulatory Reform in Europe and the United States. London: Pinter. ———. 1994. “Interdependence vs. Accountability: Non-Majoritarian Institutions and Democratic Government in Europe.” EUI Working Paper SPS 94/3. San Domenico di Fiesole: European University Institute. Manitoba Pool Elevators. 1997. “Identity Preserved Canola Production in Canada, 1996.” Discussion paper. Mulongoy, K. June 1997. “Different Perceptions on the International BioSafety Protocol.” Biotechnology and Development, no. 31. Organization for Economic Cooperation and Development (OECD). 2000. “Regulatory Developments in Biotechnology in OECD Member Countries.” . Smyth, S., and P. Phillips. 2001. “Competitors Co-operating: Establishing a Supply Chain to Manage Genetically Modified Canola.” International Food and Agribusiness Management Review (special issue). Strategis. 2000. Data search of Canadian exports by product and market. Industry Canada. . van den Daele, W., A. Puhler, and H. Sukopp. 1997. “Transgenic HerbicideResistant Crops: A Participatory Technology Assessment.” Summary Report for the Federal Ministry for Research and Technology. Berlin: Wissenschaftszentrum Berlin fur Sozialforschung. Wafula, J., and C. Falconi. August 28, 1998. “Agricultural Biotechnology Research Indicators: Kenya.” Photocopy of draft paper. Woolcock, S. 1998. “European and North American Approaches to Regulation: Continued Divergence?” In J. van Scherpenberg and E. Thiel, eds., Towards Rival Regionalism? US and EU Regional Regulatory Regime Building. BadenBaden: Nomos Verlagsgesellschaft, pp. 257–276. World Trade Organization. 1994. The Results of the Uruguay Round of Multilateral Trade Negotiations: The Legal Text. Geneva: GATT. ———. 1998a. Appellate Decision. EU—Measures Concerning Meat and Meat Products Hormones—Complaint by United States and Canada. AB-1997–4. Appeal from WT/DS26/R/USA and WT/DS48/R/CAN. . ———. 1998b. Appellate Decision. Australia—Measures Affecting Importation of

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Salmon—Complaint by Canada. AB-1998–5. Appeal from WT/DS18. . ———. 1999. Appellate Decision. Japan—Measures Affecting Agricultural Products—Complaint by United States. AB-1998–8. Appeal from WT/DS76. .

PART 2 State Trading Enterprises and the WTO

5 Implications for State Trading in the Next WTO Negotiations W. M. MINER

The general movement toward freer trade and investment and the integration of markets has highlighted the issues surrounding government intervention in production, distribution, imports, and exports. One important issue is the use of state monopolies and equivalent entities in trade. Although state trading has been practiced for decades by many countries, including developed, developing, and command economies, and been applied to a range of commodities and products, it is more common in agriculture. Most economies develop from an agricultural base, and governments have perceived a need to intervene both directly and indirectly in the sector to serve a range of national objectives and needs. Inevitably these interventions influence imports and exports in ways that distort markets and the volumes and prices of goods entering world trade. By the 1980s, the range of policy instruments and border measures in use had created an unacceptable state of chaos in world agricultural trade. In the Uruguay Round, governments agreed to initiate a reform process of “substantial and progressive reductions in agricultural support and protection” in order to establish “a fair and market-oriented trading system” for the sector.1 The Agreement on Agriculture that emerged from those negotiations took a first step in that direction, and World Trade Organization (WTO) member governments committed themselves to initiate further negotiations by 1999. Despite the failure of the Seattle ministerial meeting to launch a new WTO round, negotiations on agriculture (and services) began in 2000 and are ongoing. Several countries, led by the United States, intend to address state trading in the renewed agricultural negotiations. The issues being raised include the potential for single-desk buyers and sellers to circumvent 99

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access and export subsidy commitments, the impact of state trading on international prices and competition, and whether these entities operate in a commercial manner. Since these contentious questions are related to the rules and commitments of the Agreement on Agriculture as well as the conditions of competition among public and private traders, the next tranche of trade liberalization for agriculture is certain to address issues related to state trading and state trading enterprises (STEs). In order to assess the implications of renewed negotiations for STEs and to discuss various approaches that may be considered, it is useful to review the characteristics of STEs, the background to the existing rules on state trading and their relationship to competitive issues, as well as recent developments. Because price discrimination, importer practices, and competitive impacts of STEs are discussed elsewhere in this book, this chapter will focus on the development of trade rules and some options for addressing the concerns that are likely to be raised in future WTO negotiations.

THE NATURE OF STATE TRADING

Governments have established state monopoly agencies or provided exclusive authorities to parastatal enterprises to conduct trade in a wide range of goods. For industrial products, such direct interventions are often intended to develop and manage a sector of strategic and/or fiscal importance to the country. In agriculture the intervention role is usually associated with broader policy objectives: strengthening food security and improving and stabilizing commodity prices and farm incomes. The forms and functions of STEs are diverse and are usually organized under specific national legislation and authority. STEs’ purposes and operations differ among industrial and developing countries, as well as for export and import activities. Their prime functions may relate exclusively to trading but more often include domestic responsibilities with respect to production, purchases, sales, and stock management. Their operations may include grading, transport, and processing activities. In developing countries the role of STEs may extend to providing producer and consumer services. State trading is more prevalent in developing countries and economies in transition, particularly those with weak domestic markets and institutional infrastructures. However, some of the largest state trading operations are in industrial countries such as Australia and Canada. Although practiced for industrial goods, state trading is more commonly organized for agricultural commodities such as grains, dairy, and sugar. But STEs are also used for a range of processed food products, as well as tobacco, alcohol, and spirits where market organization and fiscal control rather than food security and income stabilization are important considerations. Although state trading

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plays an important role in the agricultural trade of many WTO member countries and in several of those seeking to accede to the WTO, particularly China, its use is declining. Just as other forms of direct government intervention in agriculture are being reduced or moved back from markets, the activities of STEs are often curtailed or eliminated as part of domestic policy reforms. There have been several attempts to evaluate the market influence of STEs on the basis of the degree of government control over an enterprise, the purposes of its operations, and its impact on trade. Based on notifications to the GATT/WTO, it is apparent that there are various degrees of linkage and control depending upon mandates and financial arrangements. Some STEs form part of the government administration, whereas others are separate entities with their own management and finances. Some are controlled by agricultural producers under the authority of government legislation and regulations. The STE activities notified are extremely diverse and commonly extend beyond trade functions. Exporting STEs usually operate differently compared to importing STEs, but some entities perform both functions. Using WTO notifications, some analysts have endeavored to classify STE operations using the average annual value of their exports and imports. On this basis the largest export STEs in the 1990s were the Canadian Wheat Board, the New Zealand Dairy Board, and the Australian Wheat Board, followed by other enterprises in Australia, New Zealand, South Africa, Turkey, and Israel. The largest agricultural STE importers in terms of value were the Japan Food Agency, the Indonesian Badan Urusan Logistik, and institutions in Egypt, Korea, Pakistan, Mexico, Tunisia, Morocco, and Malaysia (Ackerman and Dixit, 1999). However, not all STEs are notified to the WTO, and the operations of those reported are changing. For example, South Africa ended the authorities for its marketing boards in 1997. Several countries, including Indonesia, Egypt, and Korea, removed the monopoly powers of their institutions and opened imports to the private sector. Several studies provide extensive evidence of the reform of STE activity as part of structural adjustment programs, particularly in Latin America and Africa (Young, 1999). The trade effects of STE operations are extremely controversial. Most studies conclude that state trading entities have the potential to distort trade and to circumvent WTO rules and commitments, but there is insufficient information and transparency to demonstrate that they do so. Attempts to analyze the trade impacts of STEs using econometric analysis such as calculating tariff equivalents or export subsidy equivalents have been inconclusive. Differences exist over methodology and data, and over the difficulty of obtaining objective statistics and of quantifying the effects of complex marketing practices such as discounts, markups, price pooling, import

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administration, and multiterm contracts. There have been attempts to develop a qualitative categorization of potential trade distortion using market structure, policy instruments, and ownership or control to differentiate between types of state trading activities (Dixit and Josling, 1997). Although some analysts consider that the framework and tools to assess trade impacts of STEs are relatively well developed, most acknowledge the problems of obtaining objective information to undertake meaningful analysis and the difficulties of developing acceptable criteria for such a diverse range of enterprises and functions. This review of the characteristics of STEs and their operations demonstrates the challenges facing negotiators in the search for new or additional trade rules and disciplines. The diversity in purposes and forms of STEs and of product coverage greatly complicates the task of proposing common rules and disciplines. The limited transparency of these operations, as well as difficulties in distinguishing among government and public market roles and in assessing trade impacts, add to the challenge. However, not only do some consider that STEs are used to circumvent the trade disciplines; there is a view that government entities represent unfair competition in markets. There are complaints of dumping and other forms of anticompetitive behavior. Similar allegations are raised with respect to other multinational enterprises (MNEs). Although STEs are created for many purposes in addition to trade, it is evident that they have the potential to distort trade and competition. Because their use is more prevalent in agriculture, and negotiations on the trade effects of other forms of state involvement are proceeding, the issues of state trading will be pursued with respect to stronger WTO rules and commitments, possibly in relation to competition policy.

GATT/WTO RULES

The existing WTO rule relating to state trading enterprises (Article XVII) has its origins in discussions leading to the first General Agreement on Tariffs and Trade (GATT) after World War II. Trading activities conducted by governments were common and increasing, as were nonmarket economies. STEs were regarded as legitimate forms of business activity, but specific rules were proposed to govern their behavior in relation to competition with private entities. Consideration was also given to the need for rules to guide competitive behavior in world trade, whether public or private. Draft provisions on restrictive business practices were developed (the Havana Charter) but not adopted. Governments were formally the Contracting Parties to GATT, and it was the responsibility of each to enforce the rules and disciplines. But provisions were considered necessary

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with respect to the import and export activities of government agencies, and so Article XVII was adopted. Article XVII endeavors to discipline the behavior of a state trading enterprise, or any enterprise granted exclusive or special privileges, by requiring the government to ensure that the enterprise: • acts in a manner consistent with the general principles of nondiscriminatory treatment prescribed for government measures affecting trade by private traders; • requires that purchases or sales be made solely in accordance with commercial considerations; • affords foreign enterprises adequate opportunity to compete in accordance with customary business practices; • limits or reduces obstacles to trade caused by the state enterprise; • does not grant import protection above the bound tariff schedules under GATT Article II; and • notifies the products imported and exported, provides information on import mark-ups or resale prices, and responds to reasonable requests for information on operations, although confidential information that would prejudice legitimate commercial interests need not be disclosed.2 Interpretive notes and a limited number of GATT panel reports have clarified several aspects of these provisions, particularly the following: • marketing boards engaged in buying and selling are covered, including those laying down regulations for trade by private or parastatal entities; • different prices for sales in different markets may be charged provided this is done for commercial reasons to meet conditions of supply and demand in export markets; • imports are to be treated no less favorably by STEs than national products; and • disciplines relating to import and export restrictions include those operated by STEs.3 Although no changes were made to Article XVII in the Uruguay Round, an Understanding on its interpretation constituted part of the results. This was intended to improve the transparency of STE activities to assist in their monitoring and enforcement. The Understanding included a working definition for STEs: “governmental and non-governmental enterprises, including marketing boards, which have been granted exclusive or

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special rights or privileges, in the exercise of which they influence through their purchase or sales the level or direction of imports or exports.”4 The WTO Working Party was also established to review notification procedures and to consider their adequacy and the need for further information. An illustrative list is to be developed showing the kinds of relationships among governments and enterprises, as well as the kinds of activities they conduct. Member governments were required to notify their STEs and provide information on the kinds of activities engaged in by them. Since the Article applies to all goods, the notifications cover a range of products. With respect to agricultural activities, the United States notified the Commodity Credit Corporation. The European Union did not notify its agricultural intervention agencies and management committees, apparently because the entities were not directly involved in trade. Many agricultural STEs have been notified, including the Canadian Wheat Board, the New Zealand Dairy Board, and the Australian Wheat Board. The activities of STEs in China, Russia, Ukraine, and several other countries negotiating to join the WTO form part of their accession negotiations. Although the disciplines of Article XVII leave no doubt that the trade rules and commitments apply to STEs and parastatal enterprises, they represent obligations and guidelines to influence their behavior rather than specific constraints or commitments. Governments establish the purposes and mandates of STEs and interpret the reach of the Article for themselves. Member governments ensure that the STEs they establish act in a manner consistent with the general principles, rules, and commitments of GATT and operate in accordance with commercial considerations. They decide what enterprises to notify and what information to disclose. Presumably a government would not give exclusive privileges to an organization with respect to trade if it is to act as a normal commercial enterprise, although that is the obligation. It is the government’s responsibility to ensure that its state entities do so and comply with specific rules and commitments. Other governments may challenge STE actions and use the WTO trade remedy provisions to back up enforcement. However, since commercially confidential information can be withheld, there is limited public information available to support a complaint, and there have been few formal challenges in the GATT. Leading up to the Third WTO Ministerial Conference in Seattle, the trade effects of STEs were raised in the Committee on Agriculture in preparation for further agricultural negotiations. There are concerns that STEs may be used to circumvent WTO rules on market access and subsidies, although these entities are subject to the obligations. The principal concern expressed in relation to export STEs is their ability to use their exclusive marketing powers to compete unfairly in export markets. The allegations usually relate to differential pricing, price pooling arrangements, and the

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financial backing provided by governments. On the import side, it is argued that market access disciplines can be avoided where STEs manage the market and control imports. The limited transparency of the operations of state trading entities inhibits competitors from determining whether WTO rules and commitments are being respected. Many of these concerns and observations can be applied to the trading activities of large corporate entities, and consequently there is a relationship between state trading rules and competition policies. Many countries maintain domestic competition laws or antitrust legislation to discipline anticompetitive practices such as price fixing, market allocation, and the abuse of market power. These laws are intended to protect consumers and smaller businesses against unfair competition by larger corporations and MNEs. With the growing size and scope of international companies engaged in trade, and the increase of intercorporate trading, there is renewed interest in rules to guard against unfair competition in world markets. There have been attempts to develop international rules to prevent anticompetitive behavior dating back to the draft measures contained in the 1948 Havana Charter. Although these were not implemented, certain codes of behavior and guidelines for MNEs have been adopted by agencies in the United Nations. There are provisions in some WTO Agreements relating to competition, such as the agreements dealing with services and trade-related aspects of investment and intellectual property rights. The WTO Working Party on Trade and Competition Policy is continuing to examine these issues. State-regulated monopolies and parastatal enterprises are usually exempt from domestic competition laws. An exception is found in the European Union, where competition laws are applied to agricultural enterprises, and most marketing boards have lost their exclusive rights in that market. Some of the concerns over alleged unfair trading by STEs are similar to the practices governed by domestic competition laws. Although trade and competition policies have been treated separately in GATT/WTO negotiations to date, the issues cross over, and their full resolution may require a combination of trade and competition rules and commitments. Competition law was included in the North American Free Trade Agreement (NAFTA), but the commitments are limited to actions to promote effective competition law enforcement within the free trade area. NAFTA does not prohibit member governments from establishing state monopolies, but each government is responsible to ensure that its entities act in a manner not inconsistent with NAFTA. No decisions were taken in Seattle on further negotiations, but a draft text on agriculture was close to agreement. Although it did not contain any specific reference to STEs, language in the draft texts dealing with other issues included a commitment to examine whether GATT Article XVII and

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the 1994 Understanding on its interpretation require further elaboration. The interaction between trade and competition policy was among the other subjects for negotiation identified in the draft text. Further work relating to anticompetitive practices of enterprises was proposed with a view to possible future negotiations. The draft texts have no legal standing, and it is left to the WTO General Council to determine how the agriculture negotiations will proceed.

NEGOTIATING APPROACHES

Future WTO negotiations will address concerns over the impact of state enterprises on trade, at least with respect to agriculture. More comprehensive negotiations might deal with both industrial and agriculture goods and focus on the existing Article XVII and the Understanding on its interpretation. Looking farther down the road, governments might enter negotiations on trade and competition policy and deal with some aspects of state trading in new disciplines, covering the trade behavior of both state and private enterprises. In an ideal world, all these approaches would proceed together. Given the status of discussions in relation to a new round, and the setback in Seattle, it is likely that STEs will be raised first in the agricultural negotiations. Although some countries may pursue a ban on the use of state monopolies and parastatal entities with exclusive trading powers in agricultural trade, this would not be acceptable to many WTO members—including Canada. Not only would this action raise sensitive issues of national sovereignty; indeed most formal trade agreements (including GATT and NAFTA) recognize the right to establish and operate state monopolies. However, governments are obliged to notify STE activities and discuss their operations in relation to existing trade rules and commitments. They must respond to concerns over STE activities that may limit or distort trade. In this connection they must provide nonconfidential information, and they may be prepared to discuss allegations of anticompetitive behavior, unfair pricing practices, and dumping, although this would probably be contingent on including similar practices by private corporations. The most likely scenario is to pursue STE concerns as part of agricultural negotiations for a substantial improvement in market access and the elimination of export subsidies. For example, some governments may be reluctant to lower tariffs or to remove or expand tariff rate quotas unless comparable actions are taken on STE importers. This implies that sufficient competition or transparency exists to demonstrate that the STE is meeting import commitments and not abusing its market powers with respect to foreign competitors. A similar situation prevails as to monopoly exporters. The European Union has already linked negotiations on reducing or remov-

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ing export subsidies to disciplines on the use of single-desk exporters and export credits. In the expectation that a comprehensive WTO negotiation will eventually proceed, there may be further negotiations on state trading in relation to Article XVII. Several aspects of the current Article continue to cause concern, including the definition of the enterprises to be covered; the measures that constitute the granting of exclusive or special privileges; and what is meant by “commercial considerations” and “legitimate commercial interests.” There are persistent concerns over transparency and the provision of sufficient information in relation to commercial dealings to monitor STE behavior. Regardless of the nature of STE negotiations, the transparency issue is likely to be raised and, no doubt, linked to demands for equivalent information and reporting requirements in relation to the operations of MNEs and other competitive traders. This discussion leads back to questions of competition policy. Should negotiations on trade and competition policy form part of a future comprehensive round, there may be consideration of ways to improve competition in agricultural markets. Competition issues arise not only with respect to STE trade but also in relation to importing and exporting by MNEs. The increasing concentration of firms in input supply markets, processing, and distribution are giving rise to concerns over the contestability of markets and the need for additional international rules. In addition to some provisions on competition policies in other WTO agreements previously mentioned, WTO rules (Article VI) seek to discipline domestic antidumping practices (MacLaren and Josling, 1999). Strong pressures were placed on the United States by many developing and developed countries at the Seattle ministerial meeting to strengthen these disciplines. It is unlikely that negotiations in this complex area will proceed ahead of agricultural negotiations. Although these issues may be raised, it is probable that any new disciplines considering the contestability of agricultural markets will be directly linked to stronger commitments on access and export subsidies.

CONCLUSION

The impact of STEs on trade will be considered in the WTO agricultural negotiations that began in 2000. State enterprises and parastatal organizations are already subject to WTO rules and commitments, but these have proved inadequate in managing the complaints and allegations of the abuse of market powers by monopoly importers and exporters. Among the approaches taken in these negotiations may be a proposal to ban the use of state trading. This would not be acceptable given the con-

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tinued importance attached by many countries to maintaining these operations, the lack of agreement over their trade effects, and sensitivities over issues of sovereignty. New or strengthened disciplines based on WTO Article XVII could emerge from comprehensive negotiations, but these have been delayed, and as of yet there is no consensus that further disciplines are needed. There are pressures to improve the transparency of STE operations to ensure that trade disciplines are respected and marketing powers are not abused. However, adequate disclosure of trading operations may hinge on developing similar requirements for private corporations. Full resolution of these issues may require complementary actions in the area of competition policies. At this time there is no certainty that general negotiations will take place to deal with Article XVII on state enterprises or issues relating to the contestability of markets. The negotiations for a substantial improvement in market access for agricultural products and the elimination of trade-distorting subsidies will bring forward the concerns over state trading. On the import side, these are likely to deal with STE involvement in the administration of tariff rate quotas, as well as other measures affecting access such as domestic marketing and price-support activities. For exporting STEs the issues of export subsidies, export credits, pricing behavior, and other competitive practices will be raised. There will be strong pressures to improve notification requirements, monitoring, and the provision of commercial information. Calls for improved transparency are likely to extend to the business practices of private competitors. The full resolution of these complex issues is likely to require general multilateral negotiations on existing WTO rules on state enterprises and, ultimately, further disciplines on the competitive behavior of both multinational and state enterprises. But for agriculture, the STE issues will have emerged much sooner in the negotiations that were due to begin in 2000.

NOTES 1. World Trade Organization, Agreement on Agriculture. 2. Article XVII, GATT Agreement. 3. Analytical Index of the GATT, pp. 438–452. 4. WTO, Understanding of the Interpretation of Article XVII of GATT. MTN/FA 11-AIA-1(b). Geneva.

BIBLIOGRAPHY Ackerman, K., and P. Dixit. October 1999. An Introduction to State Trading in Agriculture. Washington, D.C.: U.S. Department of Agriculture.

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Canadian Agricultural Economics Society and the Western Agricultural Economics Association. Joint annual meeting, July 11–14, 1999, Fargo, N.D. Dixit, P., and T. Josling. July 1997. “State Trading in Agriculture: An Analytical Framework.” International Agricultural Trade Research Consortium, Working Paper No. 97-4, Washington, D.C. MacLaren, D., and T. Josling. July 1999. “Competition Policy and International Trade.” International Agricultural Trade Research Consortium, Washington, D.C. Petersmann, U. E. 1995. Analytical Index of the GATT. Geneva: WTO Secretariat, pp. 438–452. World Trade Organization. 1994. Uruguay Round Final Act (the GATT Agreement). Geneva: WTO. ———. 1994. Uruguay Round Final Act (the Agreement on Agriculture). Geneva: WTO. ———. 1994. Understanding of the Interpretation of Article XVII of the GATT (Marrakesh agreement establishing the WTO). ———. 1999. “Draft Ministerial Text.” WTO Ministerial Conference, Seattle, December. Young, L. July 1999. “Prevalence and Reform of State Trading Importers.” Joint meetings of the Canadian Agricultural Economics Society and the Western Agricultural Economics Association, Fargo, N.D.

6 State Trading Enterprises, Price Discrimination, and the WTO TROY SCHMITZ AND ANDREW SCHMITZ

In international trade circles there is little agreement on the functioning and efficiency of state trading enterprises (STEs). Unfortunately, the literature on STEs is very limited. Empirical studies on efficiency aspects of STEs are almost nonexistent, yet STEs come into focus in many arenas. In countries in which they operate, they are both praised and criticized by producers, consumers, and governments. They are often criticized by countries that compete with STEs for export markets. They are also criticized by the World Trade Organization (WTO) and are increasingly being investigated by the WTO. This chapter focuses primarily on export-oriented STEs. Attention is paid to international trade in wheat and barley, for which STEs play a major role. We first define STEs and discuss various categories for classifying STEs. We then present empirical evidence on the effects of a major STE— the Canadian Wheat Board (CWB)—in terms of its ability to price-discriminate and earn price premiums. We also discuss STEs in the context of the WTO. The CWB is then compared to another major STE: the Australian Sugar Corporation (ASC). We conclude with a discussion of such issues as export dumping in the context of STEs.

WHAT ARE STATE TRADING ENTERPRISES?

There are several definitions of STEs (see Dixit and Josling, 1997). For example, “STEs are state-sanctioned institutions [i.e., state-authorized institutions] and associated activities that influence the quantities, prices or the direction of trade in internationally traded goods” (Fulton, Larue, and Veeman, 1999; Veeman, Fulton, and Larue, 1998; Alston, Gray, and Sumner, 111

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1994). Organizations that are given special rights and powers by legislation fall into the above definition. Another definition, used by the General Accounting Office (GAO, 1996), that was agreed upon as a result of the Uruguay Round was “governmental and nongovernmental enterprises, including marketing boards, which have been granted exclusive or special rights or privileges, including statutory or constitutional powers, in the exercise of which they influence, through their purchases or sales, the level or direction of imports or exports.” WTO member countries are required to report any state-trading activities to the WTO. The largest export-oriented STEs from WTO member countries are the Canadian Wheat Board with an average annual export value of $3.2 billion, the New Zealand Dairy Board (NZDB) with an average annual export value of $1.8 billion, the Australian Wheat Board (AWB) with an average annual export value of $1.4 billion, and the Queensland Sugar Corporation (QSC) with an average annual export value of $925 million (Ackerman and Dixit, 1999). Other large STEs that deal in grain include the China National Cereals, Oils, and Foodstuffs Import and Export Corporation (COFCO), which is not a member of the WTO (which controls both imports and exports); the Japanese Food Agency (JFA); Badan Urusan Logistik (BULOG) in Indonesia, which control imports; and the Commodity Credit Corporation (CCC) in the United States. The European Union (EU) is also a state trader through its use of export restitution payments, that is, export subsidies. Consequently, there are both STE exporters and STE importers that affect agricultural trade. K. Ackerman and P. Dixit (1999) created a classification scheme for STEs. The system is based on each STE’s supposed ability to control domestic markets and external trade. The following four classifications are directly from Ackerman and Dixit: Type I: A Type I STE operates without any controls on either domestic markets or international trade. In other words, the STE is competing with private firms on a level playing field. Clearly Type I STEs have little, if any, capacity to affect the market, and their potential to distort trade is negligible. Type II: A Type II STE operates without any restrictions on external trade but maintains control over the domestic market. Market controls may take the form of price regulation, supply control, procurement, and domestic marketing. Domestic consumers (producers) can resort to international markets for purchases (or sales), suggesting that domestic controls without trade restrictions do not significantly violate competitive norms. The potential to distort trade for a Type II state trader is low. Type III: A Type III STE competes with private firms to procure and sell domestic production in the home market, but maintains quantitative controls on external trade. These STEs have the potential to moderately distort trade, but the actual extent of distortions depend on factors such as the extent of international market power, the range of exclusive privileges

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available to the firm, the policy objectives of the STE, and the importance (share) of external trade in domestic consumption and production. Type IV: A Type IV STE imposes quantitative restrictions on imports or exports and maintains control over the domestic market as well. These STEs are more able to distort trade than the other three groups. But, whether a Type IV STE distorts trade much more than other types of STEs depends on factors that influence the magnitude of the tariff/subsidy equivalents, similar to those indicated for Type III STEs. Thus, a Type IV STE that has a small share of the global market may distort trade less than a Type III STE that is a big player in world trade.

Ackerman and Dixit (1999) use the above scheme to classify different STEs into one of four types. They classify the CWB as Type IV for both wheat and barley. The other major export-oriented STEs that are members of the WTO (including the Australian Wheat Board, the New Zealand Dairy Board, and the Queensland Sugar Corporation) are all assigned to Type III. The JFA is classified as Type III for rice and Type IV for barley and wheat. COFCO is considered Type IV in all import and export commodities that it controls. Finally, as Ackerman and Dixit (1999) write, The CCC would vacillate between a Type I and Type II classification since its control over domestic markets and trade varies by programs authorized each year, by commodity, and by market conditions. Since the major farm policy reforms of 1996, Type I would be the most appropriate classification for the CCC.

THE SCOPE OF STATE TRADING IN WHEAT AND BARLEY

Wheat is often cited as a commodity for which state trading plays a major role. The European Union, Canada, Australia, and the United States are all state trading exporters of wheat. Together these countries represent more than 80 percent of the world’s wheat export market. Unlike Canada and Australia, the European Union and the United States do not sell wheat through single-desk, monopoly export boards. Multinationals, some located in the United States, exist alongside STEs. During 1990–1994, more than 90 percent of total wheat trade involved STEs. The CWB and the AWB are government monopoly marketing boards for Canadian and Australian exports of wheat. These boards are not policy arms of the government. In the United States, however, the CCC is a policy arm of the U.S. government. The CCC operates as an STE when it purchases U.S. grain and sells or dispenses U.S. grain, especially with the aid of the Export Enhancement Program (EEP). (The role of the CCC as a state trading enterprise is documented in Schmitz et al., 1999, and Rossmiller and Sorenson, 1991.) Among the state trading importers of wheat are the

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STATE TRADING ENTERPRISES AND THE WTO

JFA, BULOG, Iran, Algeria, Egypt, and COFCO. The use of EEP and EU restitution payments influences the pricing decisions of both STEs and private traders. The largest state trading importers during the period 1994–1997 were China, Egypt, and Japan; the largest exporters were Canada, Australia, and the European Union. Canada exports wheat to several STE importers (Schmitz and Furtan, 2000; see Figure 6.1), but so does the United States. Of the top seven economies that imported U.S. wheat from 1994 to 1996 (Figure 6.2), STEs accounted for roughly 80 percent of those imports. Therefore, the level of involvement of STEs purchasing wheat from the United States appears to be similar to the STE involvement in purchasing wheat from Canada. The high percentage of STEs in the U.S. wheat market is surprising, given that country’s disparaging view of state trading.

PRICE DISCRIMINATION AND THE CWB

As Ackerman and Dixit (1999) allege, the CWB is a Type IV STE exporter and has the potential to distort trade through price discrimination. What is the evidence? To test for price discrimination in feed barley markets, one research team (Brooks and Schmitz, 1999) used CWB feed barley daily

Figure 6.1 Top Canadian Wheat Export Markets, Average, 1994–1997

Indonesia 6.9%

Iran 11.6%

Japan 9.1%

United States 7.8% China 21.6%

South Korea 4.4% Brazil 5.7% Colombia 2.9% Mexico 3.8% Others 26.2%

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PRICE DISCRIMINATION

Figure 6.2 Top U.S. Wheat Export Markets, 1994–1996

Japan 18.2%

S. Korea 8.5% Pakistan 9.4%

China 19.9%

Philippines 10.5% Egypt 25.9%

Former FSU Soviet Union

7.6%

contract sales data for sales made via Canada’s ports (1980/81–1994/95) on the West Coast. Sales were aggregated on a free-on-board (f.o.b.) vessel basis into Japan, the United States, and the rest of the world (ROW). A mean difference test was conducted to examine whether statistically significant differences existed among the prices in these markets. Brooks and Schmitz (1999) found statistically significant differences among the f.o.b. contract prices obtained by the CWB in these markets (Table 6.1). Thus, the CWB has been able to price discriminate, allowing it to capture a higher price than would otherwise exist if there were multiple sellers of western Canadian barley. The difference between CWB contract prices for Japan and the United States, during the 1980/81 through 1994/95 period, was significant, averaging CDN$25.29 per tonne. The difference between CWB contract prices for the U.S. and ROW markets was also significant, with an average price difference of CDN$4.46 per tonne. The difference between CWB contract prices to Japan and to the ROW was significant and averaged CDN$20.73 per tonne. A. Schmitz et al. (1997) calculated the premiums earned on sales of both feed and malting barley. The difference between the effectiveness of the CWB compared to multiple sellers was calculated for each year from the period 1985/86 through 1994/95. The returns from CWB single-desk selling were found to be significantly higher than if the CWB would have

116 Table 6.1

STATE TRADING ENTERPRISES AND THE WTO

Mean Difference Test of CWB Prices for Feed Barley, 1980/81– 1994/95 (in Canadian $ per metric tonne)

Time Period 1980/81–1994/95 1980/81–1984/85 1985/86–1994/95

Japan–U.S. 25.29b 1.46 26.84b

U.S.–ROWa 4.46b 4.32 4.47b

Japan–ROW 20.73b 13.99b 23.70b

Source: Condensed from H. Brooks and T. Schmitz, 1999. Notes: a. Rest of world (ROW). b. Statistically different from zero with a probability greater than 95 percent.

been replaced by multiple sellers. From 1985/86 through 1994/95, the CWB earned an additional average return of CDN$72 million annually for Canadian barley producers, over the multiple-seller scenario. The Meyers Strategy Group (MSG, 1996) evaluated the benefits of the single-desk marketing of barley. Their report defines three types of premiums: (1) price discrimination or discounts; (2) competitor price or discounts; and (3) market restriction or discounts. MSG found that single-desk marketing delivered benefits to barley growers through its single-desk market power. The single-desk marketing strategy had a positive impact in terms of quality control, customer service, and market development—the gains exceeded CDN$10 per tonne. The MSG study indicated that in relation to export markets barley producers benefited from the export disciplines exerted by the single-desk marketing. Similarly, in terms of the domestic malting barley market, the single-desk marketing provided benefits to both barley producers and maltsters. The study by A. Schmitz et al. (1993) on the impact of a Continental Barley Market (CBM) found that the CWB earned significant premiums on malting barley over its U.S. counterpart. The researchers concluded that a CBM would reduce total barley revenue for producers by more than CDN$20 million annually. The majority of this loss would occur because of reduced premiums for malting barley. For malting barley, Canadian producers earned a significant premium over U.S. producers. D. Kraft et al. (1996) compared the actual prices the CWB received for wheat in export markets to prices obtainable in a multiple-agent setting. The average price premium from 1980/81 through 1984/85 was CDN$14.80 per tonne, and the premium from 1985/86 through 1993/94 was CDN$23.41 per tonne (Table 6.2). Premiums were also obtained for the sale of Numbers 2 and 3 Canadian Western Red Spring (CWRS) wheat.

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Table 6.2

Canadian Wheat Board’s Premium on No. 1 CWRS Export Sales, 1980/81–1993/94

Pool Year 1980/81 1981/82 1982/83 1983/84 1984/85 Average (1980/81–1984/85) 1985/86 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 Average (1985/86–1993/94)

CDN$/tonnea 22.50 16.26 13.85 10.88 10.51 14.80 25.30 18.47 19.96 31.23 21.81 13.34 12.42 33.85 34.34 23.41

Source: Kraft et al., 1996. Note: a. Assumes the Canadian prices realized by multiple sellers equal those quoted for comparable wheat in the United States, the European Union, and Argentina.

There is other evidence to show that the CWB price discriminates in international wheat markets, which underscores the findings by Kraft et al. (1996) that the CWB earns price premiums on export sales. For example, within a given price period, prices charged to various countries differed by as much as CDN$40 per tonne (Table 6.3). Figure 6.2 above also provides insights into whether or not price discrimination occurs in the marketing of wheat. As illustrated in Figure 6.2, major buyers of U.S. wheat are not Canadian customers and vice versa. Politics plays a major role in the wheat economy. By using a competitive spatial model (Schmitz, 1968) it would be impossible to derive the market shares for U.S. exports associated with the major importers that are shown in Figure 6.2. Numerous constraints would have to be added to the spatial equilibrium model to depict the actual trade patterns in grains. W. Wilson (1989) examined premiums paid for Canadian wheat sold in the export market. He examined quality characteristics as well as the importance of the source of supply. Concerning quality, Wilson (1989)

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Table 6.3

Canadian Wheat Board Daily Export Sales of CWRS for Selected Months, 1995

Date

Destination

10/12/95 10/12/95 10/18/95 10/18/95 10/18/95 10/19/95 11/09/95 11/09/95 11/30/95 12/01/95

Japan FAa Peru Colombia Colombia Thailand Japan FA Japan FA Colombia Japan non-FA Thailand

Begin Date

End Date

Protein Percent

Price (CDN$ per tonne)

12/01/95 11/10/95 02/01/95 03/25/96 11/10/95 12/01/95 01/01/96 12/15/95 01/01/96 01/01/96

01/10/96 11/30/95 02/20/96 04/15/96 11/30/95 01/10/96 01/31/96 01/10/96 01/31/96 01/31/96

12.5 12.5 12.0 12.0 13.0 12.5 12.5 12.5 12.5 13.0

315.70 273.93 279.30 281.92 279.40 320.78 325.31 277.37 330.12 291.90

Source: Schmitz, 1996. Note: a. FA = Food Agency.

states: “The incidence of dockage in Canada is similar at the farm level to that in the northern United States. However, due to regulations in the marketing system, all wheat is cleaned at the point to export.” From 1983/84 through 1986/87, the levels of nonmillable material were constant from each source, but there was substantially more nonmillable material in Japanese imports from the United States when compared to Japanese imports from Canada. According to Wilson (1989), since 1973/74 several distinct trends have resulted in price differentials between wheat of different classes and origins. The stronger, higher-protein wheat prices increased relative to Hard Red Winter (HRW) Ordinary. In 1974/75, the price ratio for CWRS increased to 116 percent and 121 percent. Since then, it has increased to 125 percent. A similar pattern occurred with the Dark Northern Spring (DNS) wheat variety. Colin Carter was one of the first economists to compute the price premiums earned by the CWB. Carter (1992), in his analysis of price premiums earned by the CWB on wheat exports to China and the Soviet Union, reached the following conclusion: A cost-minimization model cannot explain the pattern of Chinese and Soviet wheat imports. A diversification model helps explain why Canada has an abnormally high market share in the Soviet Union and China and why Canada’s wheat commands a higher price in these two markets compared to wheat originating in Australia and the United States.

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PRICE DISCRIMINATION

THE CWB AND EEP

The introduction of EEP and the resulting feed barley trade war between the United States and the European Union increased the degree to which the CWB was able to price discriminate. In the study by Brooks and Schmitz (1999), the average difference between the CWB feed barley selling price to Japan and the United States rose from CDN$1.46 per tonne in the early 1980s to CDN$26.84 per tonne during the trade war. Similarly, the average difference between Japan and the ROW increased from CDN$13.91 per tonne in the early 1980s to CDN$23.74 per tonne. Similar conclusions were reached by A. Schmitz et al. (1997). Stephen Haley et al. (1992) found that EEP increased U.S. domestic feed barley price by US$6 to US$11 per tonne in 1986/87 and, at the same time, lowered Australian, Canadian, and EU export barley prices by 5, 3, and 2 percent, respectively. A similar result was found for the following year. EEP increased U.S. prices and quantity of production, and lowered the world price faced by competitors (Figure 6.3). Given the large quantities affected by these price changes, both within the United States and internationally, EEP likely had a larger production and trade impact than did the activities associated with the CWB. EEP was in place in the United States from 1985 to 1994; it had a significant impact on the size of the premium the CWB was able to extract from the market. Kraft et al. (1996) conclude that “the ability of a single-

Figure 6.3

EEP Wheat Subsidies and U.S. and Canadian Wheat Price Spreads

80

80

60

60

40

20

20

Cdn$ per tonne

CDN$ per tonne

40

0

0

–20

-20

–40

-40

–60

-60

1988/99

1989/90

1990/91 Spread

1991/92

1992/93

1993/94 EEP subsidy

1994/95

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STATE TRADING ENTERPRISES AND THE WTO

desk seller to keep prices from falling to the lowest marginal market price is significant.” Without the CWB, all Canadian wheat prices would drop to the price level in the EEP market. Between 1985 and 1994, Canadian producers would have lost an average of between CDN$13.58 per tonne and CDN$35.91 per tonne for 1 CWRS, 2 CWRS, and 3 CWRS exports. If the prices were driven down to reflect the worst EEP markets, the loss to Canadian producers in value received for their wheat would have reached CDN$53.77 per tonne. Approximately one-half of all CWB exports were to commercial markets. Assuming all these commercial sales would be negotiated at prices reflecting an EEP subsidy, the prices for 1 CWRS, 2 CWRS, and 3 CWRS realized by multiple agents would be reduced by an average of CDN$28.47 per tonne for wheat sold in the average EEP market and CDN$36.41 per tonne for wheat sold in the maximum EEP market. The CWB was able, through strategic marketing, to sell more grain in the commercial markets and less grain in the EEP markets, thus avoiding some of the losses that would occur because of the export subsidy (that is, EEP). As Kraft et al. (1996) conclude, “A single-desk seller like the CWB is an effective marketing structure when other countries introduce export subsidies like EEP and the EU export restitution.” B. Goodwin and V. Smith (1995) found that the CWB pursued a worldwide pricing strategy that involved explicit price discrimination. For example, the CWB charged higher prices to buyers in Canada, the United States, and Asia and lower prices in markets such as Brazil, the Philippines, China, and South Africa. As shown earlier, it is not surprising that the CWB charges different prices in different markets in the presence of EEP. Goodwin and Smith allege, however, that the CWB does not have the market power to set world prices. But in the presence of EEP, the CWB does not need market power in order to price-discriminate, because EEP essentially allows the CWB to charge different prices in different markets. Hence, the CWB can capture significant price premiums over a multipleseller situation. (Note that in a truly competitive market, with government policy absent, price discrimination requires market power.) Theory suggests that in response to EEP, the CWB should have increased its sales of durum to the United States, and the CWB did just that. The CWB adjusted prices to account for EEP. (The growth in Canadian exports of durum to the United States is given in Table 6.4.) Prior to EEP, Canada’s exports of durum to the United States were relatively small.

THE CWB AND GOVERNMENT POLICY

Critics of the CWB system contend that CWB activities create trade distortions through unfair trade practices, putting U.S. wheat producers at a

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PRICE DISCRIMINATION

Table 6.4

Crop Yeara 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95

Canadian Bulk Durum Exports: Total and to the United States, 1986/87–1994/95

Canadian Total (1,000 tonnes)

United States (1,000 tonnes)

Percent to United States

1,957 2,753 2,003 2,838 3,224 3,085 2,260 2,877 3,997

62 202 186 218 370 421 404 554 293

3.2 7.3 9.3 7.7 11.5 13.6 17.9 19.3 7.3

Note: a. August/July crop year. Source: CWB 1994–1995 Annual Report, table 13, p. 62.

disadvantage. Critics view CWB practices in the same light as EU export subsidies, in that both provide an unfair advantage by increasing market share. The European Union uses subsidies to sell in foreign markets at prices well below those received by EU producers. High wheat price supports for producers in major importing countries such as China and Japan also cut into U.S. export markets. Critics often forget that STEs such as the CWB, COFCO, and JFA may have little or nothing to do with setting the parameters of government price and income policies, such as producer price supports, export subsidies, deficiency payments, and input subsidies. In fact, government policies are often the source of trade distortions. In many cases, domestic government programs result in larger trade distortions than those caused by single-desk sellers or single-desk buyers. Critical attention is often unfairly directed toward the activities of STEs when the focus should be on domestic government policy. We emphasize that the CWB, with a few exceptions, does not set agricultural policy and does not administer agricultural programs. The CWB’s major activity is to market wheat and barley grown by western Canadian farmers. The CWB influences transportation policy and the movement of prairie grain to port, but the impact is minor relative to many Canadian agricultural policies in the past. The trade-distorting effects of the CWB pale in comparison to the trade-distorting effects of previous Canadian government programs, all of which have been eliminated for the most part. One such program—the Crow Benefit—was eliminated in 1995; it was clearly trade-distorting.

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Still, critics argue that: (1) the CWB, through initial price guarantees, subsidizes the farmer; (2) the setting of initial prices distorts production; and (3) the CWB has been used by the Canadian government to implement the U.K. wheat agreement, providing credit sales to foreign markets such as Russia and Poland and blocking sales to the United States. Concerning the criticism that the CWB subsidizes farmers through guaranteed initial payments, for the wheat pool account a deficit occurred only twice from 1980/81 through 1996/97 (Figure 6.4). For durum wheat, the deficit occurred only once for the 1990/91 crop year. Thus, because of their infrequency, it would be difficult to argue that past deficits in the CWB pool account have created major trade distortions. The second point—that the CWB causes distortions through the setting of initial prices—has no validity, since initial prices are set after planting, not prior to seeding. Finally, the CWB did not set the government policy regarding the U.K. wheat agreement; rather, the U.K. wheat agreement was determined by the government of Canada. The weak link between the CWB and Canadian agricultural policy exists in other countries as well. COFCO and the JFA, for example, are two major STEs involved in buying wheat from major exporters. Both singledesk importers are essentially state-owned and state-run economic enterprises, although they have not come under the same scrutiny as the CWB. It is the Chinese and Japanese governments that set and implement agricultural policies, which have been highly trade-distorting. Regardless, given government pricing policies, COFCO and JFA import a fixed amount of product, set by government quota, at the lowest possible price. The operations of COFCO may increase internal price instability (Carter et al., 1998), Figure 6.4

Wheat Pool Deficits, 1980/81–1994/95

PRICE DISCRIMINATION

123

because, at times, the price at which they import is below their internal farm price. Importing below the local farm price generates significant import revenue for COFCO and JFA that is used, in turn, to support domestic prices. Nonetheless, these price support dimensions of agricultural policy are not set and are not influenced significantly by these STEs; rather, they are in the hands of government. Governmental agricultural policy impacts trade much more than do the activities of STEs.

THE CWB AND THE WTO

The WTO has raised some important questions regarding STEs. What activities fall within the legal definition of state trading? What criteria govern STEs? Do STEs distort trade? Does the WTO distinguish between hard price discrimination (charging different buyers different prices without the use of direct government subsidies) and soft price discrimination (charging different buyers different prices with the use of direct government subsidies)? The WTO lists activities that define the scope of state trading. A state organization involved in any of the activities in the following list (taken directly from a WTO notification) falls within the definition as a state trader. Additionally, several WTO member countries are interested in placing disciplines on state trading activities through the WTO Working Party on State Trading. (a) Purchase of all or a significant percentage of domestic production, (b) Intervention purchases and sales (based on predetermined floor and ceiling prices), (c) Involvement in support schemes for domestic production, (d) Administration of marketing arrangements, (e) Import operations (possible monopoly on imports), (f) Export operations (possible monopoly on exports), (g) Domestic distribution of national production (possible monopoly), (h) Domestic distribution of imports (possible monopoly), (i) Quality control of domestic production (for export), (j) Storage, shipping, handling, processing, packaging, insuring and other export-related activities, (k) Credit guarantees (or other assistance) for producers and national consumption, (l) Marketing activities (promotion activities for exports and national consumption), (m) Maintenance of emergency stocks (national defense preparedness or implementation of food security programs), (n) Granting of licenses (for import, export or production), (o) Negotiation of long-term bilateral contracts for exports, (p) Implementation of quantitative restrictions (on imports/exports), (q) Implementation of bilateral aid agreements.

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STATE TRADING ENTERPRISES AND THE WTO

STEs must meet three criteria in order to avoid violating WTO rules. First, an STE must be nondiscriminatory with respect to trade, that is, different prices may be charged for market reasons but not for political reasons. If state traders have a large degree of market influence, they may be able to buy, or sell, the same product from, or to, different markets at different prices. Although this type of activity may reflect a trade distortion (different prices and quantities than would prevail under perfect competition), it does not necessarily contravene international trade regulations. Price discrimination, provided it is only for commercial purposes, is not a WTO violation. Second, the WTO requires that the use of quantitative restrictions be limited. And third, information about the STE and its operations is to be reported regularly to the WTO through the notification process. Even though the practices of STEs may create distortions compared to perfectly competitive trade, the WTO does not necessarily object to these activities. The WTO’s views on hard price discrimination, as practiced by STEs, seem counter to its views on import duties, which are often highly trade-distorting. In other words, prices and quantities are significantly different from those that would exist in a free market. The WTO generally takes a disparaging view of export dumping, that is, charging lower prices abroad than in the home market. One of the sources of confusion over WTO rules is the WTO’s interpretation and enforcement of antidumping rules. Generally, antidumping rules are applied by a country against one of its major trading partners, for example, the wheat-dumping case leveled by the United States against Canada (Alston, Gray, and Sumner, 1994). To apply antidumping rules to the world grain trade is another matter. Historically, the United States and the European Union, through restitution payments and EEP, have violated antidumping rules. Both were selling wheat abroad below the cost of production and charging prices below domestic levels. In addition, because of their use of subsidies, the United States and European Union were practicing soft price discrimination (Schmitz and Gray, 1992). The use of soft price discrimination can be in violation of WTO rules if certain subsidy levels are exceeded. How does the CWB measure up to the three criteria noted above? In terms of the first, the CWB is permitted to practice price discrimination, that is, charge one price in one market that is different from the price charged in another market, as long as the CWB does so without government subsidies. In other words, the CWB is not in violation of WTO rules if it practices hard price discrimination. Conversely, soft price discrimination, whereby government subsidies are used beyond certain levels, is in violation of WTO rules regarding export subsidies. The CWB practices hard price discrimination. Yet such practice is no basis for WTO discipline. Kraft et al. (1996), A. Schmitz et al. (1997), and Brooks and Schmitz (1999) clearly demonstrate that the CWB price-

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125

discriminates in both the wheat and the barley markets; but it does so without government subsidies. (A possible exception would be occasional pool account deficits.) The second criterion, on quantitative restrictions, is difficult to interpret. Limiting sales of wheat to premium markets and increasing sales to elastic, nonpremium markets are consistent with the practice of price discrimination. Thus, if the CWB were replaced by multinational grain companies (MGCs), Canadian wheat exports to the United States would be expected to increase (Carter and Loyns, 1996). By 1998, Canada had no quantitative import restrictions for wheat, durum, or barley. The CWB meets the third criterion because it reports its trading activities to the WTO at regular intervals. To further explore the implications of WTO regulations on the CWB, consider the following. Suppose that the CWB can obtain additional returns for producers through price discrimination. This is clearly allowed under the WTO, even though price discrimination by the CWB may be trade-distorting. We compare this scenario to the Carter and Loyns (1996) case in which the CWB taxes producers as a result of market inefficiencies. This is essentially what the U.S. Foreign Agriculture Service argues when it compares Canadian c.i.f. (cost, insurance, and freight) prices with those of the United States, claiming that the CWB undercuts the competitors in some markets. Is this tax trade-distorting? To our knowledge, the WTO has not dealt with taxes imposed by export STEs. Even so, we show below that neither price premiums nor taxes give rise to major trade distortions. Table 6.5 presents results from the “CWB premiums” calculated by Kraft et al. (1996) for wheat and Schmitz et al. (1997) for feed barley and malting barley, compared with the “CWB costs” calculated by Carter and Loyns (1996). Using the Kraft et al. (1996) results, Canadian wheat production would have increased by 1.45 million metric tons (mmt) because of the premiums earned through price discrimination, increasing Canadian exports by 1.1 percent of world trade. In contrast, the higher costs reported by Carter and Loyns would have decreased production by 3.29 mmt, dropping Canadian exports by 2.5 percent of world trade. For feed and malting barley, using the A. Schmitz et al. (1997) results, Canadian barley production would increase 0.12 mmt and 0.1 mmt, respectively. The resulting increase in exports represents 2.7 percent of the world malt and feed barley trade. To compare the trade impact, note that if the export demand elasticity for feed barley is –20 (A. Schmitz et al., 1997), then increased Canadian exports of 0.2 percent would have a negligible price effect. If the full shift in Canadian production is reflected in the world market, as shown in Table 6.5, then the trade-distorting effects for barley and wheat are less than 3 percent over the competitive equilibrium. If both premiums and taxes are in effect, then the trade-distorting effects are roughly 1

126 Table 6.5

STATE TRADING ENTERPRISES AND THE WTO

Impacts of the CWB on Canadian Production, World Price, and Trade

Scenario CWB premiums CWB costs

Crop Wheat Malt barley Feed barley Wheat Malt barley Feed barley

Change in Supply Change Canadian Change in Exports in World as % Canada Price of World (mmt) (CDN$/mmt) Trade 1.45 0.10 0.12 (3.29) (0.11) (1.24)

(0.04) (0.29) (0.23) 0.38 0.31 0.52

1.1 2.5 0.2 (2.5) (2.7) (2.7)

Change in Canadian Production as % of World Production 0.3 0.06 0.07 (0.6) (0.07) (0.7)

Source: Schmitz et al., 1999, p. 32. Notes: The supply elasticities for wheat and barley in western Canada are 0.46 and 0.304 respectively (A. Schmitz et al., 1997). The demand elasticities for Canadian wheat and barley in the rest of the world are –10 and –20 respectively (A. Schmitz et al., 1997). mmt = million metric ton

percent of world trade. However, neither of these effects, regardless of their magnitude, are actionable under WTO because hard price discrimination is permitted. Whether or not Kraft et al. (1996), A. Schmitz et al. (1997), or Carter and Loyns (1996) are correct, these effects of the CWB do not counter the WTO agreement. The results presented in Table 6.5 come from a partial equilibrium framework. If the trade impact of all single-desk buyers and single-desk sellers was considered, then the price distorting effects of single-desk sellers might be offset by the price distortions caused by single-desk buyers. Thus, the net results of CWB actions may be smaller than what is suggested in Table 6.5.

THE CWB AS A STATE TRADING ENTERPRISE?

Despite the above analyses, which provide a strong case to support the claim that the CWB is not in violation of current WTO rules, how will the possible new set of rules under the next round of WTO negotiations affect the status of the CWB? Although the CWB may well be in compliance with current WTO rules, it is still a state trader under almost any definition. Certainly, the next round of WTO negotiations will involve clarifying

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127

and classifying state trading activities into those that are acceptable and those that are not acceptable. The way in which one defines the various degrees of state trading under the next round of negotiations will have farreaching implications for future agricultural trade policy in several countries. In their classification scheme (discussed above), Ackerman and Dixit (1999) seem to imply that an STE classified as a higher type is much more trade-distorting than an STE classified as a lower type. For example, the CWB is classified as a Type IV state trader, whereas the CCC (after 1996) is considered a Type I state trader. Further, they state that “the potential to distort trade for a Type II state trader is low.” Type II STEs are classified as those that maintain control over the domestic market but that operate without any restrictions on external trade. It is well known (T. Schmitz et al., 1997) that the trade-distorting effects of domestic subsidies can outweigh the trade-distorting effects of many policies that restrict trade. In these cases, a Type II STE could be more trade-distorting than a Type IV STE. The CWB does not maintain control over the domestic market for feed barley and feed wheat. For example, in 1998 over 50 percent of the feed barley marketed in western Canada was outside the CWB. With regard to feed barley and feed wheat, the CWB controls exports only and competes with private firms to procure and sell feed. Hence, the CWB is actually a Type III STE when it comes to feed barley and feed wheat. Furthermore, the CWB only operates in certain areas within western Canada. Canadian producers in other provinces are outside its jurisdiction, which would imply that the CWB is really a Type III STE with regard to all forms of Canadian wheat and barley. Under the classification scheme of Ackerman and Dixit (1999), the CCC should not be classified as a Type I STE but rather as a Type II STE— even after 1996. This is because as of January 2000 the loan rate was still in place in the United States and, in some cases, was binding. For example, there was a period in 1999 when the U.S. domestic price of cotton fell below the loan rate, so cotton producers still received domestic subsidies in the form of a loan. To summarize, STEs should be judged on the degree to which they distort trade. In order to actually put a weight on trade distortions caused by domestic and trade policies versus STEs, one would have to perform an empirical economic impact analysis. Unfortunately, there is a dearth of literature on empirical analysis of most STEs. However, in the case of the CWB, the empirical analyses that are available suggest that it causes minimal trade distortions. Moreover, the analysis of Ackerman and Dixit (1999) raises an extremely interesting question: How does a Type IV STE exporter interact with a Type IV STE importer? We do not suggest an answer here.

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STATE TRADING ENTERPRISES AND THE WTO

COMPARISONS WITH THE QUEENSLAND SUGAR CORPORATION

To provide additional insight regarding the role of STEs and their ability to price-discriminate, consider international sugar markets. A well-known STE is the Queensland Sugar Corporation (QSC). The world sugar market is highly distorted, created largely by import quotas and export subsidies. Also, preferential treatment is given to certain sugar exporters. For example, preferential exporters to the United States include Brazil, Australia, and the Dominican Republic. As of January 2000, world sugar prices were in the neighborhood of US$0.06 per pound, whereas internal U.S. prices ranged from US$0.17 to US$0.19 per pound. Those exporters receiving preferential treatment receive quota rents since they sell sugar into the United States at the internal U.S. price. In this context, the QSC clearly price-discriminates, for it sells into the U.S. market at a much higher price than it does into many of its other markets. Price discrimination is facilitated through the use of U.S. government policy in this instance (note the differences and also the similarities between sugar and wheat, where traditionally EEP played a major role in facilitating price discrimination by STEs). The impact of sugar policies used by the United States and the European Union clearly have a much larger impact on trade than does the QSC. Professor Robert Mundell, who won the 1999 Nobel Prize for economics, in reviewing monopoly power in the United States commented in the 1960s that economists, given the empirical evidence, might well find a better use for their time fighting fireflies and termites than worrying about the welfare costs of monopolies. The same could be said of the WTO’s concern with the QSC relative to the effects of sugar policy. It is interesting to place the activities of the QSC in the context of rentseeking (e.g., Krueger, 1974). Krueger’s claim is that import quotas lead to major resource inefficiencies because of the cost the private sector incurs seeking the right to import and export. Ironically, in the case of the QSC, these costs are largely eliminated because the QSC is the only seller from Australia into the U.S. market.

CONCLUSION

Allegations have been made that STEs have the potential to affect price exports in noncommercial ways, thereby creating effects equivalent to export subsidies. The fact that an STE charges different prices in different markets at a given point in time does not necessarily imply that the STE is inefficient. Consider the case of export dumping. According to U.S. law, an exporter into the U.S. market is dumping if it charges a price in the U.S.

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market below that in the home country. However, such pricing activity does not necessarily mean that the exporting firm in question is not maximizing profit. We know from theory that a firm that can price-discriminate will earn profits above what would be the case under competition. Therefore, export dumping can be consistent with profit maximization. Export dumping need not be a “noncommercial” activity. With regard to the allegations that the CWB essentially gives wheat away in the international market, one is left with a question: How could this be? Consider the case in which the output of wheat is given and the demand for this wheat is known with certainty. There is an equilibrium price and quantity—corresponding market shares determined by the interaction of government policy, STEs, and private traders. Suppose that at the beginning of the marketing period the CWB decides to consistently undersell the competition. Clearly, each day the CWB would be the only seller. However, after a period of time the CWB would be out of wheat. Then the remaining competition would market their wheat and actually receive a higher price because of the dumping strategy by the CWB. Many questions remain concerning STEs. For example, how does one deal with COFCO, since China is not a member of the WTO? Also, with the extremely low grain prices at the beginning of 2000, the United States was once again a buyer of wheat through the CCC (Figure 6.5). This activity, coupled with the US$8.7 billion bailout in 1999, puts the United States in a difficult position to argue for freer trade and the elimination of STEs.

Figure 6.5

U.S. Wheat Deficiency Payments and Loan Marketing Gains (all classes), 1981–1998

4,000 Target price deficiency payments

1

Loan deficiency payments and marketing loan gains

Millions U.S.$ Million $ U.S.

3,000 2,000 1,000 0 1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

Source: USDA-FSA, Commodity Fact Sheet, Wheat. Nov. 1998 and USDA-FSA-EPA. Note: 1999 projected.

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We have presented evidence that a major STE—the Canadian Wheat Board—does price-discriminate in the world wheat and barley markets. The ability to price-discriminate varies from year to year depending on key factors such as the level of export subsidies of major competitors. These activities are not in violation of WTO rules because the CWB generally practices hard price discrimination. In addition, even though the CWB price-discriminates, its activities do not create major trade distortions. Unfortunately, little empirical evidence is available for major STE exporters of commodities other than wheat and barley. Therefore, the conclusions reached concerning the activities of the CWB may or may not have general application to other STEs. We are not optimistic that numerous empirical studies on specific STEs will be forthcoming. This is largely because of data limitations. Unless one has actual sales data, it is difficult to determine the degree of price discrimination in international markets.

BIBLIOGRAPHY Ackerman, K. Z., and P. M. Dixit. October 1999. An Introduction to State Trading in Agriculture. Washington, D.C.: USDA Economic Research Service Agricultural Economic Report No. 783. Alston, Julian, Richard Gray, and Daniel Sumner. 1994. “The Wheat War of 1994.” Canadian Journal of Agricultural Economics 42: 231–251. Brooks, H. G., and Troy Schmitz. 1999. “Price Discrimination in the International Grain Trade: The Case of Canadian Wheat Board Feed Barley Exports.” Agribusiness: An International Journal 15: 313–322. Carter, Colin. 1992. “The Participation of China and the Soviet Union in the Global Wheat Market.” In Tilman Becker, Richard Gray, and Andrew Schmitz, eds., Improving Agricultural Trade Performance Under the GATT. Kiel, Germany: Wissenschaftsverlog Vauk, pp. 45–59. Carter, C. A., and R.M.A. Loyns. 1996. The Economics of Single Desk Selling of Western Canadian Grains. Edmonton, Alberta: Alberta Agriculture, Food, and Rural Development. Carter, Colin A., R.M.A. Loyns, and Derek Berwald. 1998. “Domestic Costs of Statutory Marketing Authorities: The Case of the Canadian Wheat Board.” American Journal of Agricultural Economics 80, no. 2: 313–324. Dixit, P. M., and T. Josling. 1997. “State Trading in Agriculture: An Analytical Framework.” International Agriculture Trade Consortium Working Paper. Washington, D.C.: USDA/ERS/CAD. GAO (U.S. General Accounting Office). 1996. “Canada, Australia, and New Zealand: Potential Ability of Agricultural State Trading Enterprises to Distort Trade.” GAO/NSIAD-96-94. Washington, D.C.: GAO. Fulton, Murray, Ken Rosaasen, and Andrew Schmitz. 1989. Canadian Agricultural Policy and Prairie Agriculture. Ottawa, Ontario: Economic Council of Canada. Goodwin, B. K., and V. H. Smith. 1995. Price Discrimination in International Wheat Markets. Paper prepared for the Wheat Export Trade Education Committee, Montana State University, Bozeman, Montana.

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Haley, Stephen L., Peter A. Riley, Karen Z. Ackerman, and Mark E. Smith. 1992. “Evaluating Export Subsidy Programs: The Case of US Barley.” Journal of International Food and Agribusiness Marketing 4, no. 1: 1–29. Kraft, D. F., W. H. Furtan, and E. W. Tyrchniewicz. 1996. Performance Evaluation of the Canadian Wheat Board. Winnipeg, Manitoba: Canadian Wheat Board. Krueger, A. 1974. “The Political Economy of Rent Seeking.” American Economic Review 64 (June): 291–303. Meyers Strategy Group (MSG) Pty, Ltd. April 1996. “The Australian Barley Board Grain Pool of WA and NSW Grains Board: The Value of the Single-Desk for Barley.” Willoughby, Australia: Wheat and Coarse Grains Committee. Rossmiller, G. E., and V. L. Sorenson. 1991. “Summary and Policy Implications: The Link to GATT.” State Trading in International Agricultural Markets: Institutional Dimensions and Select Cases. Washington, D.C.: International Policy Council on Agriculture and Trade, pp. 154–170. Schmitz, Andrew. 1968. “An Economic Analysis of the World Wheat Economy in 1980.” Ph.D. diss. University of Wisconsin, Madison. ———. August 17, 1996. “Economic Performance of the Canadian Wheat Board: Myth and Reality.” Filed in the court case Archibald et al. v. CWB & HMQ. Federal Court No. T–2473–93. Calgary, Alberta, Canada. Schmitz, Andrew, and Hartley Furtan. 2000. The Canadian Wheat Board: Marketing in the New Millennium. Regina: Canadian Plains Research Center, University of Regina. Schmitz, Andrew, Hartley Furtan, and Katherine Baylis. 1999. “State Trading and the Upcoming WTO Discussions.” Choices (Second Quarter): 30–33. Schmitz, Andrew, and Richard Gray. 1992. “Distorted Agricultural Trade: Who Wants Free Trade Anyway?” In Tilman Becker, Richard Gray, and Andrew Schmitz, eds., Improving Agricultural Trade Performance Under the GATT. Kiel, Germany: Wissenschaftsverlog Vauk, pp. 163–180. Schmitz, A., R. Gray, T. Schmitz, and G. Storey. 1997. The CWB and Barley Marketing: Price Pooling and Single-Desk Selling. Winnipeg, Manitoba: Canadian Wheat Board. Schmitz, A., R. Gray, and A. Ulrich. 1993. A Continental Barley Market: Where Are the Gains? Saskatoon, Saskatchewan: Department of Agricultural Economics, University of Saskatchewan. Schmitz, Troy, Andrew Schmitz, and Chris Dumas. 1997. “Gains from Trade, Inefficiency of Government Programs, and the Net Economic Effects of Trading.” Journal of Political Economy (June): 637–647. Wilson, W. W. 1989. “Differentiation and Implicit Prices in Export Wheat Markets.” Western Journal of Agricultural Economics 14: 67–77.

7 State Trading Enterprises and the WTO: Importing Versus Exporting PHILIP ABBOTT AND LINDA YOUNG

State trading enterprises (STEs) have existed in international agricultural markets for several decades in a variety of forms as both importers and exporters. STEs continue to exist under the 1994 Uruguay Round Agreement (URA) of the World Trade Organization (WTO). New rules to govern or eliminate STEs have been proposed as an issue for upcoming WTO negotiations and are strongly resisted by countries maintaining state trading enterprises. Much of the literature on STEs has focused on exporting agencies, as the most prominent STEs found in world markets are for large country exporters. Some of these entities include the Canadian Wheat Board, the New Zealand Dairy Board, the Australian Wheat Board, and the Queensland Sugar Corporation. A few large and many smaller STEs persist as agricultural importers. Among the large importing agencies are the China National Cereals, Oils, and Foodstuffs Import and Export Corporation (COFCO), Indonesia’s Badan Urusan Logistik, the Japanese Food Agency, the Korean Livestock Products Marketing Board, and Mexico’s CONASUPO. Table 7.1 provides some information on the market shares and the size of these entities in international markets. Notifications to the WTO indicate that many more STEs exist in addition to these large traders. Thirty countries notified the WTO of over 100 agricultural STEs in 1995 and 1996 (Ackerman and Dixit, 1999). The reasons why STEs exist for both exporters and importers, and for both large and small traders, highlight the differing objectives and issues—beyond market power—that give rise to this institution and explain resistance to reform or elimination. STEs are most commonly found for politically sensitive agricultural products. Grains, dairy, and sugar are the most common commodities for 133

3,213 1,805 1,401 1,332 925 361 286 237 194 194 192 184 2,883 2,003 1,335 758 713 593 432 378 329 227 125 121

Wheat, barley Dairy products Wheat Corn, rice, sugar Sugar Rice Fruits Kiwi Wheat Maize Apples, pears Citrus fruits Wheat, corn, rice, oils Wheat, rice, barley Wheat, flour, sugar Cotton Wheat Tobacco Beef Wheat Milk powder Wheat, barley, maize Sugar Rice

Trade Value ($ millions)

3.1 8.4 4.3 8.2 4.7 2.8 7.6 2.5 4.7 0.8 1.1 2.0

18.1 6.8 9.2 4.9 8.2 5.8 4.4 38.2 1.3 2.1 5.7 3.2

World Market Share (%)a

Source: Adapted from Ackerman and Dixit (1999), who report STEs and their import or export commodities and values, typically for 1993–1995. Notes: a. World market share is export or import value, from Ackerman and Dixit, divided by total world trade value for the commodities managed, from FAO’s AGROSTAT database. b. COFCO (China) both imports and exports agricultural commodities.

Large Exporters Canadian Wheat Board New Zealand Dairy Board Australian Wheat Board COFCO (China)b Queensland Sugar Corp. (Australia) New S. Wales Rice Marketing Board (Australia) South African Deciduous Fruit Board New Zealand Kiwifruit Board Soil Products Office (Turkey) South African Maize Board New Zealand Apple and Pear Marketing Board South African Citrus Board Large Importers COFCO (China)b Japanese Food Agency BULOG (Indonesia) Chinatex (China) GASC (Egypt) Japan Tobacco Agency Korean Livestock Marketing Board Ministry of Food (Pakistan) CONASUPO (Mexico) Tunisian Grain Board National Sugar and Tea Office (Morocco) Bernas (Malaysia)

Commodities

State Trading Agencies in International Agricultural Markets, 1993–1995

Agency (Country)

Table 7.1

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which both domestic markets and international trade is controlled by STEs (WTO Secretariat, 1995). In many countries the existence and operation of these agencies reflects a philosophy that government involvement in markets is both necessary and correct. Managed trade in both domestic and international markets is a consequence of the operations of this institution. STEs not only exercise market power—which may reside with large trading countries—but also seek a variety of domestic and foreign policy goals through managed trade. The importance of STEs over the last two decades has declined considerably, especially for importers. A. Schmitz et al. (1981) estimated that 91 percent of world grain imports were handled by a state trading enterprise. Others (Abbott and Young, 1999; Ackerman and Dixit, 1999) estimate that by 1996 the share of wheat imports handled by STEs had fallen to less than 50 percent and may now be as low as 33 percent of the market. The share of rice imports handled by STEs fell from an estimated 93 percent in 1980 (Falcon and Monke, 1980) to about 35 percent in the mid- to late 1990s (Young, 1999). The decline in the role of importing STEs has been driven largely by the requirements of World Bank and International Monetary Fund structural adjustment programs in developing countries. Management of markets by STEs proved to be costly and unsustainable when macroeconomic crises emerged. Economic necessity, not a change in philosophy, dictated these reforms. In Asia, where structural adjustment was largely avoided, STEs remain far more prevalent than they do in other regions of the world. To date, the WTO has had little to do with the decline or reform of STEs in international agricultural markets. This change in the role of state trading agencies has been accompanied by changes in the ways governments manage markets and the ways STEs interact with international markets (Abbott and Young, 1999; Young, 1999; Ackerman and Dixit, 1999). In many instances, state trading agencies now coexist with private importers rather than being eliminated entirely. Although they no longer have monopoly control over imports, they continue to exercise many of the functions that gave rise to their existence. In some cases, state trading agencies have become regulatory boards and have given up their role as a physical handler of grain. Principally for exporting boards, privatization of STEs has occurred, and so in some cases they have become more like producer cooperatives than a government agency. These institutional changes again reflect the broad policy goals and objectives of this institution and the fact that the same goals persist in spite of requirements for reform and elimination under structural adjustment programs. A new institution for agricultural markets that came out of the Uruguay Round of GATT/WTO negotiations is the tariff rate quota (TRQ). TRQs gave rise for the need for new STEs to administer the quotas, which are

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part of this trade regime (Abbott and Morse, 2000). In many developing countries licenses are required for imports under TRQs, as licensing is the most common way to implement this trade regime. Thus, some form of government intervention persists, and for politically sensitive agricultural commodities state trading is often the vehicle through which that occurs. In this chapter we explore the rationale behind the existence of STEs and how that rationale relates to proposals for their regulation, reform, or elimination. The existence and implementation of policy objectives give rise to several institutional innovations, of which state trading agencies often remain important elements. Therefore, we look at some of the important institutional innovations accompanying the reform and evolution of agricultural STEs.

STES UNDER GATT AND THE WTO

Historically, STEs have been permitted to operate under GATT, and this was continued under Article XVII of the URA. The only change in the URA was the imposition of stricter notification requirements for STEs, including revisions to the 1960 questionnaire countries are required to complete for their STEs. In addition, under Article XVII a new definition of a state trading enterprise states that they are any governmental and nongovernmental enterprises, including marketing boards, which have been granted exclusive or special rights or privileges, including statutory or constitutional powers, in the exercise of which they influence through their purchases or sales the level or direction of imports or exports. (WTO, 2000)

The definition of an STE continues to be debated in academic and public work examining this institution (Kostecki, 1982; Sorenson, 1991; Abbott and Young, 1999; Dixit and Josling, 1997; Veeman, Fulton, and Larue 1999; and Ackerman and Dixit, 1999). An important distinction of the WTO definition is that an STE physically handle the commodity in question. Establishing a definition is important in determining what agencies must be notified to the WTO, but this distinction may not carry important economic significance, especially as one looks at how reform proceeds in many countries. Although the WTO permits STEs to exist, it seeks to impose the same disciplines on them as are imposed on private firms. Specifically, state trading agencies are governed by: nondiscrimination, commonly referred to as most-favored-nation (MFN) treatment; no quantitative restrictions; preservation of tariff concessions; transparency; and that sales be made in accordance with commercial practices (WTO, 2000).

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The lack of transparency is probably the most common concern about STE behavior. It is feared that STEs may be able to violate their WTO commitments in a disguised fashion. Importing STEs may be able to impose greater protection, and exporting STEs offer higher export subsidies, than would be the case if private firms handled trade. In addition, importing agencies may be able to exercise monopsony power, and exporting agencies may be able to exercise market power, including price discrimination. Moreover, there is a concern that STEs will follow practices unlike those of a commercial entity, including basing trade decisions on politics. Elimination or regulation of STEs has arisen as an important issue for WTO negotiations. The U.S. position (Rominger, 1996; USTR, 1999a) continues from the Uruguay Round: STEs should be eliminated in countries where they remain important. This position is strongly resisted by many governments. Some analysts (Miner, 1999; MacLaren and Josling, 1999; Abbott, 1998) argue that since competition policy will also be addressed in the next round, subjecting STEs to the disciplines of competition policy could eliminate several problems. The Canadians (Veeman, Fulton, and Larue, 1999) have recognized that contestability, or the existence of barriers to entry, may be an important criterion governing the extent to which STEs distort trade. In addition to competition policy, state trading overlaps other important debates in the WTO. For example, state trading has emerged as an important mechanism for the implementation of TRQs. Another issue is whether potential new entrants to WTO can meet their accession requirements with state-managed markets. Resistance to elimination of state trading in the WTO arises because these institutions are important vehicles for implementing domestic agricultural and trade policies. If the WTO regulates such agencies in specific ways, they are likely to evolve or to be replaced by other regimes in order to continue broad policy goals. This can be a costly, politically difficult, and time-consuming process. An existing consensus among interest groups within a country must be changed or somehow reestablished.

WHY DO STES EXIST/PERSIST?

Table 7.1 above highlights the importance of large exporting STEs and suggests that one goal of such agencies is to exercise market power in international markets. There is a substantial debate in the literature concerning the extent to which the Canadian Wheat Board, for example, exercises market power and is able to price-discriminate among importing countries (Carter and Loyns, 1996; Kraft, Furtan, and Tyrchniewicz, 1996; Schmitz et al., 1997; Smith and Goodwin, 1995). C. Carter and A. Schmitz (1979) recog-

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nize the potential market power of importers, specifically the Soviet Union and Japan, both of which utilized state trading agencies at that time. It may be the case that the Chinese grain agency also has market power in international grain markets (Crook et al., 1999). Market power may exist in a world with differentiated products, as according to Chamberlin (1932). In that case, importers facing a few large exporters offering slightly different products may be able to exercise countervailing market power. Representatives of marketing boards in Pakistan, Morocco, China, and India have expressed a belief that they all have some market power in negotiating terms of grain sales, which they would lose if state trading agencies ceased to exist. Moreover, negotiation of subsidies under the U.S. Export Enhancement Program, as well as credit guarantee programs run by the United States and European Union (EU), are typically negotiated government-to-government. These negotiations may be facilitated for the importers by the existence of STEs. In the case of preferential trade arrangements, such as the Generalized System of Preferences (GSP) and Lomé, state traders may exist in developing countries to exploit any market power deriving from those preferences as well. The Korean Livestock Board is another example of a board that may have a relatively small share of an international market, but the product in question—beef—is highly differentiated, increasing to some extent the market power of the board. The generally low percentages of world market share shown in Table 7.1 suggest that we must view carefully the extent to which this market power is really translated into increased or reduced price margins. The exercise of market power must also be moderated by the fact that these agencies address other domestic and foreign policy objectives in addition to the exercise of market power. And if replaced with a large private monopoly who was not obligated to meet these other objectives, the elimination of state trading could lead to an increased exercise of market power and greater distortions in international agricultural markets. STEs may also be able to exercise or control market power over domestic markets. Indeed, one of the rationales for the existence of STEs is that in the absence of STEs private traders would likely exploit local markets through the exercise of market power. The concern over domestic market power must be considered in light of the desire of agencies to ensure efficient and equitable functioning of domestic markets. It is not uncommon for such agencies to set margins all along the marketing chain, to subsidize transportation and milling activities, and to provide technical advice to market participants in order to increase efficiency as well as equity. In addition to the exercise or control of market power, state trading agencies are mandated to achieve a variety of domestic policy objectives. Income redistribution is often an important element of their operation. In many countries, producer support is an explicit policy goal, and consumer

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subsidization is also often administered by such agencies. The most important goal of the agencies, however, is price stabilization (WTO Secretariat, 1995; Timmer, 1996). This is achieved both by regulating trade across the border and by stockpiling. Stockpiling also promotes food security, another goal sought by these agencies. State trading agencies may also address foreign policy objectives. For example, in the case of TRQs, STEs often ensure that WTO commitments are met. A potential problem highlighted for importing STEs is that decisions on source of supply may be dictated by political rather than economic considerations. The extract below lists some of the numerous and conflicting objectives that must be addressed by state trading enterprises. A point we would like to emphasize here is that any market power to be exercised by STEs— whether in domestic or international markets—is moderated by the implications for the domestic and foreign policy objectives on this list. Conflicts and trade-offs are the rule, rather than the exception, for the achievement of the multiple goals held by STEs. Market Power (Exercise or Control) International Market Optimal tariffs, taxes, and subsidies Price discrimination Countervailing negotiating power Domestic Market Collect rents from market position Prevent distortions from private agents Policy Objectives Income Redistribution Producer support and farm income Consumer subsidization Sectoral Policy Price stabilization Food security Efficient market functioning Foreign Policy Meet WTO commitments Supply sourcing based on politics

POLICY TRADE-OFFS AND CONFLICTS OF STES

This section clarifies the conflicts that arise between the objective of income redistribution and the exercise of market power by an STE. These features often differ between importers and exporters, as the intended targets of subsidization can differ. Historically, importing agencies more often subsidize consumers, whereas exporting agencies often emphasize produc-

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er support (although producer support is now becoming more important for developing country importers). These trade-offs have been explored in the context of U.S. and EU trade policy for wheat (Abbott and Kallio, 1996). For an exporting STE with market power, the simplest optimal policy is an export tax. Implementation of an optimal export tax will raise national welfare, but it will also result in the redistribution of income from producers toward consumers. Export subsidies raise the domestic price and enhance producer welfare but are contrary to the need to reduce quantity exported in the exercise of market power. One solution to this problem for an exporter with market power is to target subsidies by discriminating among importers. Export subsidies can function like an effective export tax if properly targeted, raising domestic prices and enhancing producer welfare while also increasing national welfare (Abbott, Paarlberg, and Sharples, 1987). This and other work have shown that very careful targeting of subsidies is required for this outcome, and most work shows that a far more common outcome from targeted subsidies is a gain to producers at the expense of national welfare. However, export subsidies are generally a costly means of redistributing income to producers. One reason why exporting STEs may exist is to capture the benefits from market power and redistribute the benefits toward producers. Pricepooling may be an explicit device to accomplish this end, although it is constrained by the need to eventually sell production. When STEs are reformed they are sometimes privatized as producer boards that can perform the same function. For importing STEs the problems are somewhat different. Optimal policy with market power in the international market is a tariff. Tariffs raise the domestic price and producer welfare is enhanced, consistent with a producer support objective. However, optimal tariffs conflict with consumer subsidy objectives (Timmer, 1989, 1996; Abbott, Konandreas, and Benirschka, 1993), which are historically common among importing countries employing STEs. Thus, the same policy dilemma that we described above for exporters exists for importers with consumer subsidy objectives. In addition, many importing state trading agencies try to simultaneously subsidize producers as well as consumers. The budgetary costs of this strategy are often not sustainable and are one of the reasons for elimination or reform of this institution under structural adjustment programs. The exercise of market power in this case would assist the producer subsidization goal but would conflict with simultaneous subsidization of consumers and raise the cost to meet that objective. One importer strategy to circumvent this problem is to target subsidies to specific groups. It is common for STEs to subsidize a lower-quality product while allowing private markets to coexist for the higher-quality product. In both Egypt and Morocco, subsidies are given for low-quality

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flour while the private sector is allowed to handle higher-quality flour. In the Moroccan case the state trading agency has become a regulatory agency with significant control over domestic marketing. In Egypt the state trading agency manages the low-quality-flour market and coexists with private traders restricted to the higher-quality market. If products to be imported are differentiated by exporter, then importing agencies may also have countervailing market power, which they can exercise through their negotiations with the several exporters that they face. To the extent that they have market power, this will reduce the cost of their imports. This objective is consistent with most other objectives, but it requires a monopolistic entity at the border—either public or private. The importance of market share determination is an issue that has received some attention in the literature (Blandford, 1988; Johnson, Grennes, and Thursby, 1979; Alston et al., 1990), but relatively little attention has been given to the possibility that in the differentiated product world importing agencies can exercise countervailing market power.

WTO AND COMPETITION POLICY

At this point it is appropriate to ask to what extent the exercise of market power is currently limited in the WTO. Historically, policy reform in the WTO has focused more on reducing protection rather than explicitly limiting the exercise of market power. The underlying theoretical framework has most likely been to view protection as the outcome of rent-seeking by special-interest groups rather than as a means to exercise market power. There are some aspects of the WTO agreement that are explicitly based on market power considerations, however. Control of market power through introduction of competition policy into the WTO is an important issue to be addressed in future negotiations as well. Antidumping legislation is intended to prevent discrimination between domestic and export markets by exporters. Therefore, at least in theory, it is based on the notion that price discrimination by exporters should be disciplined. Tariff concessions, to the extent that they are binding, should limit the application of optimal tariffs for importers. In practice, the extent of dirty tariffication that came out of the last round means that optimal tariffs are likely to continue to be feasible for many importing countries. With limited market power, optimal tariffs are small. Further reductions of tariffs could limit this practice. The optimal intervention for exporters is an export tax, which is not currently disciplined. Export subsidies work against the exercise of market power; however, the trade literature has shown in some situations that

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export subsidies can arise as optimal policy, and so to some extent that exercise of market power can be subject to discipline. Price discrimination is another manner in which market power can be exercised. To the extent that price discrimination is a violation of the WTO requirement that MFN treatment be offered comparably to all countries, this can also be viewed as limited in GATT, although it is not expressly forbidden. Competition policy, or the application of antitrust legislation, has not historically been addressed in GATT. With the rise of multinational enterprises and increasing integration of international markets, especially for processed and high-value food products, issues of antitrust violation across borders are becoming more common. Antitrust agencies have been sharing information across borders informally, and there is an effort to either coordinate antitrust legislation or to apply the disciplines of antitrust legislation to international trade. This effort is arising from those interested in industrial policy, not agricultural policy (Abbott, 1998). Nevertheless, this may become an important issue for the next round of agricultural trade negotiations, because institutions such as STEs may be subject to disciplines that arise from these negotiations. STEs, as public agencies, are now generally exempted from domestic competition policy requirements. There exists a debate on whether or not competition policy should be applied to agricultural STEs in the future. It should be noted that in the application of antitrust legislation most countries recognize a trade-off between the benefits to competition and the advantages derived from exploiting economies of scale. Hence, when it is in their national interest, governments often permit large firms to exist, even when they have some degree of market power. The same logic must lie behind why STEs have been granted exemptions from antitrust legislation in the past. Their actions are seen as implementation of national policy and are therefore in the national interest. Thus, if competition policy is addressed in the upcoming WTO negotiations, whether or not agricultural STEs will be subject to those provisions remains uncertain. Whether or not STEs are indeed in the public interest is at the heart of the subject this chapter addresses. To some, STEs are redistributing income toward worthy recipients, whereas others see them as serving the rent-seeking activities of special interests. In the application of competition policy, contestability (i.e., the extent to which barriers to entry into a market exist) is often the criterion used to establish whether or not firms need to be disciplined. A monopoly can be permitted to exist when the potential entry of other firms into the market disciplines its pricing strategy. The same criterion has been used to assess whether agricultural STEs can exercise market power. Recent work (Dixit and Josling, 1997; Veeman, Fulton, and Larue, 1999) has established categories of STEs largely based on whether or not markets served by STEs are

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contestable. Such work looks principally at the market share of STEs relative to private firms. One of the recent institutional innovations is the coexistence of STEs with private firms (Young, 1999; Abbott and Young, 1999). If the private firms are subject only to a tariff and not to quantitative controls, then the exercise of market power by the STE may be severely curtailed. If the tariff applied to private firms is not prohibitive, then the market may be contestable. Quotas, licensing schemes, or other nontariff barriers may exist and limit the market share of private firms. To the extent that quantitative restrictions of this sort exist on the activities of private firms, contestability is compromised. In the case of TRQs, if above-quota tariffs are prohibitive, then those institutions function much like a quota—and an STE will maintain the ability to exercise its market power over international markets. When STEs reform or are privatized, this also does not immediately imply that the contestability criterion is met. Public monopolies have frequently been replaced by private monopolies. The objectives of public monopolies are likely to differ from those of private monopolies. As we noted above, domestic policy goals will moderate the exercise of market power by an STE, so privatization could lead to greater distortions in international markets through the unmoderated exercise of market power by private firms.

COEXISTENCE OF STES WITH PRIVATE FIRMS

A variety of institutional forms for STEs have arisen to achieve more desirable outcomes given the trade-offs STEs must make. This is particularly true in the case of reform. One of the most notable new institutional innovations is the coexistence of STEs with private firms. This has been especially important in China and Eastern Europe, where STEs continue to manage trade, but in their accession agreements or proposals with the WTO they allocate a certain market share to private interests. Based on the information on the wheat market provided by one research team (Abbott and Young, 1999; for more recent information see Ackerman and Dixit, 1999), there are at least six significant cases where private firms and state trading agencies coexist, including Egypt, Russia, Pakistan, Bangladesh, China, and countries in Eastern Europe. L. Young (1999) found nine cases in the rice market where private traders and state traders coexist, including India, Algeria, Colombia, Pakistan, and Syria. We believe the reason STEs grant private firms only partial access to the market is that the STE must continue to ensure that certain domestic policy objectives are met. The best examples of these are food security and price stabilization, achieved through stockpiling, license administration,

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purchases of imports to ensure domestic needs are adequately met, administering subsidies, and targeting those subsidies to vulnerable groups. With coexistence, both the stabilization and income-distribution objectives continue to be achieved while the efficiency of private traders serving particular market segments is also realized. As previously discussed, the Egyptian case of coexistence provides an example where coexistence achieves a variety of goals, including state subsidization of lower-income consumers. This method of subsidization is common in countries where the state has managed trade and indicates a natural complementarity between state agencies and private firms. Relatively little evidence exists on how trade regimes change when both STEs and private firms coexist. In their empirical investigation of STE behavior, Abbott and Young (1999) found consistently lower tariffs where STEs and private firms coexist, compared to when STEs continue to have monopoly control over markets or when markets were completely privatized. This investigation of discrimination by evaluation of market share determination was mixed, however. It was not clear that all coexistence led to a greater role for price in the determination of import sources. A variety of outcomes are possible with coexistence, as the private firms are likely to remain subject to regulation and licensing requirements governed by the state; thus, it is not surprising that consistent behavior is not observed. One of the reasons for this particular institutional innovation—giving part of the market to private firms—is to promote market contestability even though state trading agencies remain. When private firms are able to share a certain part of the market (e.g., the higher-quality market), and if they were only subject to a tariff, it would appear that significant barriers to entry do not exist. However, if there are licensing arrangements or quantitative restrictions administered by STEs, such as may exist under TRQs, entry in the market by private firms will be limited, thereby compromising contestability.

TRQS AND STES

It is not uncommon for coexistence to occur in countries where a former STE or some form of state involvement is used to implement tariff rate quotas. For example, the deal negotiated between the Chinese government and the U.S. Trade Representative (USTR, 1999b) explicitly includes TRQs, with a significant share of the quotas to be handled by the private sector rather than COFCO. TRQs are also common in Eastern Europe, where recent accession negotiations have allowed them to continue some state involvement in trade (but with private firms coexisting with the state traders in many cases). In other cases where TRQs are implemented, the

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right to allocate quotas may be given to producer groups or to agencies with close ties to producers, as in several markets in Korea (Choi and Sumner, 1999) and the Philippines. One examination of TRQ implementation mechanisms (Abbott and Morse, 2000) shows that TRQs are typically designed to allow the benefits of quotas and low tariffs to go to domestic interests, frequently producer groups. Hence, the producer support objective of domestic agricultural policy is facilitated by this institution. For most other cases, the most common form of TRQ implementation for politically sensitive commodities is a licensing arrangement. The same research team (Abbott and Morse, 2000) finds that quotas under TRQs are more likely to be filled where TRQs are administered by state traders or governed by licensing. This means that import quantities meet the minimum access commitments made by countries in the Uruguay Round. For cereals, where state trading is the predominant implementation mechanism, overfill (i.e., imports well in excess of quotas) is generally found in nearly two-thirds of the cases; underfill occurs in less than 10 percent of the cases. For meat, where state trading is less common, underfill is more frequent and is found in more than half of the cases examined. Tariffs are more often applied to commodities that were not extensively traded prior to 1995. In those cases it is not surprising that even with somewhat lower tariffs imports have not surged to reach minimum access commitment levels. This is because low price elasticities of demand mean that reductions in domestic prices due to liberalization have a relatively small impact on trade. We believe one of the reasons why state traders manage TRQs for certain commodities is to ensure that WTO commitments are met. Moreover, it is very common for the politically sensitive commodities to see substantial overfill or imports well in excess of minimum access commitments. We believe this is because the state continues to manage those markets and is importing calculated food needs or issuing licenses to ensure adequate domestic supplies are available. Abbott and Morse (2000) describe this trade regime as an endogenous quota. They equate it with “dirty quotafication,” where the state varies the quota from one year to the next based on domestic production in order to meet its domestic stabilization goals (a behavior of STEs examined in Abbott, Patterson, and Young, 1998). This is yet another practice reflecting the desire by governments to continue state trading in order to manage domestic markets in politically sensitive commodities to achieve food policy goals. The case of the Chinese offer negotiated with the U.S. Trade Representative (USTR, 1999b) illustrates how state trading and private firms may coexist and how TRQs may limit contestability in those markets. In their offer, a schedule specifies tariffs for various quantities of imports

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and specifies what percentage may be imported by private traders. No minimum quantities of imports are guaranteed. As the state trading agency COFCO controls the total amount imported, it could exercise market power by restricting imports. However, COFCO can increase imports when domestic needs are high.

CAN STES BEHAVE LIKE PRIVATE FIRMS?

A question underlying the earlier discussion is whether state trading enterprises can and will behave like private firms. Put another way, will they follow commercial practices? Commercial behavior can be divided into two distinct categories: the level of protection, and the extent to which behavior is discriminatory. Abbott and Young (1999) found no significant differences between the level of protection applied by wheat importers before and after reforms of STEs. This is because the level of the world price is far more important than this particular institutional arrangement in establishing the desired level of protection. If the policy goal is simply to achieve a particular level of protection, there exist numerous institutional alternatives that can achieve the same end. Abbott and Young (1999) find weak evidence that politics may play a smaller role in market share determination after STEs are reformed or eliminated. This means that elimination of these institutions may reduce discrimination in import sourcing. But it is also likely that large private firms engage in price discrimination. One team (Patterson and Abbott, 1994) demonstrated that large U.S. wheat-trading firms discriminate by destination, and although the margins differ relatively little by destination, there is statistical but not economically significant market power. Moreover, if price discrimination is a common practice among private firms, then it makes little difference if STEs are reformed or eliminated in the extent to which this practice would continue. Overall we find little evidence to suggest significantly different behaviors by STEs when compared to private firms. Institutions innovate and evolve, with political and economic costs, to accomplish whatever goals the noncommercial behavior was intended to achieve.

CONCLUSION

Underlining several of our earlier discussions is the notion that domestic policy objectives transcend institutional arrangements. State trading enterprises exist to achieve domestic agricultural policy objectives, but other

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institutions could evolve to achieve similar outcomes. We have also observed that several institutional innovations occur to seek better outcomes than under simple tariffs or export subsidies. For example, producer boards will redistribute the revenues from implicit or explicit export subsidies or taxes, and thus the benefits from international market power, toward producers. Importing STEs face a similar dilemma, as optimal tariffs benefit producers rather than consumers, who are often the intended beneficiaries of policy. Institutional innovations such as targeting of subsidies seek to achieve preferred redistribution of income. Market power is seen as an important reason why many STEs exist, but it is not the only reason. The extent to which market power is exercised is moderated by the trade-offs made to achieve other policy goals. We have discussed how income redistribution such as producer support and other simple policy options often conflict, and for state trading agencies the redistribution objective is likely to dominate. State trading agencies offer countries an institution that can explicitly implement instruments to achieve these trade-offs. State trading enterprises in several instances have implemented new institutional innovations, including coexistence with private firms and the implementation of tariff rate quotas by STEs. Coexistence of private firms with STEs has been a response to demands for privatization and the limitation of market power in some countries. Coexistence ensures that market power is limited only when STEs do not apply quantitative restrictions to private firms. TRQs are an important new trade regime that resulted from the Uruguay Round and in several instances have been implemented by state trading agencies. Since quotas often are used under TRQs, contestability may be compromised. One virtue of TRQs implemented via state trading is that the state traders often ensure that WTO commitments are met. In fact, when state traders manage markets, quotas tend to be filled, and overfill of quotas is frequent. In the future, it is possible that competition policy will be applied to STEs. Trade-offs may exist between competition and national interests. The application of antitrust legislation may exempt STEs, as they are implementing domestic agricultural policy and so in the national interest. State trading per se is really not the problem that WTO negotiations need to address. The fundamental question raised here is, To what extent do WTO disciplines need to be applied to market power in the future and to what extent do we need to ensure that market share is not determined in a discriminatory manner regardless of institution? We also need to recognize that state trading exists to achieve desired policy goals, so that as regulations are imposed to eliminate or control state trading new institutions are likely to evolve to achieve those continuing policy goals. It is difficult to

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project exactly what form these new institutions are likely to take, and so we argue that it is better to discipline outcomes and behaviors rather than institutional forms.

BIBLIOGRAPHY Abbott, P. C. October 1998. “Competition Policy and Agricultural Trade.” Paper presented to the OECD Workshop on Emerging Agricultural Trade Issues, Paris. Abbott, P. C., and P.K.S. Kallio. 1996. “Implications of Game Theory for International Agricultural Trade.” American Journal of Agricultural Economics 78: 738–744. Abbott, P. C., P. Konandreas, and M. Benirschka. 1993. “A Model for Assessing Food Security Policy Alternatives.” In P. Berck and D. Bigman, eds., Food Security and Food Inventories in Developing Countries. Wallingford, U.K.: CAB International. Abbott, P. C., and B. A. Morse. April 2000. “Tariff Rate Quota Implementation and Administration by Developing Countries.” Agricultural and Resource Economics Review 29, no. 1. Abbott, P. C., P. L. Paarlberg, and J. A. Sharples. 1987. “Targeted Agricultural Export Subsidies and Social Welfare.” American Journal of Agricultural Economics 69, no. 4: 723–732. Abbott, P. C., P. M. Patterson, and L. M. Young. 1998. “Plans and Adjustment: A Structuralist Approach to Modeling Grain Importer Behavior.” In Tulay Yildirim, Andrew Schmitz, and W. Hartley Furtan, eds., World Agricultural Trade. Boulder: Westview. Abbott, P. C., and L. M. Young. 1999. “Wheat-Importing State Trading Enterprises: Impacts on the World Wheat Market.” Canadian Journal of Agricultural Economics 47: 119–136. Ackerman, K. Z., and P. M. Dixit. October 1999. “An Introduction to State Trading in Agriculture.” AER 783. Washington, D.C.: Economic Research Service (ERS), USDA. Alston, J., C. Carter, R. Green, and D. Pick. 1990. “Whither Armington Trade Models?” American Journal of Agricultural Economics 72, no. 2: 455–467. Blandford, D. 1988. “Market Share Models and the Elasticity of Demand for U.S. Agricultural Exports.” In C. A. Carter and W. H. Gardiner, eds., Elasticities in International Trade. Boulder: Westview. Carter, C. A., and R.M.A. Loyns. 1996. “The Economics of Single Desk Selling of Western Canadian Grain.” Edmonton, Alberta: Alberta Agriculture, Food, and Rural Development. Carter, C. A., and A. Schmitz. 1979. “Import Tariffs and Price Formation in the International Wheat Market.” American Journal of Agricultural Economics 17: 241–253. Chamberlin, E. 1932. The Theory of Monopolistic Competition. Cambridge: Harvard University Press. Choi, J. S., and D. A. Sumner. December 1999. “Welfare Implications of Tariff Rate Quota Management in Korea.” Presented at the IATRC Annual Meeting, New Orleans. Crook, F., S. Langley, F. C. Tuan, and H. Colby. 1999. “State Trading and

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Management of Grain Marketing in China.” Agricultural Outlook (June-July): 27–30. Dixit, P., and T. Josling. July 1997. “State Trading in Agriculture: An Analytical Framework.” International Agricultural Trade Research Consortium Working Paper 97–4. Falcon, W. P., and E. A. Monke. 1979–1980. “International Trade in Rice.” Food Research Institute Studies 17, no. 3: 279–304. Johnson, P. R., T. Grennes, and M. Thursby. 1979. “Trade Models With Differentiated Products.” American Journal of Agricultural Economics 61: 120–127. Josling, T. 1998. “State Trading and the WTO: Agricultural Trade Policy Aspects.” Paper presented to the Workshop on the Role of the State in Agricultural Trade, Stanford University, November 19–21. Kostecki, M. M. 1982. “State Trading by the Advanced and Developing Countries: The Background.” In M. M. Kostecki, ed., State Trading in International Markets. New York: St. Martin’s. Kraft, D. F., W. H. Furtan, and E. W. Tyrchniewicz. 1996. “Performance Evaluation of the Canadian Wheat Board.” Winnipeg, Manitoba: Canadian Wheat Board. MacLaren, D., and T. Josling. July 1999. “Competition Policy and International Agricultural Trade.” International Agricultural Trade Research Consortium Working Paper 99–7. Miner, W. October 1999. “State Trading and Agricultural Trade: New Rules and Policy Options.” Paper presented at the World Bank/WTO conference on Agriculture and the New Trade Agenda in the WTO 2000 Negotiations, Geneva. Patterson, P. M., and P. C. Abbott. 1994. “Further Evidence on Competition in the US Grain Export Trade.” Journal of Industrial Economics 42: 429–437. Rominger, R. September 12, 1996. “Statement Before the House Committee on Agriculture.” Deputy Secretary of Agriculture, USDA, Washington, D.C. Schmitz, A., H. Furtan., H. Brooks, and R. Gray. 1997. “The Canadian Wheat Board: How Well Has It Performed?” Choices (First Quarter): 36–42. Schmitz, A., A. McCalla, D. Mitchell, and C. Carter. 1981. Grain Export Cartels. Cambridge, Mass.: Ballinger. Smith, V., and B. Goodwin. 1995. “Does Canada Enjoy Market Power in the International Wheat Market?” Paper presented at the meeting of the American Association of Agricultural Economics, Indianapolis. Sorenson, V. L. December 1991. “The Economics and Institutional Dimension of State Trading.” In L. Vernon et al., eds., State Trading in International Agricultural Markets: Institutional Dimensions and Selected Cases. Washington, D.C.: International Council on Agriculture and Trade. Timmer, P. C. 1989. “Food Price Policy: The Rationale for Government Intervention.” Food Policy 14, no. 1: 17–42. ———. 1996. “Does BULOG Stabilize Rice Prices in Indonesia? Should It Try?” Bulletin of Indonesian Economic Studies 32, no. 2: 45–74. United States Trade Representative (USTR). 1999a. “Preparations for the 1999 WTO Ministerial General Council Discussion on Mandated Negotiations and the Built-in Agenda: Submission from the United States of America.” November 23. . ———. 1999b. “Statement of Ambassador Charlene Barshefsky Regarding Broad Market Access Gains Resulting from China WTO Negotiations.” Washington, D.C.: USTR, April 8.

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Veeman, M., M. Fulton, and B. Larue. April 1999. “International Trade in Agricultural and Food Products: The Role of State Trading Enterprises.” Ottawa: Economic and Policy Analysis Directorate, Agriculture and Agri-Food Canada. World Trade Organization (WTO). 2000. “International Trade in Agriculture and Food Products: The Role of State Trading.” . WTO Secretariat. October 1995. “Operations of State Trading Enterprises as They Relate to International Trade.” Background paper by the Secretariat. G/STR/2. Geneva: WTO. Young, L. July 1999. “Prevalence and Reform of State Trading Importers in World Grain Markets.” Research Discussion Paper No. 32. Bozeman: Trade Research Center, Montana State University.

8 The Competitive Impacts of State Trading Enterprises MURRAY FULTON, BRUNO LARUE, AND MICHELE VEEMAN

State trading enterprises (STEs) are the subject of significant interest in agricultural trade negotiations. At a broad level, there is interest in the potential membership of countries like China and Russia in the World Trade Organization (WTO), as those nations have substantial state trading activities. More specifically, however, the interest in STEs appears to focus on whether countries can use these institutions to bypass provisions negotiated during the Uruguay Round. As an example, considerable interest—especially by the United States—is focused on the operations of the export marketing boards of Australia, Canada, and New Zealand. The concern is the degree to which STEs engage in activities that are difficult to monitor and the extent to which they may engage in practices that support noncommercial objectives. In turn, the nations with export STEs are concerned that such allegations deflect attention from the state-based institutions and practices of the United States and the European Union (EU) that distort agricultural trade. The question of whether STEs might be able to bypass trade agreements is similar to questions being asked in other areas. For example, in this volume C. Ford Runge (Chapter 1) and William A. Kerr (Chapter 3) explicitly examine the degree to which the provisions of trade agreements can be limited or undone because of actions in other areas such as the environment and labor standards. The ability of STEs to bypass trade agreements is linked to competition. In general, STEs can be expected to affect the provisions of trade agreements only if they are able to exert some control over the market. More specifically, the question is whether STEs have enough market power to be able to affect prices, output, and trade flows. 151

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The purpose of this chapter is to examine the linkages that exist between STEs and competition. The section just below examines the connections between trade and competition policy and the applicability of competition policy to STEs and multinational institutions. This is followed by an examination of contestability, relevant markets, and normal commercial practices. A key element is the application of the concept of a relevant market—an important element in the examination of mergers—to STEs. The focus then turns to classification schemes for STEs based on concepts of contestability and relevant markets.

TRADE, COMPETITION, AND STES

Competition policy and legislation has traditionally been a subject of concern to individual countries and has been implemented on a country-bycountry basis. Policy and legislation in the area of competition is a recognition that some markets are characterized by a substantial level of imperfect competition and market failures and that such characteristics are often associated with reduced economic efficiency or unacceptable income distribution. Competition policy typically involves government intervention when certain forms of business conduct (e.g., mergers or predatory pricing) are deemed to reduce economic and social well-being. Because there are differences among countries in the products they produce and consume (e.g., some countries may be a large net exporter of product while others are not), there will also be national differences in the views as to how industry structure and conduct affects national welfare (Graham and Richardson, 1997). STEs are often exempted from national competition legislation. However, exemptions to such legislation are not restricted to STEs. Full or partial exemptions from competition legislation, or special rules, are often applied to the agricultural sector and to other institutions associated with agriculture, such as cooperatives (OECD, 1996a, 1996b). These exemptions can be provided because they are expected to increase market efficiency or change income distribution. For instance, the U.S. Capper Volstead Act provides cooperatives with an exemption to antitrust laws so that farmers can organize collectively to provide them a means of competing with investor-owned firms. The focus of competition policy is on the behavior of firms in domestic markets rather than on their behavior in international markets. However, relationships between international trade, trade policy, and competition policy are evident, and there has been periodic discussion of the benefits of international action to link trade policy and competition policy. For instance, the Havana Charter included draft provisions on restrictive busi-

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ness practices, although these were not adopted in the GATT framework (Miner, Chapter 5). Codes of conduct for multinational enterprises have been developed under the auspices of the Organization for Economic Cooperation and Development (OECD), but they are voluntary and not legally enforceable. Ways in which competition policy could be incorporated into the negotiating agenda of the WTO are discussed by Bernard Hoekman (1997). This author concludes that an option that should enhance market access, improve efficiency, and strengthen the world trading system would be the incorporation of antitrust principles into antidumping; the most beneficial outcome would be abolition of antidumping measures. However, this abolition is unlikely to be easily achieved, as shown by the unsuccessful efforts of Canadian negotiators to incorporate such a change into the Canada-U.S. Trade Agreement. In recognition of the line between trade and competition, a WTO Working Group is currently examining this issue. Among the questions being considered are the haphazard application of competition policy by individual countries and the degree to which countries are able to selectively apply their domestic competition policy (e.g., merger guidelines) to strengthen the competitive position of the country relative to trading partners. No definitive outcomes have emerged to date. Peter Lloyd and Gary Sampson (1995) attribute the increasing attention on the interface between trade and competition policies to the greater economic integration of markets across countries that has directly arisen from multilateral and unilateral reductions in border-level barriers to trade. This greater economic integration is of relevance to STEs. Trade agreements have traditionally focused on lowering barriers to trade (e.g., quotas, tariffs, and nontariff barriers). As these barriers are lowered, other instruments may be required to address remaining problems with market performance. For instance, if a noncompetitive market structure is affecting trade flows, remedies that are based in competition policy, rather than trade policy, will likely need to be addressed. The next section introduces a framework for examining the major issue raised in this chapter, namely, the impact of STEs on competition. Since this framework is drawn from the area of competition policy, it has applicability to other competition issues in the area of trade, not just STEs.

CONTESTABILITY AND RELEVANT MARKETS

Simply put, the research question is this: Under what conditions are STEs likely to affect prices? We examine the industrial structure of the industry

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in which the STE operates. From a trade policy perspective, the relevant question is this: Do trade rules directly affect industrial structure in such a way that STEs possess the power to potentially affect prices and trade flows? The extent to which STEs are able to affect prices in a market is linked to two factors: market contestability and relevant markets. In this discussion, we attempt to understand the normal commercial practices of firms in an industry, whether the firms are STEs or not. The fact that the STE is a state-based organization or has been granted exclusive or special privilege is not the issue, unless these characteristics specifically confer some specific market power not available to other firms. Contestability Industrial organization analysis typically relates market structure to the conduct of firms that operate in that particular market; market conduct, in turn, affects market performance. Although the connection between market structure, conduct, and performance was initially thought to be linear, the more general industrial organization analysis views market structure, conduct, and performance as being jointly determined, with important feedbacks between all three areas (Jacquemin, 1987). Market structure describes the way in which an industry is structured. Descriptions of market structure involve features such as: the number and size distribution of competitors; barriers to entry and exit; the degree of product homogeneity or differentiation; the number and nature of product substitutes; the existence and extent of vertical integration; the availability of information; and the nature and extent of risk. Market conduct refers to the behavior of economic agents in the industry, specifically whether firms act independently or interdependently in their output, pricing, and product (i.e., nonprice) decisions and the nature of these decisions. Market performance, reflecting resource allocation at the industry level, is assessed in terms of profitability, technical efficiency, the exploitation of economies of scale, the stimulation of innovation, and the degree of product choice by consumers. The crucial importance of conditions of entry to firm conduct and industry performance is recognized by the concept of contestability. William Baumol et al. (1982) argue that the welfare properties of perfect competition can be achieved under conditions of oligopolistic markets as long as there are no impediments to firm entry and exit. For a market to be perfectly contestable, potential entrants must not be at a cost disadvantage to existing firms, and entry and exit must be costless. Firms must be able to exit without the loss of sunk capital costs, either by selling assets without loss or by transferring them to another production activity. If such conditions prevail, the threat of entry forces established firms to set prices equal

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to average cost, since any above-normal rate of return on assets would induce entry. Thus, in a perfectly contestable market, cost minimization for the industry is achieved, prices reflect average costs, and the traditional distinction between long- and short-run analysis is blurred (OECD, 1996c). Although the concept of contestability is relatively easily understood, it has several problems and limitations.1 For instance, empirical measurement is difficult, as contestability cannot be done directly but must be assessed on the basis of outcome indicators such as concentration measures, trade shares, price differences, and the existence of sustained rents (profitability measures have been suggested in this regard; OECD, 1996c, 1996d). In addition, contestability is a matter of degree. As a consequence, contestability can be determined only by a complete examination of an industry and the behavior and strategies of the firms in the industry. Cost advantages may accrue to incumbents because of economies of scale, learning by doing, and customer loyalty. Incumbents may also have an advantage because of experience with local culture, customs, and language. Natural barriers to entry due to geography may only be partially overcome by transportation and communication, thus allowing existing firms to raise prices above average cost. Governments may also create barriers to entry. Examples include quotas, permits, preferential purchasing, and patents. Finally, the strategic actions of private firms may create barriers to entry (OECD, 1996c, 1996d). Relevant Markets The major question posed in this chapter—namely, What is the impact of an STE on industry competition?—is very similar to that posed by competition authorities in the case of mergers. The purpose of this section is to show how the concepts used in the analysis of merger can be applied to STEs. In Canada, the Competition Bureau deems a merger is likely to substantially prevent or lessen competition if the merged entity is in a position to exercise a materially greater degree of market power in a substantial part of a market than would be the case if the firms that are merging operated independently (Competition Bureau, 1997). If this notion is applied to an STE, then an STE would be deemed to substantially prevent or lessen competition if its presence is likely to result in a materially greater degree of market power in a substantial part of a market than would be the case if the STE were not present. Given the similarity in the question being posed, the guidelines and procedures used by the Competition Bureau to examine mergers can be fruitfully applied to STEs. Two key questions are examined to determine if a merger will substantially prevent or lessen competition: What is the relevant market? and What

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is the merged entity’s share of the relevant market? Although market-share information is not a sufficient basis upon which to reach a conclusion that a merger is likely to prevent or lessen competition substantially, it is an important consideration. For instance, in Canada the Competition Bureau will generally not challenge a merger if the market share of the merged entity is less than 35 percent or if the postmerger four-firm concentration ratio (CR4 ratio) is less than 65 percent. These thresholds identify mergers that are unlikely to have anticompetitive consequences from mergers that require more analysis. For the purposes of examining a merger, the relevant market is defined as “the smallest group of products and smallest geographic area in relation to which sellers, if acting as a single firm (a ‘hypothetical monopolist’) that was the only seller of those products in that area, could profitably impose and sustain a significant and non-transitory price increase above levels that would likely exist in the absence of the merger” (Competition Bureau, 1997). The Competition Bureau considers a 5 percent price increase to be significant and a one-year period to be nontransitory. The determination of whether a significant and nontransitory price increase would likely be unprofitable involves examining the likely demand and supply responses from both product and geographic competitors. On the demand side, the degree to which buyers can be expected to switch to substitute products and/or to the same product sold in other areas is examined. On the supply side, the questions examined are closely related to contestability. These questions include: Is new entry likely to occur through the construction of facilities or as a result of other sellers adapting existing facilities to supply the product or a substitute? Are sellers of the product or of a substitute product who are located in distant areas likely to divert their product into the area in question? The merger tests could be applied to STEs. For an STE, the questions are: What is the relevant market? and What is the STE’s share of the relevant market? Following the guidelines of the Competition Bureau, the activities of the STE would be unlikely to prevent or lessen competition substantially if the market share of the STE is less than 35 percent or if the CR4 ratio with the STE present is less than 65 percent. These thresholds would identify STEs that are unlikely to have anticompetitive consequences from those that require more analysis.

PRICE DISCRIMINATION AND TRANSPARENCY

STEs have often been criticized as being insufficiently transparent and for facilitating hidden subsidies arising from cross-subsidization in pricing

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policies (i.e., price discrimination). The literature on industrial organization theory and competition policy provides some insights on these questions. Price discrimination involves the sale or purchase of a good at price differentials not directly corresponding to differences in supply cost (Scherer and Ross, 1990, p. 498). For a seller to practice (third-degree) price discrimination profitably, three conditions must apply.2 The seller must have some control over price; the seller must be able to segregate its customers into groups with different elasticities of demand or different reservation prices; and the opportunities for arbitrage—the resale by lowprice customers to high-price customers—must be constrained. Despite the popular view that price discrimination is bad, this practice is widespread, usually innocuous, and sometimes procompetitive (Green, 1990, p. 494). The pervasiveness and benefits of price discrimination are recognized in the interpretative notes to GATT/WTO Article XVII, which spells out that STEs can charge different prices for sales in different markets, provided this is done to meet conditions of supply and demand in export markets. Price discrimination is sometimes condemned because it is symptomatic of monopoly, and the exploitation of monopoly power implies a misallocation of resources. However, this criticism is not appropriate if monopoly power would be present whether or not price discrimination were practiced (Scherer and Ross, 1990, p. 494). Price discrimination can improve the performance of industries that are unavoidable monopolies by reducing the inefficiencies that arise from output restriction (Scherer and Ross, 1990; Varian, 1996). Price discrimination can enhance competition by facilitating experimentation in pricing. Unsystematic price discrimination can have an important procompetitive effect in undermining oligopoly discipline. In some circumstances, as when a firm faces increasing returns to scale over a large range, certain types of systematic price discrimination, such as so-called Ramsey pricing, can enhance economic efficiency.3 However, price discrimination will be anticompetitive if it enables a firm to entrench its market power by creating strong seller-buyer relationships, resulting in barriers to entry of new competitors. Systematic predatory discrimination that is directed at killing the rival is clearly undesirable but is rarely observed because it is not profitable under most circumstances. The competition legislation of some nations has restricted price discrimination. One example is the U.S. Robinson-Patman Act. Although this law was passed to help small businesses, it is recognized to have harmed competition by restricting price competition (Scherer and Ross, 1990, pp. 509–516). A review of the provisions of this law in 1977 by the U.S. Department of Justice condemned it for harming competition by imposing rigid pricing in oligopolistic markets where firms have used the law to prevent competitors from price-cutting (Hilmer et al., 1993, pp. 78–79).

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In Australia, a recommendation to repeal the more limited restrictions on price discrimination included in antitrust legislation was made by a committee of inquiry into national competition policy. The committee concluded that price discrimination generally enhances economic efficiency and that exceptions would be adequately covered by antitrust provisions on anticompetitive agreements and misuse of market power. The committee considered that the restriction of price discrimination otherwise should not form part of a national competition policy (Hilmer et al., 1993, pp. 74–80). The recommendations of the committee were adopted in the subsequent revision of Australia’s Trade Practices Act. A review of literature on firm behavior and industry performance indicates that in general price discrimination is a normal expression of price competition and thus a normal commercial practice. Exceptions occur when this practice harms contestability of markets by restricting or excluding new competitors. There is no indication that this has been the case in the pricing practices of export marketing boards. However, it is also clear that the impact on contestability of some import STEs is deleterious when access of competing traders to that market is restricted (i.e., if the STE is effectively given “sole importer” or “preferred importer” status or if it operates in a highly protected market, as when imports are effectively limited by restrictive tariff rate quotas). Under these circumstances, an import STE is able to exert considerable market power in pricing on the protected domestic market. Another issue to be considered is the question of the transparency of STE operations. It would not seem to be in the spirit of GATT/WTO to impose higher reporting standards on an STE than those that are customarily applicable to its competitors in any market. Such a requirement would place STEs at a competitive disadvantage. This would be of particular concern in export markets where the exclusion of an STE could harm, rather than aid, the competitive environment (i.e., when industry concentration would be expected to increase, and thus the extent of competition would be expected to decline, with the elimination of an STE). This situation could be expected, for example, if some export STEs were to be eliminated.

FRAMEWORK FOR ANALYSIS OF STES

The concepts we introduce provide some basis for developing a framework for the analysis of STEs. At least five observations can be drawn. First, the relevant market in which the activities of an STE are to be examined is not necessarily that of the country that is home to the STE. Using the relevant market concept as defined for the analysis of mergers, the appropriate market for an examination of STEs is the smallest group of

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products and smallest geographic area in which a hypothetical monopolist could profitably impose and sustain a significant and nontransitory price increase. If the STE’s share of this relevant market is relatively low, or if this relevant market has some workable degree of competition, the activities of the STE are unlikely to reduce competition. If these thresholds are exceeded, more analysis is required. Second, the contestability literature points out that the existence of a relatively concentrated market does not necessarily indicate imperfect market conduct if the entry/potential entry of new competitors is likely to have a major impact on firms’ conduct and performance. By the same logic, the dominant market position of an STE cannot be used to infer that the market is not contestable. Rather, the question must be asked as to whether the actions of the STE are curtailed because of the potential for entry by other firms. If so, then the STE, despite its substantial market share, is likely to have little impact on competition. Third, the basis of comparison in analyzing the impact of an STE must focus on the behavioral characteristics that would be expected in the absence of the STE. This analysis requires the identification of measures, which may necessarily be proxy, or rule-of-thumb indicators, of the impact of different types of STEs on market structure, conduct, and performance rather than the characteristics per se of the STEs. The question that should be asked is: Would the removal of the STE or changes in its operation appreciably improve market efficiency? This question must be asked on a case-by-case basis and may not always be easily answered. Fourth, theoretically, a fundamental difference exists between soleseller export STEs (e.g., single-desk export marketing boards) and solebuyer STEs. In the former case, in most (if not all) instances other suppliers of that source product elsewhere exist and can compete in world markets; their structure of costs is not affected by the existence of a competing STE. In fact, the deletion of an existing export STE in the world grain market, for instance, could increase the level of seller concentration in that market. However, this is not the case for a sole importer STE; the power to act as the sole importer directly limits the access of other traders to that market. Thus, the issue of whether other importers or traders may supply the import market, and the associated issue of whether any minimum access commitments are binding or exceeded, can provide indicators of the potential market power of import STEs. Finally, it should be recognized that differences among countries in their approaches to contestability may reflect legitimate differences in history and culture. Attempts to harmonize policies and institutions are not necessarily desirable on their own account; neither are they necessarily likely to result in fewer entry barriers in international markets. Although there is a need for some multilateral decisions on the requirements for

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transparency, minimum rules, and operating procedures (see OECD 1996c, 1996d), countries do have the right to develop their own mechanisms to encourage contestability. Table 8.1 presents a categorization scheme for STEs based on the observations above. This categorization scheme is based on indicators of potential competition or contestability, since this is the crucial issue in whether STEs are able to act noncompetitively. Other relevant criteria can be proposed that may also be of interest, such as whether the relationship between the STE and government/politicians is at arm’s length and whether the STE operates with an appropriate level of transparency. However, these are subsidiary criteria to indicators of potential competition or contestability. STEs classified as Type I include those that have little, if any, effect on contestability or potential competition and consequently can be concluded to have relatively little impact on trade or prices; their potential to distort trade is low. Type III STEs, in contrast, have the potential to distort trade because they have clear adverse impacts on contestability in the markets in which they operate. Type II STEs operate in circumstances in which

Table 8.1

STE Classification Based on Contestability

STE Class

Import STE

Export STE

Type I STE (Green): The market is contestable

• Faces competition in the domestic market and controls less than 33% of domestic market sales.

• Faces competition in the export market and controls less than 33% of export market sales. • Faces competition in the export market and has a single desk in the domestic market, but the border is open to imports. • Faces competition in the export market, but controls 33% to 49% of world export sales. • Faces competition in export markets and has a single-desk role in the domestic market, but the border is not open to imports. • Controls 50% or more of world export sales of the commodity. • Controls 50% or more of world export sales of the commodity and has a single desk in the domestic market.

Type II STE • Faces competition in the (Amber): domestic market but controls Contestability 33% or more of domestic sales. may be compromised Type III STE (Red): Contestability is contravened

• No competition in importation. • No competition in importation and TRQ and/or MAC are administered by the STE.

Source: Veeman, Fulton, and Larue, 1998.

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contestability may be compromised and consequently prices and trade flows may be distorted. Case-by-case analysis of whether distortion actually occurs is necessary. The typology can be viewed in the context of a “green” (Type I), “amber” (Type II), and “red” (Type III) characterization. Type III (red) STEs should be phased out or converted to less distorting operations. Type I (green) STEs should be subject only to reporting and periodic monitoring. In contrast, Type II (amber) STEs would be required to engage in more intensive reporting and to undergo more stringent monitoring on a case-bycase basis. If transparency, reporting requirements, and reforms to Type II STEs are deemed inadequate, consideration could be given to reclassifying those STEs as Type III unless changes are made to their power and operation so that they can legitimately be classified as Type I. The categorization scheme outlined in Table 8.1 can be compared to a scheme proposed by P. Dixit and T. Josling (1997), which has the following characteristics: the trade balance for the product; the range of marketing activities subject to a degree of market control by the STE; the type of policy regime within which the STE operates; the product range of the STE; and the ownership and management structure of the STE. The most important of these characteristics is market control, referring to four specific activities that the STE might be engaged in: importing, exporting, domestic procurement (purchases), and domestic marketing (sales). The classification of STE according to market control is outlined in Table 8.2. The activities identified by Dixit and Josling are necessary conditions for STEs to exert market power—if an STE did not possess such control measures it could not influence prices. However, these measures are not sufficient conditions for an STE to control prices or to exert a noncompeti-

Table 8.2

STE Classification Based on Control of Domestic Markets and Trade

Trade Controls

Domestic Market Controls

Potential for Trade Distortion

Type I

No

No

Negligible

Type II

No

Yes

Low

Type III

Yes

No

Moderate

Type IV

Yes

Yes

High

STE Type

Source: Dixit and Josling, 1997.

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tive influence. An examination of the sufficient conditions requires a focus on the contestability and relevant market issues outlined in the categorization scheme presented in Table 8.1. The importance of distinguishing between the necessary and sufficient conditions is highlighted by the manner in which several high-profile STEs are categorized under the two schemes. Using Dixit and Josling’s scheme, K. Ackerman and Dixit (1999) classify the Canadian Wheat Board (CWB) as Type IV (high), whereas the Australian Wheat Board and the New Zealand Dairy Board are classified as Type III (moderate). Using the contestability approach, M. Veeman et al. (1998) classify these same three STEs as Type I (green). The difference in classification reflects the different foundations upon which the two classification schemes are based. The following example of the CWB serves to highlight these different foundations. Other STEs are also briefly examined. A Case Study: The Canadian Wheat Board The CWB is a Canadian crown corporation governed by a fifteen-member board (ten members are elected by farmers, the other five appointed by the government). The CWB has single-desk sales authority over the sale, to export markets, of Canadian wheat and barley. In addition, the board has single-desk sales authority over wheat and barley from western Canada sold for domestic human consumption (i.e., for sales of western Canadian wheat and barley to Canadian millers, maltsters, and food processors). As Dixit and Josling’s scheme indicates, the Canadian Wheat Board possesses controls over the domestic market in the case of wheat and barley for human consumption and exports in the case of all wheat and barley. It is on this basis that Ackerman and Dixit categorize the CWB as a Type IV STE using the scheme outlined in Table 8.2. However, simply possessing these powers does not mean that the CWB is likely to adversely affect competition to any significant extent. When market contestability is examined, the CWB is categorized as a Type I STE using the scheme outlined in Table 8.1. The major reason why the CWB is unlikely to affect competition to any significant extent lies in the definition of the relevant market. In terms of export sales, the relevant market is not wheat and barley from Canada but rather wheat and barley from within the importing countries and from other exporting countries, as importing countries will be able to switch to those sources if the CWB were to raise prices to any substantial degree. When the relevant market is understood in this context, the presence of the CWB in the export trade may even enhance competition, as the CWB represents an additional trading company to the multinational companies that operate in the world market for wheat.

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On the domestic front, the relevant market is not the Canadian human consumption market for wheat but rather the North American market. The price at which wheat is sold to Canadian millers has for some years been constrained by a domestic human consumption (DHC) price policy to levels equivalent to U.S. futures prices plus transportation costs. In addition, the border is open to grain imports from the United States and Mexico. The DHC policy ensures a common North American price and is a reflection of the contestability of the Canadian market; even if the CWB had not adopted this policy, competitive forces would result in Canadian millers paying the same price (adjusted for transportation) as their U.S. counterparts. It should be noted that tariff rate quotas do apply to imports of wheat, barley, and their products from other origins.4 These arrangements are not administered by the CWB. Because the CWB does not appear to affect the contestability of either the export or the domestic market in any fundamental way, it is classified as a Type I STE using the Table 8.1 contestability scheme. The conclusion that the CWB does not adversely affect competition is supported by the findings of numerous inquiries that have investigated CWB activities and wheat exports to the United States. One of these inquiries, administered by the U.S. International Trade Commission (USITC), focused on durum wheat. Its report was released in 1990. This report was followed by the creation of a binational panel inquiry, convened under the provisions of the CanadaU.S. Trade Agreement. Finally, another USITC investigation was launched in response to a complaint about milling-wheat imports from Canada. All three inquiries found no evidence of unfair trading practices. Other STEs The case study of the CWB illustrates the importance of focusing on contestability and relevant markets when examining and classifying STEs. Although such cases are not presented here, the difference in the categorization of the New Zealand Dairy Board and the Australian Wheat Board can be explained by similar arguments to that outlined for the CWB (see Veeman et al., 1998, for details). The examination and categorization of import STEs differs considerably from that of export STEs. Generally speaking, import STEs are more trade-distorting than are export STEs. If an import STE faces effective competition in its importing activity, then the market can be considered contestable (Type I STE; see Table 8.1). However, contestability issues emerge when the import STE has single-desk authority. Although the presence of a single-desk export STE does not necessarily limit imports, the presence of a single-desk import STE can limit imports if tariff rates are set high enough and if the STE administers tariff rate quotas and/or minimum

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access commitments. In this case, the power to act as the sole importer directly limits contestability and the STE is classified as Type III (see Table 8.1). Veeman et al. (1998) provide examples of import STEs and their classification. The state-mandated import system in Korea is categorized as a Type III STE, whereas the Japanese Food Agency is classified as a Type III import STE. For Indonesia, the rice operations of Badan Urusan Logistik (known as BULOG) were classified as Type II, whereas its operations as a single-desk importer of sugar, soybeans, and wheat, which continued until 1998, were considered to be Type III.

CONCLUSION

Considerable interest has been directed to state trading enterprises for about a decade. Part of the reason for this interest has been the potential WTO membership of countries like China and Russia, which have substantial state trading activities. Interest has also been directed to STEs because of a concern that they might engage in activities and practices that are difficult to monitor and that they might support noncommercial objectives and be used to circumvent trade agreements. The ability of STEs to bypass trade agreements is clearly linked to issues of competition. STEs can only be expected to bypass trade agreements if they are able to exert some control over the market so that prices— and, in turn, production, consumption, and trade—are affected by their actions. The extent to which STEs are able to affect price in a market is linked directly to market contestability, market competition, and the concept of relevant markets. A key finding of this chapter is that the notion of a relevant market—a concept developed to assist the examination of merger impacts—can be fruitfully applied to STEs. Although STEs may have control over exports or domestic sales, this does not mean that they are unduly influencing competition. Rather, what is important is the role the STE plays in the relevant market and the contestability of that market. The importance of relevant markets and contestability is highlighted here by illustrating how the consideration of such issues affects the categorization of export STEs such as the Canadian Wheat Board, the New Zealand Dairy Board, and the Australian Wheat Board. In examining the impact of STEs on prices, it is also critical that consideration be given to the normal commercial practices of firms in the industry. For example, price discrimination and the degree to which firms’ pricing actions are transparent are some of the issues that need to be considered. However, since price discrimination and nontransparency of pric-

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ing are normal commercial practices, both STEs and non-STEs need to be treated similarly with respect to these issues (see Schmitz and Schmitz, Chapter 6, for more details on price discrimination). As W. M. Miner points out in this volume (see Chapter 5), there is considerable evidence that STEs are becoming less important in agricultural trade, partly because of changes in trade rules and partly because of domestic policy reforms (see also Ackerman and Dixit, 1999). If trade irritants— such as price discrimination and nontransparency—are associated with STEs, then the question needs to be asked if such irritants can be addressed by trade rules or if they need to be addressed by competition policy. The ability of STEs to engage in activities that are difficult to monitor and to undertake practices that support noncommercial objectives is likely not be a trade issue but rather an issue of competition. This conclusion emphasizes the need for national competition policies to be considered in light of their international relevance. For example, there is a need to consider whether the exemption in some nations of STEs from national competition or antitrust policies is still relevant. Similarly, there is a need to consider the consistency of national competition with trade remedy legislation and the consistency of both of these components of national legislation across trading nations. Overall, the framework of relevant markets and contestability developed in this chapter provides a methodology for dealing with the impacts of STEs on international trade.

NOTES 1. It should be noted that some economic theorists have questioned the theoretical foundations of contestability (Martin, 1993). Although there are pitfalls with contestability, it nevertheless remains as a useful device for thinking about entry to an industry and the degree to which this may modify firms’ ability to price in a noncompetitive fashion. Seen in this light, the idea of contestability is closely related to the notion of relevant markets. 2. Economic theory recognizes three types of price-discrimination schemes. In the first type, the firm charges different prices to consumers according to their different willingness to pay. This requires knowledge about the willingness to pay of all consumers and is, therefore, unrealistic in practice. In second-degree price discrimination, firms offer different packages to consumers and consumers decide which package to consume. With third-degree price discrimination, different groups of consumers pay different prices for the same good. Consumer segregation may be based on geography (e.g., domestic versus foreign), age (e.g., discounts for the elderly), or other characteristics. 3. A firm with economies of scale (economies of scale are relative to market size) cannot operate profitably if it prices at marginal cost. Pricing according to a Ramsey formula that involves raising prices above marginal cost and links price increases to elasticities of demand can achieve profitability and enhance economic efficiency (Scherer, 1990, pp. 496–499; see also Baumol and Bradford, 1970).

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4. Prior to implementation of the Canada-U.S. Trade Agreement (superseded now by the North American Free Trade Agreement), the CWB controlled importation of CWB-regulated grains. However, from 1991 import licensing for U.S. grains was restricted to those grains for which U.S. support levels exceeded those for Canada; this still continues to be the case for wheat. Since 1994, Mexico has been exempted from import licensing. Consequent on the Uruguay Round outcome, in August 1995, import licensing for wheat, barley, and products was converted to tariff rate quotas, except for imports from the United States and Mexico.

BIBLIOGRAPHY Ackerman, Karen, and Praveen Dixit. October 1999. “An Introduction to State Trading in Agriculture.” Market and Trade Economics Division, Economic Research Service, Agricultural Economic Report No. 783. Washington, D.C.: U.S. Department of Agriculture. Baumol, William J., and David F. Bradford. 1970. “Optimal Departures from Marginal Cost Pricing.” American Economic Review 60: 265–283. Baumol, William, John Panzar, and Robert Willig. 1982. Contestable Markets and the Theory of Industry Structure. New York: Harcourt, Brace, Jovanovitch. Caves, Richard E. 1996. Multinational Enterprise and Economic Analysis. Cambridge, U.K.: Cambridge University Press. Competition Bureau. 1997. “Merger Enforcement Guidelines.” As accessed March 5, 2000. . Dixit, Praveen M., and Tim Josling. July 1997. “State Trading in Agriculture: An Analytical Framework.” International Agricultural Trade Research Consortium Working Paper No. 97–4. Graham, E. D., and J. D. Richardson. 1997. Global Competition Policy. Washington, D.C.: Institute for International Economics. Green, Christopher. 1990. Canadian Industrial Organization and Policy. 3d ed. Toronto: McGraw-Hill Ryerson Ltd. Hilmer, F. G., M. R. Rayner, and G. Q. Tapperell. 1993. National Competition Policy. Report by the Independent Committee of Inquiry. Canberra: Australian Government Publishing Service. Hoekman, Bernard. 1997. “Competition Policy and the Global Trading System.” World Economy 20, no. 4 (July): 383–406. Jacquemin, Alex. 1987. The New Industrial Organization: Market Forces and Strategic Behavior. Cambridge, Mass.: MIT Press. Lloyd, Peter, and Gary Sampson. 1995. “Competition and Trade Policy: Identifying the Issues After the Uruguay Round.” World Economy 18, no. 5 (September): 681–705. Martin, S. 1993. Advanced Industrial Economics. Oxford, U.K.: Blackwell. Organization for Economic Cooperation and Development (OECD). 1996a. Directorate for Food, Agriculture, and Fisheries. “Competition Policy and the Agro-Food Sector.” Paris: OECD. ———. 1996b. International Trade and Investment Division. “Trade and Competition: Frictions After the Uruguay Round.” Economics Department Working Paper No. 165. Paris: OECD/GD(96)105. ———. Trade Directorate. 1996c. “The International Contestability of MarketsEconomic Perspectives: Issues Paper.” Paris: OECD TD/TC(96)5.

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———. Trade Directorate. 1996d. “Measuring the International Contestability of Markets: A Conceptual Approach.” Paris: OECD TD/TC(96). Scherer, F. M., and David Ross. 1990. Industrial Market Structure and Economic Performance. 3d ed. Boston: Houghton, Mifflin. Varian, H. R. 1996. “Differential Pricing and Efficiency.” First Monday (Peerreviewed journal on the Internet). , as accessed July 24, 1997. Veeman, M., M. Fulton, and B. Larue. 1998. “International Trade in Agricultural and Food Products: The Role of State Trading Enterprises.” A Report to Agriculture and Agri-Food Canada, Ottawa, November. World Trade Organization. August 4, 1999. “Objectives for the Agriculture Negotiations: Export Competition: Negotiations on Agriculture.” Preparations for the 1999 Ministerial Conference. Communication from the United States. WT/GC/W/286.

PART 3 Regional Trade Agreements

9 Regional Trade Agreements and Agriculture: A Post-Seattle Assessment TIM JOSLING

The breakdown of the ministerial meeting of the World Trade Organization (WTO) in Seattle has once again raised the possibility of regional trade agreements (RTAs) becoming the instrument of choice for countries as they seek to reduce trade barriers, encourage investment, and improve transparency in the market for goods and services.1 The burst of activity in regional trade blocs that began in the mid-1980s lasted for more than a decade and changed the architecture of the trade system in a dramatic way. That period ended in the mid-1990s, when a strengthened multilateral system appeared to reduce the attraction of regional action and when U.S. domestic politics put a damper on the Clinton administration’s ability to expand the North American Free Trade Agreement (NAFTA). After some initial successes, the Asia-Pacific Economic Cooperation (APEC) process was slowed by the Asian financial crisis, and the inexorable expansion of the European Union (EU) to include countries of Central and Eastern Europe is likely to take many years longer than first envisaged. But if countries continue to disagree on the scope and governance of the WTO, then that institution may again be left behind, just as the process under the General Agreement on Tariffs and Trade (GATT) seemed unwieldy and ineffective in the aftermath of the failed 1982 ministerial meeting. Regional integration is best seen as the product of a set of global and national forces, linked with multilateral integration (globalization) rather than unrelated to it. Some regional agreements are extensions of national economic and foreign policies with motivations ranging from the construction of new political units to the need to consolidate political and economic reforms. Other agreements try to preserve market access when larger political units break up. Some countries join agreements to gain preferred access 171

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to regional markets; others see these pacts as a safe haven against the aggressive use of trade policies by others.2 But there is a systemic role to regional trade pacts that arises from their size and ubiquity. RTAs in effect share with the multilateral pacts such as the WTO (and plurilateral bodies such as the Organization for Economic Cooperation and Development) responsibility for the “management of globalization.”3 At a time when critics of the trade system are calling into question the desirability of continued opening of markets and liberalization of market access, it would be unfortunate if regional and multilateral institutions dissipated their energies in counterproductive conflict. The WTO, and its predecessor, GATT, include specific rules that constrain the activities of regional trade pacts. The most important of these rules are contained in GATT Article XXIV and Article V of the General Agreement on Trade in Services (GATS).4 Article XXIV allows regional trade agreements to be established (and hence by implication to violate Article I.1 by giving preference to members not extended to all other members of the WTO).5 The conditions include the provision that the regional trade agreement lead to free trade within a reasonable period of time among members, cover substantially all trade, and include the elimination of all duties and other restrictive regulations of commerce. Third countries that lose market access as a result of the increase in a tariff can negotiate compensation under certain conditions. These rules have been crafted to ensure that the regional integration process does not harm those that are left outside. Few consider these rules to work well. They are vague and difficult to enforce. Moreover, as the nature of regional integration changes, so the rules themselves look more dated. The relationship between the multilateral trade system and regional integration has become central to several current issues in commercial diplomacy. The resolution of the tensions that have arisen will therefore have a considerable impact on trade prospects for decades to come. Agriculture is at the center of these problems. Regionalism is of particular interest to Canadian agriculture. It poses both a significant challenge and a possible opportunity for Canadian agricultural trade policy (Josling, 1998b). The challenge arises from the fact that the expansion of regional pacts could slow down the process of multilateral trade liberalization upon which the future of Canada’s export agriculture rests. Yet Canada—a member of NAFTA, an active participant in APEC, the instigator of a free trade agreement with Chile when the United States was unable to move in that direction, and an ardent advocate of closer transatlantic links—has its feet firmly planted in the regionalism camp. Canada is therefore well positioned to benefit from better access in all the major regions of the trading world. The balance between securing greater regional access and facilitating the process of global integration is

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thus of considerable significance for Canadian officials. If the regional trade agreements that Canada supports have the effect of slowing down the opening of markets to Canadian farm exports, then this is a serious indictment. If they are a constructive part of the gradual development of a global food system, then the regional and the multilateral agreements are mutually reinforcing. If changes are needed to the rules that govern the relationship between regional and global institutions in order to increase their complementarity, then these rules should be a priority for trade policy. This chapter reexamines the linkages between these regional trade agreements and the WTO. Will RTAs get a boost from the breakdown of the Seattle ministerial meeting? How can the WTO respond to the development of “foreign policies” by trade blocs? Is there room for an alternative trade negotiating machinery in the movement toward open markets? How have RTAs contributed to the problem of the management of globalization? How is the WTO responding to this development? Can the multilateral and regional trade systems work together to solve the problems faced by the trade system?

TRADE CREATION, TRADE DIVERSION, AND TRADE DEFLECTION

The heart of the economic dilemma posed by RTAs is the relative importance of two different trade impacts, commonly referred to as “trade creation” and “trade diversion.” 6 To this should be added a third—“trade deflection.” The impact of including agriculture in the terms of a free trade agreement rests in large part on the magnitude of these three effects. Including agriculture in a free trade area or common market has benefits for the importing countries within the region, as protection is reduced on supplies from the partner countries, as well as for the exporters in the region who find their market expanding. The reduction in protection in the importing country creates trade and thus moves in the direction of multilateral liberalization. Canada, for instance, benefits from the reduced protection for its less-efficient sectors by granting better access for U.S. products under NAFTA. Although the political popularity of this improved access may not be great, the main benefits derive from increased imports that result from lower prices. The major drawback comes from the fact that the partner country that gains better access may not be the most efficient supplier. As a consequence, desirable trade may be diverted from other suppliers in favor of the preferred source. This limits the benefits to the importing country and can, on occasion, negate any economic advantage from the partial liberalization. Trade diversion also hits suppliers in other countries, as existing exports

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can be displaced by the preferred supplies from the partner. Canada could benefit from trade diversion in the U.S. market, for instance, if preferences under NAFTA gave it an advantage over, for example, Argentina. Similar diversion can occur with regional agreements on trade and investment rules, where the increased investment can be channeled in directions that are less productive than would have occurred with a multilateral liberalization of investment. Finally, any regional agreement on standards also risks making it easier for high-cost, regional sources of supply to meet the requirements, thus potentially diverting trade from more efficient suppliers elsewhere. The potential distortions in trade patterns arising from trade diversion have been the main reason why regional trade agreements are treated with suspicion by economists and others taking a global view of trade. From the viewpoint of Canada, granting access to U.S. grain and oilseed production is likely to have rather limited trade diversion effects. The United States will tend to sell grain and oilseed products at somewhat close to world market prices. For other products the picture is not so clear. For dairy and poultry products the U.S. exporter benefits considerably from the higher Canadian prices for the limited quantities that can be imported under NAFTA. Trade diversion in this case takes the form of foregoing the tariff revenue and paying a higher price in foreign exchange than would be the case for imports from third countries. Trade deflection refers to the channeling of goods into a country through a partner with a lower tariff level. This possibility leads to the establishment of rules of origin, which seek to limit free access to goods produced in the partner country. Theoretical treatments of free trade areas commonly assume that rules of origin work. A little reflection casts severe doubt on that assumption. First, with homogeneous commodities the problems of enforcing rules of origin are likely to be formidable. But even if every grain of sugar or bushel of wheat was labeled as to its origin, increased imports for domestic consumption in the low-tariff partner would allow exports to the high-tariff partner (legal deflection) up to the level of domestic production. Thus, living next to a large, more liberal trading partner may essentially imply taking on the price levels in that market. Canada is unlikely to be able to maintain prices higher than those in the United States if it were to give unrestricted access to U.S. imports. Rules of origin demonstrating that the goods are indeed from the United States do not inhibit such trade deflection. The notion of trade deflection can be extended somewhat to include the impact of arbitrage on domestic policy instruments. The indirect link between regional agreements and agricultural policy reform is through the impact of the partial opening of borders on the effectiveness, rather than the administration, of policy.7 In some cases this will lead to harmonization, in

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other cases to common policy instruments. In a few instances policies will become so ineffective that they may have to be abandoned. Once again it is the smaller partner that is going to be most affected. Thus, the Canadian domestic policy set may look very different after a few years of adjustment to the realities of NAFTA. The impact of different export policies is a clear-cut example of trade deflection. If one partner has an export subsidy, then free regional trade will encourage imports from neighbors either (illegitimately) for re-export or (legitimately) to replace the exported quantity on the domestic market. Given the constraints on export subsidies within the WTO, this may increasingly become an irritant in bilateral relationships. 8 This was the underlying cause of the conflict between the United States and Canada on the growth of exports of Canadian wheat to the United States. In addition, export subsidies on internal trade are often outlawed within a free trade area, as representing obvious distortions of internal competition—as happened in the case of the Canada-U.S. Free Trade Agreement that preceded NAFTA.9 Such inevitable weakening of national policy instruments comes chiefly through the arbitrage possibilities of regional free trade. The same effect tends to limit “domestic” policy instruments as well as those that operate at the border. One good example is that of supply control, as used in Canada, which aims at restricting supplies onto the domestic market to raise the price. It has long been recognized that some form of border protection (usually in the form of an import quota) is needed to make supply control effective. If the regional trade agreement removes such external protection, then the domestic supply control will eventually be rendered ineffective.10 This indirect impact through arbitrage may in the longer run prove to be the most significant link between regional trade agreements and the changes in Canadian domestic agricultural policies.

THE FOUR PHASES OF POSTWAR REGIONALISM

Four distinct periods of “regionalism” can be identified in the postwar period. The first is represented by the British Commonwealth, its associated preference system, and the similar colonial and postcolonial preference schemes operated by the other European countries with overseas territories, notably France, Portugal, Belgium, and the Netherlands.11 The remnants of this system of preferences can be seen in the Lomé Convention that governs preferential trade between the European Union and the African, Caribbean, and Pacific (ACP) countries. Canada still has an agreement covering the importation of goods from the Caribbean countries (CARIBCAN), which originates from these commonwealth links. Agriculture was

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central to the preference agreements of the colonial and postcolonial era. In fact, Canada itself still had a strong trade link with the United Kingdom in the postwar period as a result of historical ties. Certain commodities, notably sugar and bananas, still reflect the preferential links of the postwar period, although the proportion of agricultural trade covered by such schemes is now rather low. The final winding-up of the colonial systems is now under way, some forty years after the granting of independence to most of the countries. The problems that this poses for the trade system are discussed below. The countries of continental Western Europe, with the encouragement of the United States, experimented with a second type of postwar regionalism: economic integration as a step toward political integration leading to the formation of the European Economic Community (EEC). In the context of rapid reconstruction of the war-torn economies, this regional integration played a strong role in the recovery of the European economies. Agriculture was included in the development of the internal market, but with high levels of external protection. As a direct result of the apparent success of the EEC in the late 1950s, a parallel wave of regionalism was initiated in other parts of the world. This included the European Free Trade Association (EFTA), the Central American Common Market (CACM), and the Latin American Free Trade Area (LAFTA). The latter agreement included almost all the countries of South America as well as Mexico. But the spread of RTAs in the 1960s did not have much impact on agriculture. At that time, most regional trade agreements (with the notable exception of the EEC) left agricultural goods out of their free trade provisions, or included them only in limited ways, in deference to the political sensitivity of the sector and the potential for conflict with domestic policy objectives (WTO, 1995). As a result, the main problem left over from this second regionalism phase is the reintegration of agriculture in Western Europe into the global trade system. The Uruguay Round made a good start at this, but it could take another decade before the process is complete. After a long period of stagnation, a third wave of regional trade agreements started in the mid-1980s. This phase of regionalism had echoes in Europe with the development of the Single Market Program in the European Union but reached its peak in the trade and economic reforms in Latin America. These regional agreements were undertaken in conjunction with structural adjustment and trade reform in the countries concerned. The treatment of agriculture has been markedly different during this third phase. In the Americas, MERCOSUR (Common Market of the South), the revived Andean Pact, and the strengthened Caribbean Community and Common Market (CARICOM) all include agriculture in their free trade provisions, with relatively few exceptions.12 NAFTA also envisages a free market in agricultural goods between the United States and Mexico, although for sev-

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eral products (such as sugar, dairy products, and poultry) Canada is not part of this market. In Europe the same trend toward a fuller incorporation of agriculture is noticeable, although progress is vastly complicated by the existence of the Common Agricultural Policy (CAP). The countries of Central and Eastern Europe have included agriculture fully in the Baltic Free Trade Area (BFTA) and in a more limited way in the Central European Free Trade Area (CEFTA). The Europe Agreements that aim for free trade between the Central and Eastern European countries and the European Union also include agriculture, albeit with quantitative limits on products that threaten the operation of the CAP. As and when these countries become members of the European Union, they will fall within the orbit of the CAP. RTAs themselves are not static institutions; neither are they passive participants in world trade. Few have kept the same membership for long, and all have evolved as a result of both internal and external dynamics. One aspect of this evolution that began to emerge piecemeal in the early 1990s was the development of trade relationships among blocs. This has led to a new style of trade pact: free trade network (FTN) arrangements, which link free trade areas by means of treaties among the blocs. The best-known case was the European Economic Area (EEA) between the European Union and the EFTA countries, which granted free movement of goods (except agricultural products), services, and factors between the two blocs. The structure was intended as an alternative to EU membership for the EFTA countries at a time when those countries had foreign policy objections to joining the Union.13 The fourth phase of regionalism occurred in the mid-1990s as attempts were made to transform networks into (actual or potential) trade agreements that spanned the continents. This new breed of supraregional FTNs includes both APEC and the Free Trade Area for the Americas (FTAA). These are different from traditional regional trade blocs in that they have overlapping membership (several countries participate in both) and hence join rather than isolate continents. The fact that a country can be a member of more than one such agreement is the key in this regard: such a country can hardly discriminate against itself. Moreover, they can include both countries and existing trade agreements as components. In this way they may build on current agreements (e.g., FTAA) or be neutral toward them (e.g., APEC, which includes members of trade associations like the Association of Southeast Asia Nations [ASEAN], the Closer Economic Relations Agreement [CER], MERCOSUR, and NAFTA, as well as countries that belong to no bloc, such as Japan). Although they differ among themselves in certain crucial ways—in particular in their treatment of trade with third countries—they represent new ways of negotiating reductions in trade barriers.

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It is notable that FTNs seem at present to include agricultural trade. The FTAA, which is intended to consolidate the regional pacts in the Americas, is scheduled to include agricultural products and thus lead toward a single market in the Western Hemisphere. A separate negotiating group on agricultural trade has been set up as part of FTAA to guide this process. For countries such as Argentina and Brazil, inclusion of agriculture is imperative. Canada, as a proponent of the FTAA, will be confronted with the need to include agriculture despite the domestic sensitivity in some sectors. In agreements involving the European Union and non-EU members, agriculture is still treated as being outside the realm of unrestricted free trade. The Euro-Med agreements now being finalized between the European Union and the countries of North Africa have so far avoided including sensitive agricultural products, as does the customs union that was negotiated with Turkey. The negotiation of a free trade agreement between the European Union and South Africa has been held up by the reluctance of the Union to grant improved access to goods that would have directly competed with those covered by the CAP. Similarly, talks between MERCOSUR and the European Union, as well as those between the Union and Mexico, are finding it difficult to overcome the problems that improved access to the EU market would seem to pose for European agriculture. The European Union is in the process of renewing its trade agreements with the ACP countries. The eventual intention is to turn these nonreciprocal agreements into full free trade areas, but these negotiations are also hampered by consistency with the CAP. Thus, agreements with the European Union, other than those leading to membership, have a more uncertain influence on agricultural trade liberalization. Insofar as they eventually force changes in the CAP, they will have been successful in furthering trade reform, but such an outcome is by no means assured. In Asia the process of including agriculture in free regional trade has gone even less far: the countries of ASEAN have to date been unwilling to incorporate primary agriculture as an integral part of their planned free trade area, although some food commodities are included in the preferential tariff scheme. The financial crisis in several countries of the region in 1997 probably further delayed bold steps toward liberalization in agriculture, although it did not reduce the need for such changes. However, the CER (between Australia and New Zealand) now fully includes agricultural goods, even requiring some changes in domestic policy to make it possible.14 Agriculture now seems firmly included in the process of regional trade liberalization. As such, market access opportunities will open up for exporters such as Canada. The dangers of having to purchase high-cost supplies from regional partners are not likely to be a major problem for

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Canada, although some overseas markets could be lost as a result of trade diversion in other regional blocs, such as Europe. The best guarantee against trade diversion is the reduction, either unilaterally or in global negotiations, of external protection. Canada has several industries where some reduction of high levels of tariffs would reduce the costs of trade diversion. Trade deflection and its accompanying arbitrage impacts on domestic policy are likely to force changes in Canadian policies. However, in many areas Canada has already changed its agricultural policies to conform with the WTO “green box,” and that will be enough to resist the impact of pressures from regional trade flows. Canada should still be concerned with the systemic impact of the growth of regionalism and of FTNs on the global trade system, but the economic costs of regionalism to Canada are unlikely to be severe, and the benefits could be substantial.

REGIONALISM IN THE POST-SEATTLE TRADE POLICY CLIMATE

What is the likelihood that we might see a burst of activity in the development of RTAs as a result of the breakdown of the Seattle ministerial meeting? Several factors point toward that outcome. First, there will be less of a problem for regional pacts to get consensus from a smaller group of countries on advances in liberalization. Some of the larger developing countries, such as India, which played a major role in resisting EU and U.S. suggestions for the Seattle Round, would have much less influence in the context of regional talks.15 The European Union has much more leverage over the developing countries in Africa and the Caribbean than over the countries in Asia and Latin America. It will be more readily able to develop its trade relationships with developing countries with less constraints than would be imposed by further WTO negotiation.16 The United States also could pursue its own regional trade policy objectives in the Americas through the FTAA and with the Asian countries through APEC without the European Union having to be brought along.17 Moreover, the European Union and United States could continue to differ on the extent of the new round, and whether it would include new areas such as competition, without holding up regional market access talks. There is a chance that Latin America, a region with a strong commitment to multilateral processes but also with a rapidly developing regional trade framework, could decide that regional access was more realistic as a goal than further multilateral trade liberalization.18 The countries of East and Southeast Asia have generally put more emphasis on multilateral trade processes to help them secure access into industrial country markets. Regional blocs such as ASEAN have been a subsidiary aspect of their trade policies. Japan and Korea have avoided becoming involved in regional

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groups (other than APEC, which as argued below is not a typical regional trade agreement), but that could change if the WTO fails to recover momentum and loses credibility. Small countries in all parts of the world that have in the past used RTAs as safe havens for access into major markets could be tempted to do so again if the ability of the WTO to enforce rules (in favor of small countries against their larger trading partners) is weakened. The way forward for regional talks is not without obstacles. The U.S. Congress is not enamored with NAFTA, and the pact has tepid electoral support. Public-interest groups in developed countries who argue against further liberalization have not shown an enthusiasm for regional trade institutions. Indeed, a significant part of the anger exhibited on the streets of Seattle was aimed at NAFTA as well as the WTO. Without U.S. support it is difficult to see either the FTAA or the APEC processes moving fast. As they both have staked their credibility on timetables, they have more to lose from a period of inactivity than does the WTO.

REGIONAL PACTS AS ACTORS IN TRADE POLICY

One aspect of the challenge posed by regionalism to the WTO is the emergence of what might be called “foreign policy” in the development of regional trade blocs. As long as regional trade agreements stuck to their initial task of removing trade barriers within their collective borders, then the only issue for the multilateral system was the violation of the mostfavored-nation (MFN) principle, that is, no one member should get preference over another in member state markets. The rules in the GATT/WTO thus focus on the issues of coverage of the regional agreement (substantially all trade), the completeness of its provisions for internal free trade (elimination of duties and other restrictive regulations of commerce), and compensation for any increase in tariffs on third countries when member states form a customs union. The role of RTAs as instruments of external commercial policy was either not envisaged or left aside deliberately. But the existence of RTAs has an impact on the commercial policy of countries and regions well beyond the freeing of internal trade and the harmonization of external tariffs. The regional blocs themselves become instruments of trade diplomacy and elements of trade policy. One clear example is using the “threat” of regional pacts to influence the pace of multilateral talks. It is widely acknowledged that the outburst of regional activity in the mid-1980s was linked to the disillusionment of many countries with the progress of the multilateral system. The United States overcame its long-held aversion to regional deals and signed free trade agreements with Israel and Canada. The NAFTA negotiations also

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were spurred in part by the slow progress in the GATT talks. Having created an alternative trade system based on regional pacts, however, it became tempting to use this system to persuade reluctant parties (e.g. the European Union) to conclude the Uruguay Round of trade negotiations. Both APEC and the FTAA reflect in part a sense of frustration with the multilateral process. Clearly this could happen again. The new U.S. administration under President George W. Bush could ask Congress for authority to negotiate new regional or bilateral deals, with the implied intent of making it more costly for others to block an acceptable multilateral trade package. Another strategic use of regional machinery is the case of China and its role in APEC. Although APEC is not a typical RTA, it fulfills some of the functions of a regional bloc with respect to China. The fact that China is engaged in a dialog about trade policy in a structured setting has been useful in the long process of negotiation for its reentry into the WTO.19 Should the U.S. Congress decide not to make permanent China’s MFN status (thus effectively blocking its entry into the WTO), one might expect APEC to take on an additional burden of progressively integrating China into the trade system.20 The EU countries have obviously gone farthest in this respect. Using the collective responsibility for trade policy built into the Treaty of Rome, they have developed their own foreign commercial policy around the Brusselsbased institutions. This essentially has taken over the commercial aspects of foreign policy from the member states. The European Commission has some powers of initiative as well as responsibility for negotiation, both with respect to regional and global trade policy. The result has been a trade strategy that has emphasized both the support for regional agreements in other parts of the world and the negotiation of a network of bilateral trade pacts with other countries. The scope of these agreements ranges from the Europe Agreements with potential members and the Euro-Med Agreements with the countries bordering on the Mediterranean, to bilaterals with South Africa and Mexico. They also include long-standing trade and development agreements with seventy-one developing countries (ACP) embodied in the series of Lomé Conventions.21 Among the bilaterals under consideration is one with MERCOSUR, which would contribute a useful dimension to the foreign commercial policy stance of both institutions.22 The significance of this aspect of RTAs is that the trade policy inherent in the WTO is only a part of the relevant policy environment. To the chagrin of many international economists, countries often put considerable weight on developing regional trade relationships even when their own best commercial interests may indicate otherwise. Unilateral free trade policies make economic sense but are difficult to sell politically. Multilateral trade liberalization may be the best institutional arrangement to persuade all countries to go down the primrose path, but many politicians are skeptical

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about the prospects for and the outcome of such talks. Regional talks seem to offer some of the advantages of mutual market access agreements in a more manageable environment.23 Small countries in particular are often more concerned with access into regional markets than global access.24 Thus, the policy environment includes the aspirations of countries expressed through their participation in and influence on RTAs. In turn the RTAs themselves have to define their own relationship to the WTO.25

THE CHALLENGE OF ALTERNATIVE NEGOTIATING MECHANISMS

In terms of the management of the multilateral trade system, some of the newer regional trade arrangements provide a strong challenge for global institutions. This challenge is summed up by their application of the mostfavored-nation principle. If they negotiate free trade among members and do not “multilateralize” the tariff reductions to other countries, then they are behaving as regional blocs writ large. The FTAA is in this category, as are the FTNs being negotiated by the European Union. But if they do extend the benefits to all WTO members they are in effect conducting multilateral negotiations, to the delight of so-called free-riders, who pick up the gains but do not have to contribute to the tariff reductions themselves. One agreement that poses a special problem for the WTO is APEC, which defies categorization as a regional trade bloc and instead poses as a “process” for discussion of trade issues in the Asia-Pacific region. In that region, the APEC process calls for “coordinated unilateral” trade liberalization, extended to non-APEC members through the MFN rule of the WTO, by 2010 for developed and 2020 for developing countries (Bergsten, 1996). By that stage APEC itself could have expanded to include several more Latin American countries and may even have spread to South Asia. It is not clear that APEC would in the event adopt this “unconditional MFN” position. It would then, in effect, be conducting multilateral negotiations at the expense of the WTO—in addition to giving the European Union a free ride. Hence, there is an assumption among trade economists and trade policy professionals that the WTO process will be weakened if APEC becomes an alternative negotiating venue, or if it grants preferences for members only, thereby becoming just another large regional trade bloc. In reality, it is more likely that MFN treatment will remain conditional on all beneficiaries contributing to the reduction of tariffs. Thus, APEC will offer to extend negotiated trade access to (for example) Europe as long as Europe offers similar liberalization. If Europe agrees (along with other non-APEC countries), then the liberalization will have been “multilateral”; if Europe declines, the liberalization will have proved to be regional in scope (see Bergsten, 1997).

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THE FUTURE OF PREFERENTIAL TRADE AGREEMENTS

It is common to consider RTAs as being reciprocal free trade areas or customs unions. In many parts of the developing world another type of trade agreement has been traditionally more important that the RTA: trade accords that grant preferential access for goods from the region into the developed markets of Europe and North America. Such trade relations with the European Union are at the heart of the commercial trade patterns of the ACP countries. Prospective changes in these relationships are even more challenging than those in the reciprocal regional agreements or in global trade rules and institutions. Sweeping changes in trade could occur—with potentially drastic impacts on certain countries. In particular, the system of preferential access for certain tropical commodities is at risk. The Lomé Convention is the centerpiece of the European Union’s relationships with the developing countries of ACP. It is premised on a “preferential partnership,” which includes better access to the EU markets than other developing countries, as well as special lines of development assistance. The Fourth Lomé Convention was signed in 1990, reviewed as its midpoint in 1995, and expired on February 29, 2000. 26 The Lomé Convention was replaced by the Cotonu Agreement on Trade, Aid, and Sustainable Development on June 23, 2000. Seventy-seven ACP countries signed a twenty-year accord that extends the current Lomé trade terms at least through 2002, when a so-called preparatory period would begin during which ACP countries will build their capacities to withstand freer trade. Commencing 2008–2020, the EU and ACP will begin two-way free trade arrangements conforming to WTO rules. The Lomé Convention granted nonreciprocal free access to the EU market for all goods except those that might interfere with domestic policies such as the CAP (for such products, access is limited by quantitative restrictions). Separate protocols to the agreement covered access to the banana, sugar, rice, and rum markets in the European Union. The Lomé Convention/Cotonu Agreement will change markedly in the coming years, as Lomé had been declared to be in contravention of international trade rules. The first banana panel raised the issue of the legality of Lomé under GATT. Lomé could not be justified as a part of a free trade area under GATT Article XXIV, as it was nonreciprocal. ACP countries did not have to grant duty-free access to the products of Europe. Preferences are also allowed under the so-called enabling clause for giving advantages to developing countries. But the justification of the Lomé Convention as a manifestation of “special and differential treatment” in favor of developing countries, encouraged by the GATT, was rendered doubtful by the fact that many developing countries (in Asia, primarily) did not qualify for ACP assistance and trade benefits. In the days before the WTO, this conflict

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between the global trade rules and the trade and development policy of the major players was largely ignored. The reports of panels were merely put on one side if the country whose policy was criticized chose to block adoption. Now, with a clearer set of rules and a stronger procedure to enforce them, the conflict cannot be so easily ignored. The Lomé Convention was granted a waiver, which expired on February 29, 2000, from the obligation to conform with the WTO rules. The EU and ACP countries must still secure a WTO waiver for the extension of the Cotonu Agreement through 2008. This will increase the pressure to bring the relationship between the European Union and the ACP into conformity with global trade rules. This has led the European Union to consider various options for the continuation of the trade and aid relationship with ACP. The relationship was, in any case, the subject of some scrutiny in Europe. The trade performance of ACP seemed to be lagging behind that of Asian countries despite preferential access. Perhaps the preference system itself was discouraging flexibility in trade and locking ACP into traditional and less dynamic trade patterns. Foreign investment did not seem to be encouraged by the preferences, and the fact that the arrangements seemed always at the whim of Europe made them less than stable as a base for such investment. The option chosen by the European Union was to move toward a series of free trade areas with the ACP countries. This would end the system of nonreciprocal preferences and bring the European Union into conformity with the WTO. The United States, like Europe, has special trade relations with the Caribbean region, and they are also in a state of flux. The Caribbean Basin Initiative (CBI), put into legislative form in the Caribbean Basin Recovery Act of 1986 (revised in 1990), gives to most countries in the Caribbean and Central American region nonreciprocal access to the U.S. market. In addition, there are development funds and other benefits accruing to members of the CBI club. Such benefits have been realized somewhat unevenly, with some countries expanding exports rapidly and others hardly at all. One problem is the set of commodities explicitly excluded from free access under the agreement: textiles and shoes, along with orange juice and sugar. However, for some of these products limited access exists. In addition, various tariff exemptions have been granted for goods reimported into the United States if made from exported inputs. In addition to these trade arrangements, CBI countries have also been eligible for certain funds for developments projects. However, there were often conditions attached to the use of such monies that not all countries could accept. Moreover, the source of funding has been curtailed in recent months. The CBI also appears vulnerable to charges that it violates internation-

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al trade rules. It does not constitute a free trade area under Article XXIV, which would require reciprocal access and wider coverage; neither does it qualify as a scheme to grant developing countries “special and differential treatment,” as it discriminates in favor of a group of such countries. The prospect is therefore strong that there will be pressure to make the CBI reciprocal and, hence, more like a free trade area. This pressure would intensify if Lomé were to become a set of reciprocal trade agreements. The United States is very concerned with the increasing role of countries in the region as a channel for illegal imports such as narcotics. The United States has also offered to make sure that the region does not suffer too much as a result of the reallocation of licenses under the banana regime. In addition, funds under the section 936 program of CBI, which are about to end, could be restored in some other form. Taken together, this suggests that the U.S. administration could get a more generous package of trade and aid for the region (and for Africa) through Congress. Nevertheless, the relations with the region will continually be dogged by the anomaly of Cuba. Much as the U.S. administration would like to move toward more normal trade relations with Cuba, domestic political considerations make it uncertain that this will happen without a major change in the island regime itself. Canada has always had a special relationship with the countries of the Caribbean, from the days of trade in sugar and rum to the extensive cultural and educational interchange. Under the CARIBCAN Agreement of 1986, Canada offers the CARICOM countries duty-free access for essentially all goods except those of a sensitive nature, such as textiles. Canada imports sugar from the Caribbean, but at world prices. The pact was renewed for a period of ten years in 1994. The WTO began a review of the arrangements in 1998. Canada will therefore soon be under the same pressure as the European Union and the United States to generalize or make reciprocal this access, as it is likely to be found in violation of the WTO. Generalization would imply spreading access to other developing countries; making the arrangement reciprocal would imply allowing Canadian goods in without the common external tariff (CET) of CARICOM. Negotiations have not been completed to renegotiate CARIBCAN, and it is not clear what suggestions will emanate from the Canadian side. Canada has a reputation for being generous toward developing countries, but it also has growing interests in Asia and suffers periodically from internal constitutional tensions that occasionally restrict its foreign policy. The initiative of Canada to seek a free trade pact with Chile when NAFTA expansion was put on hold indicates that it is prepared to move ahead of the United States on occasion. However, it is clear that the relationship

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between Canada and the Caribbean will follow the trend set by the United States and European Union, that is, toward more balanced access with less emphasis on traditional export commodities. The United States has for decades had a security concern about Central America that has dominated the economic relationship. In recent years the fear of communist regimes has given way to concerns over political instability and social unrest. This would pose a threat to the United States in part as a result of labor flows moving north, first to Mexico and then to the United States. In addition, there has always been a fear that a significant part of the illegal drug trade passes through Central America. U.S. assistance to the area reflects this combination of military, economic, and social motivations. The countries of the region have full CBI access, in parallel with the CARICOM countries. Their own markets are even more focused on the United States than are those of the Caribbean. They sell to the United States the full range of tropical products as well as beef and horticultural products. They have a common market (the CACM) that had for several years been moribund before the revival of regional integration activity in the late 1980s. This will enable these countries to participate in the merging of trade blocs that forms the basis for the FTAA. However, CACM solidarity is not always apparent, and it is possible that Costa Rica could prefer NAFTA membership (if a further expansion is possible after Chile) and thereby cause some problems for the other CACM members. In agricultural terms, NAFTA membership may guarantee access and attract investment in a way that is considerably better than a continued CBI agreement with all the political subjectivity that entails. The countries of the Andean Pact also have over the years expressed concern that much of its agricultural trade with the United States is both unrecorded and illegal. The supply of narcotics from the region is a source of export earnings (and farm income) as well as a matter of political tension. As a result, there has for some time been a receptive mood in Congress to provide various forms of economic assistance as alternatives to the production of illicit drugs. This has led to a trade agreement, the Andean Pact Trade Agreement (APTA), which allows free access to particular quantities of agricultural goods into the United States. However, the Andean Pact itself is undergoing strains. The basic problem is that the group was never a cohesive economic market: the Andes chain gave countries common geographical and cultural features but hampered rather than sponsored trade. With the partial exception of Colombia’s trade with Venezuela and Ecuador, little cross-border traffic has existed. Bolivia has now joined MERCOSUR as an associate member, with Chile, and Peru is seeking to do the same. Venezuela is interested in having closer links with Brazil, with whom it shares a long border. Colombia is also interested in eventually joining MERCOSUR or some free trade zone that might emerge

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from its expansion. In this case, these members will probably graduate from the preferential agreements such as APTA as they become more focused.

REGIONS AND THE MANAGEMENT OF GLOBALIZATION

How can one best analyze the role of RTAs in the management of globalization? The recent literature on the dynamics of regional integration has been concerned with the twin questions of expanding membership (“widening”) and extending functions (“deepening”).27 These are, in the current context, different aspects of the management of globalization. Deepening regional integration extends the scope of the RTA into new areas besides the traditional one of tariff policy as the need to re-regulate is felt. 28 Widening implies the drawing of more countries into the re-regulated market to facilitate investment and trade. It used to be assumed that the two aspects were alternatives: an RTA either attracted new members (until it had swallowed up all the regional candidates), or it spent its efforts developing new forms of collective activity to manage the internal market. If it did one, the other was put on hold. More recently, it has been realized that the two aspects of integration are linked in a more complex way. Deepening raises the cost of those who are left outside and hence increases the attraction of membership.29 In addition, widening decreases the cost to and increases the benefit from admitting new members, although it still may complicate deeper integration, which tends to require more regulatory adjustment in each member.30 If qualified candidates are not available or interested at any level of “depth” of integration, an RTA might consider creating a new category of membership so as to achieve both widening and deepening at the same time. Some examples illustrate the way that these concepts help to understand the choices faced by various regional trade groups. The European Union is remarkable for having had a steady progression of new members at the same time that it has accumulated new obligations, objectives, and competencies. From achieving its initial goal of establishing a customs union in the late 1960s (the adoption of the common external tariff by the original six was achieved ahead of schedule) it expanded to include three new members in 1973 and added a tenth in 1979. A new effort to deepen the European Union in the late 1980s was accompanied by enlargements in 1986 and 1995. A major deepening occurred with the establishment of monetary union and the introduction of the euro in 1999. Now the enlargement process is under way again, with the possible accession of several countries in Central and Eastern Europe. By contrast, MERCOSUR shows little inclination to deepen its level of integration, even allowing associate

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members to join as if it were a free trade area rather than a customs union. NAFTA has neither widened nor deepened, although the timetable for tariff reduction is intact and the institutions that were created seem to function. Among other RTAs, the Andean Pact seems to be regressing from a customs union to a free trade area and is in danger of losing members. CARICOM has made efforts to deepen the level of integration, but it is also absorbing new members and considering the possibility of accepting others. An FTAA that included NAFTA, MERCOSUR, CARICOM, and the CACM would represent the ultimate in widening of previously regional trade agreements. There is even some evidence of deepening, as the FTAA negotiators discuss activities well beyond the current level of trade agreements. As has been the case for many years, Asian integration is much less advanced. ASEAN has focused more on widening than deepening and has not yet achieved the status of a full free trade area. The relationship between widening and deepening of RTAs and the architecture of the trade system is crucial. Obviously the process of widening poses a challenge for the WTO: an EU of twenty-seven members, a network of free trade areas with seventy-seven developing countries, and bilateral relationships with other blocs will have a considerable influence over what the WTO does and how it does it. But the process of deepening has even more of an implication for the WTO. The way in which RTAs deal with such issues as competition policies, labor, and even environmental policies could go some way in determining the scope of the WTO in these areas.

WIDENING AND DEEPENING THE WTO

The same dynamic concepts of widening and deepening can usefully be applied to the WTO. Widening the WTO is evident from the significant increase in membership since the completion of the Uruguay Round and the list of members still waiting to join. Many of these countries are in transition from central plan systems that did not allow private trade. Others are new countries emerging as a result of shifts in the political system. Some are small countries that previously saw little to gain from participating in a system that seemed to have little relevance to their economies. Deepening is the spread of the WTO competence into new areas, including services, intellectual property, investment, and (perhaps) competition policy, as well as into labor and environmental issues. As multilateral policy moves beyond tariff and nontariff (i.e., border) policies, the need arises for new rules and forms of agreement to promote competitive conditions and restrain the natural tendency of countries to protect their own markets. Such deepening does not come easily. More domestic constituencies are

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becoming involved in the trade policy debate and insist on participating in the process. Some protest the intrusion of multilateral rules into domestic affairs, in part reflecting their reduced influence over the regulatory instruments. Others push for greater regulation of the internal affairs of other countries as a precondition for improved market access. Both views were being expressed on the streets of Seattle. The relationship between widening and deepening in the WTO is in many respects similar to the analysis for regional groups. The initial reaction is that the two are alternatives. Widening limits deepening, as the more diverse and comprehensive WTO membership makes it more difficult to develop rules that operate on internal processes (e.g., state trading). But the existence of rules for deeper integration (or the management of globalization) makes it more essential for countries to join. To be outside the WTO is to mark oneself as a country not yet ready for participation in the new global economy. Foreign direct investors (except in the case of China) would be wary of such a situation. Although deepening can lead to widening, the process of widening can still pose problems for the operation of the multilateral system. First is the problem of decisionmaking. Just as the European Union needs the occasional intergovernmental conference among its own membership to rewrite the voting rules and legislative pathways, so the WTO is badly in need of such a deliberation to revise its own procedures. How well the WTO deals with the issue of widening will go a long way in determining its relevance as a trade institution.

ESTABLISHING THE DIVISION OF LABOR

The relationship between regional and multilateral trade institutions has two aspects. One is the impact of the regional integration on the functioning of the world trade system. Does regional integration benefit the world economy by encouraging trade, or does it distort the system by encouraging inefficient trade patterns? This is the basic question that has occupied academic debate on regionalism for a half-century and more. The answer is, “It all depends.” If the trade partners chosen are low-cost, and the regional bloc does not itself have high protection, then the free regional trade is a step toward global free trade. If freer regional trade prepares domestic interests for global competition and RTAs allow for institutional experimentation, then the links with the multilateral system are reinforcing. If the trade partners who get preferential access are high-cost, and the regional bloc has high protection, then the pattern of trade tends to become more distorted, and the movement is away from global free trade. 31 And if regional trade negotiations divert attention from global talks and give

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opportunities for protectionist activities, then the two are in clearly in conflict. The second aspect of the relationship is discussed less often. Does the existence of multilateral institutions such as the WTO make it easier or more difficult for countries to develop ties of an economic or political nature with others, either within their region or outside? Although there may be strong arguments on the grounds of economic efficiency for one global market for goods and services, to argue for uniformity of trade-related regulations, or a one-size-fits-all approach to dealings with other countries, is much less convincing. In reality, countries choose to have closer relations with some countries than with others. An international system that prohibits this is unlikely to be acceptable. The GATT made it relatively easy for countries to form free trade areas and customs unions by declining to enforce its own rules on the issue. The WTO has so far followed suit, although the mechanism for rule enforcement is now broadly in place. Similarly, the GATT turned a blind eye toward many preference schemes that were not free trade areas and encouraged others. The WTO has the option of taking a lenient view of existing and new regional nonreciprocal and commodity-specific preference schemes or of strictly enforcing its free trade area or MFN-only rule. The more constructive approach to the issue of the management of globalization is to look for a division of labor between regional and multilateral trade institutions. Each contributes to liberalization, but regional institutions have to be incorporated into the multilateral system just as the multilateral trade environment influences the development of regional trade relationships. Specific challenges arise from the need to incorporate ongoing regional negotiations in Europe, the Americas, the Asia-Pacific region, the transatlantic partnership, and the relationship between the developing countries and the developed countries in North America and Europe. In addition, there are generic issues such as the interpretation of Article XXIV, in particular the requirement that regional trade blocs cover “substantially all trade” and that they do not increase trade barriers to nonmembers (without negotiating compensation), the question of representation of trade blocs in the WTO, and the current requirement that trade blocs include free trade rather than partial trade preferences. Four changes can be contemplated in the operation of the rules and procedures of the WTO with respect to RTAs. First, the existing WTO rules on the acceptability of free trade areas and customs unions could be applied more rigorously. The requirement that substantially all trade be covered should be clarified. Second, as a condition of the free trade area or customs union being accepted by other WTO members, the participating countries should be required to ensure that other countries are not adversely affected. This should be done primarily through reductions in the tariff levels against

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third countries. A third useful step might be to follow the lead of the European Union and accept membership from customs unions as single units. In most cases, countries that are members of regional trade groupings, even customs unions, still negotiate in the WTO as independent countries. This would mean that common customs duties are negotiated in the same way as national tariffs. A fourth step—one that could usefully be taken at the multilateral level—is to ask the Committee on Regional Trade Agreements (perhaps in conjunction with the Committee on Agriculture, in the case of agricultural products), to report on the activities of these blocs in light of the process of multilateral trade reform.

CONCLUSION

The pace of regional integration has slowed markedly in recent years. MERCOSUR, the European Union, and ASEAN all have plans to expand membership, but in each case the process is likely to be slow. Although some deepening of existing regional trade groups is also taking place, as the European Union develops its own monetary identity and other groups develop common external tariffs and coordinated trade negotiating positions, deep integration is also facing problems in both Europe and the Americas. But if the multilateral process of rulemaking and market opening continues to flounder as a result of internal structural problems and external protest, then regional bodies may resume their role as the engine of global integration. The European Union and United States hold the key to these developments. They could, for instance, agree on an agenda for another WTO round. Had they done so before Seattle, it is less likely that the developing countries would have chosen that occasion to rebel against their minor role in the proceedings. It could be too late now for the old formula to work: developing countries may have to be included in a meaningful way to get a new round started. Another scenario is for the European Union itself to assume the mantle of leadership in trade policy. Regional trade groups need to redefine their relationship to other groups and to the world trade system. The FTAA, APEC, and the New Transatlantic Agenda are manifestations of the search for wider structures into which individual countries and regional groups can fit. The EU will also develop its own relationship to MERCOSUR, to Mexico, to South Africa, and to the seventy-seven countries now covered by the Cotonu Agreement. It is clear that the regional trade liberalization process itself is significantly influencing the terms of access to major markets around the world. Whether or not agriculture is included in such regional agreements has

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therefore become an important issue for the global trade system and, by extension, for Canadian agriculture. To the extent that these agreements do include agriculture, this gives them a new significance, for better or worse, in the process of liberalizing agricultural trade. It also necessitates some coordination with the multilateral process in order to avoid detracting from the more fundamental objective of multilateral trade liberalization. To the extent that agriculture is excluded from these agreements, different concerns apply. The sector is likely to remain protected by domestic and trade policies for even longer if it can resist improved access to regional trade partners. The agricultural and food processing system will tend to remain localized in such cases, servicing domestic production often at a high cost and being protected from international competition. For exporting countries such as Canada, such isolated, nationally based food industries are not a constructive part of the global food system. Canada, as was mentioned earlier, is right in the thick of the discussion about RTAs. It belongs to NAFTA and APEC, is a key supporter of FTAA, and was among the first to suggest a transatlantic trade agreement. It has shown a willingness to discuss trade agreements with MERCOSUR, and it has developed trade ties with Chile. It has even discussed a trade arrangement with the remnants of EFTA (Norway, Switzerland, and Iceland). Whether regional trade agreements become the focus of trade policy in the next few years will be of considerable interest to Canada. It may also be something that Canada itself can influence.

NOTES 1. The phrase regional trade agreements includes free trade areas and customs unions based on regional proximity as well as bilateral reciprocal agreements that link trade partners farther afield. The more general term preferential trade agreements includes nonreciprocal arrangements as well as free trade areas and customs unions. 2. For a good discussion of the motivation behind regional trade agreements, including an elaboration of the safe-haven argument, see Whalley (1998). 3. The phrase was used by Pascal Lamy, the EU trade commissioner, at the Seattle ministerial meeting. I use it here to mean the regulation (or re-regulation) of markets in a global economy to make sure that those markets fulfill the function of allocating resources and distributing products and services without the negative social impacts (market failures) to which an unregulated market is prone. It thus includes improvements in market access as well as constraints on national policies such as subsidies other than those agreed to be acceptable. It also allows for agreed measures of consumer and environmental safety and the protection of basic human rights, although many of these measures will be subject to controversy for years to come. 4. The entire GATT was incorporated as part of the WTO. The GATS was

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negotiated as part of the Uruguay Round. It deals with the treatment of service trade in regional trade agreements. It follows GATT Article XXIV reasonably closely but also includes a provision that prohibits the a priori exclusion of particular service sectors from the regional agreement. 5. Trade agreements can also be authorized under the WTO if they conform with the enabling clause, the 1979 Decision on Differential and More Favorable Treatment, Reciprocity, and Fuller Participation of Developing Countries, which was designed to allow developing countries to take advantage of preferential access into other markets. In addition, GATT Article I.2 allowed the United Kingdom and other countries in the British Empire that were contracting parties to the agreement to continue to grant preferences. 6. For more detailed treatment of the issues of trade creation, see Bhagwati and Panagariya (1996) and Bhagwati, Krishna, and Panagariya (1999). Further discussion of the agricultural trade implications of these concepts is to be found in Josling (1993). 7. This argument is developed more fully in Josling (1998a). 8. Export restrictions are also difficult to maintain for the same reason. 9. It can be argued, however, that there is little economic or political logic to the exporting members of the FTA selling to partners at a higher price than to third countries, or to the importing country buying subsidized goods from third countries but not from the partner. Hence, in NAFTA, export subsidies are allowed within the market if the importer does not complain and if the exporter needs such subsidies to remain competitive with subsidized imports from outside. 10. This same reasoning applies to policies that try to stabilize the domestic market, such as by holding public stocks. Such policies are made less effective or more costly by the existence of a free intraregional market. 11. It was the existence of the Commonwealth that required the inclusion of a clause in Article I, allowing existing preferences to continue, and Article XXIV, allowing free trade areas as an exception to the nondiscrimination principle, in GATT 1947. 12. MERCOSUR at present leaves out sugar, but includes other agricultural commodities. Moreover, the common external tariff (CET) is relatively low for agricultural products. 13. This idea of a network was suggested in some quarters as an approach to Asian trade integration, with the components being NAFTA, CER, and ASEAN. Another variation on the same theme is the Latin American Integration Association (ALADI), the descendant of the original Latin American Free Trade Association (LAFTA). Regional groups are encouraged within ALADI, subject to common rules, but in addition individual member states can enter into economic cooperation agreements with each other and give limited preferences for imports from other members. 14. Australian dairy marketing regulations were modified to allow New Zealand dairy exports to enter as if they were produced in Australia. 15. India has for some years discussed the formation of a regional bloc in South Asia—the South Asia Regional Cooperation Council (SAARC)—but this has yet to lead to significant trade liberalization. 16. One aspect of this would be that the EU could design trade arrangements that did not threaten its agricultural policy beyond the capacity of the domestic sector to adapt. 17. In this case it would be easier to bring in some aspects of agricultural

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trade, such as the abolition of export subsidies or the acceptance of biotech products. 18. The Cairns Group is split on the issue of regional trade agreements but generally favors them in the context of broader multilateral trade developments. This split could become more pronounced if countries such as Argentina and Brazil lost faith in the ability of the WTO to open up agricultural markets. 19. China was, of course, a contracting party to the GATT before leaving in 1949. Taiwan is also not a WTO member, although it has followed GATT/WTO practices on a voluntary basis. 20. Russia has also been admitted into APEC, although full WTO membership for that country is not expected for some years. 21. The current Lomé Convention has expired and negotiations have been concluded on a successor Cotonu treaty. The new agreement will extend the nonreciprocal preferences for eight years, during which new free trade agreements consistent with the WTO will be negotiated. 22. MERCOSUR would ensure that the NAFTA countries did not get better access to the EU markets than they, and the European Union would likewise avoid being at a disadvantage in Latin American markets relative to the United States. 23. Economists are concerned that the benefits that arise from greater access and lower domestic prices of import goods might be less in regional talks and that the enthusiasm from exporters might be based on the access to protected regional markets rather than on competitive opportunities in global markets. 24. A case in point: the countries of the Caribbean, many of whom have been much more concerned with the renegotiation of the Lomé Convention and the U.S. Caribbean Basin legislation than with the WTO, which they regard as an institution that cares little for their problems and offers little support. 25. It is becoming increasingly common for RTAs to coordinate their trade representation and diplomacy with respect to the WTO. This arises in part from the increasing burden of participating in all the various committees and meetings in Geneva. The Regional Negotiating Machinery of CARICOM is a good example. In addition, MERCOSUR has announced its intention to coordinate its WTO strategy. 26. The Sugar Protocol attached to the Lomé Convention has no expiration date. 27. One could perhaps add a third dimension: “consolidating” an agreement already in place. 28. By analogy with the well-known bicycle theory of GATT—that forward movement is necessary to prevent undoing—RTAs seem to need to deepen in order to avoid the unraveling of steps already taken. 29. This is the insight of Baldwin’s domino theory of integration (Baldwin, 1996). 30. Trade diversion is likely to be less as more countries join, as the chance of including a low-cost supplier increases. The size of the market for members’ exports also increases with widening, although preferred access to that market is shared with more regional suppliers. 31. By their nature, large trade blocs are less likely to be trade-distorting than are small blocs. It is more likely that large blocs will contain low-cost suppliers of particular products. Yet the large blocs pose much more of a challenge to the multilateral institutions. They represent alternative locations in which to regulate trade and to negotiate tariff reductions. They pose the threat of trade conflicts that could have systemwide implications. And they make it more difficult for countries outside the blocs to compete in world markets.

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BIBLIOGRAPHY Baldwin, Richard. 1996. “A Domino Theory of Regionalism.” In Richard Baldwin, Pentti Haaparanta, and Jaakko Kiander, eds., Expanding Membership of the European Union. Cambridge, U.K.: Cambridge University Press. Bergsten, C. Fred. 1996., “APEC in 1996 and Beyond: The Subic Summit.” Working Paper Series No. 96–12, Institute for International Economics, Washington, D.C. ———. 1997. “Open Regionalism.” Institute for International Economics. APEC Working Paper 97–3. Bhagwati, Jagdish, Pravin Krishna, and Arvind Panagariya, eds. 1999. Trading Blocs: Alternative Approaches to Analyzing Preferential Trade Agreements. Cambridge: MIT Press. Bhagwati, Jagdish, and Arvind Panagariya. 1996. Free Trade Areas or Free Trade? The Economics of Preferential Trading. Washington, D.C.: American Enterprise Institute. Frost, Ellen L. May 1997. Transatlantic Trade: A Strategic Agenda. Institute for International Economics. Policy Analyses in International Economics No. 48. Josling, Tim. 1993. “Agriculture in a World of Trading Blocs.” Australian Journal of Agricultural Economics 37, no. 3 (December). ———. 1996. “Agriculture in a Transatlantic Economic Area.” In Bruce Stokes, ed., Open for Business: Creating a Transatlantic Marketplace. New York: Council on Foreign Relations. ———. April 1998a. “Agricultural Trade Policy: Completing the Reform.” Washington, D.C.: Institute for International Economics. ———. 1998b. “The Impact of Regional Trade Agreements on Canadian Agriculture.” Canadian Journal of Agricultural Economics 46, no. 4: 407–416. Krishna, Kala, and Anne O. Krueger. 1999. “Implementing Free Trade Areas: Rules of Origin and Hidden Protection.” In Jagdish Bhagwati et al., eds., Trading Blocs: Alternative Approaches to Analyzing Preferential Trade Agreements. Cambridge: MIT Press, chap. 26. Lawrence, Robert Z. 1996. Regionalism, Multilateralism, and Deeper Integration. Washington, D.C.: Brookings Institution. Summers, Laurence H. 1999. “Regionalism and the World Trading System.” In Jagdish Bhagwati et al., eds., Trading Blocs: Alternative Approaches to Analyzing Preferential Trade Agreements. Cambridge: MIT Press, chap. 27. Whalley, John. 1998. “Why Do Countries Seek Regional Trade Agreements?” In Jeffrey Frankel, ed., The Regionalization of the World Economy. Chicago: University of Chicago Press. World Trade Organization. April 1995. Regionalism and the World Trading System. Geneva: WTO.

10 The European Union and Eastern Europe ALAN SWINBANK AND CAROLYN TANNER

One of the most hotly debated questions among trade economists and lawyers in recent decades has been whether or not regional trade agreements act as building blocks or stumbling blocks to multilateral trade liberalization (see, e.g., Pomfret, 1997, and Panagariya, 1999, for overviews of the issues raised). The failure of the WTO ministerial meeting in Seattle in December 1999 to launch a new (Millennium) round of multilateral trade negotiations can only reinforce the importance of this question. In this chapter, with its sector-specific focus, the query might be rearticulated as follows: Does the formation (and expansion) of regional trade agreements serve the process of agricultural policy reform and trade liberalization in the agricultural sector? Although the answer requires a global perspective, the European dimension cannot be ignored. Indeed, the response might well be dominated by the European experience. In the 1950s, six Western European states came together to form the European Communities (EC). 1 Since implementation of the Maastricht Treaty, the grouping has been known as the European Union (EU), subsuming the EC. Membership has now expanded to fifteen, and negotiations are under way with twelve Central and Eastern European and Mediterranean states, with entry of some or all of these applicants possible over the next decade. The EC was one of the first customs unions to be notified under Article XXIV of the General Agreement on Tariffs and Trade (GATT). Agriculture was included in the customs union; indeed, the European Union’s Common Agricultural Policy (CAP) is—both internally and externally—one of its most controversial features. By contrast, when the European Free Trade Association (EFTA) was established, the agricultural sector was largely excluded from its provisions. There have always been some Europeans who have worked for a feder197

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al Europe, who have seen the EC/EU as a staging post on the way to a United States of Europe. Although the European Union has many federal characteristics, with common policies (e.g., CAP), its own legal system and Court of Justice (which in areas of EU competence override national legislation and courts), and a centralized (albeit small) budget, it is not yet a single federal state (unlike Australia, Canada, the United States, etc.). Thus, for the purposes of this chapter, EC/EU is taken to be a regional trade agreement, and attention is focused upon the CAP. Over the years, the European Union has developed a complex web of preferential trading agreements—which are said by the European Union to be consistent with GATT Article XXIV—most notably in the Mediterranean basin, and with the (sub-Saharan) African, Caribbean, and Pacific (ACP) states under the Lomé Convention, which allows continued preferential access for former colonies. With the collapse of the Soviet empire in the late 1980s, the European Union extended its web of preferences (under the name “Europe Agreements”) to the ten Central and Eastern European countries (CEECs) that are now negotiating membership, and a whole series of new trade alliances—in the form of free trade areas and customs unions—were established throughout Europe. Thus, there is a rich European experience from which to examine the track record of the interface between agricultural trade liberalization and the grouping and regrouping of European states into regional trade agreements. Despite this, there is a good deal of uncertainty as to how the present arrangements will evolve.

CAP: TRADE DIVERSION AND REVERSAL RATHER THAN TRADE CREATION

Article 38 of the Treaty of Rome asserts that “the common market shall extend to agriculture and trade in agricultural products” and that “the operation and development of the common market for agricultural products must be accompanied by the establishment of a common agricultural policy between the Member States.”2 In articulating the objectives of the CAP, Article 39 specified that they should “increase agricultural productivity by promoting technical progress and by ensuring the rational development of agricultural production and the optimum utilisation of the factors of production, in particular labour.” Given that the agricultural sectors of several of the original six member states were highly protected, it might be thought that the language of Article 39 held out the promise of trade creation. A situation could be envisaged under which, overall, the European Union’s trade with third countries would remain unchanged (and thus with no trade diversion) but

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that within the common market lower-cost producers would displace higher-cost producers as trade barriers were torn down. However, this was not to be. An early indication of troubles ahead was the outbreak of the socalled chicken war when, in July 1962, an import levy system was applied to poultry and, as “a result, U.S. chicken exports to West Germany plummeted” (Josling, Tangermann, and Warley, 1996, p. 57). Broadly speaking, the common levels of CAP price support agreed, for the late 1960s for milk and cereals to replace the national policies that had previously applied, resulted in significant price increases in France, with limited price reductions in Germany and elsewhere (see Marsh and Ritson, 1971, p. 177). Furthermore, compensation was paid to Germany, Italy, and Luxembourg in order to broker the deal (Neville-Rolfe, 1984, p. 230). Together with productivity gains, the high prices were undoubtedly responsible for the increase in output that took place, resulting in a displacement of imports and eventually trade reversal. If EC market prices had been competitively determined within the protected market of the customs union, productivity gains in the face of low population growth and a limited income elasticity of demand would have triggered price falls. Instead, output expanded, increasing the EC’s level of self-sufficiency in several key commodities (see Table 10.1). It is widely accepted that U.K. accession to the EC in 1973, and adoption of the CAP, resulted, first, in significant trade diversion as the United Kingdom began sourcing more of its supplies from its EC partners; and, second, trade erosion as U.K. production expanded. Indeed, this had been the expectation throughout the United Kingdom’s courtship of the EC, dating back to the 1950s (Josling, Tangermann, and Warley, 1996, p. 43).

Table 10.1

Degree of Self-Supply in Certain EC-6 Agricultural Products (in percent)

Product Cereals (excluding rice) Wheat Sugar Butter Cheese Meat Beef and veal Wine

1956/1960 85 90 104 101 100 95 92 89

1968/69 or 1968 92 109 103 112 103 94 89 96

1973/74 or 1974 98 117 112 119 103 94 91 102

Source: Commission of the European Communities, 1976 and 1977. Note: 1968/69 or 1968: three-year average for crop-year or (for livestock products) calendar year. The term self-supply is not defined in the source.

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Australia was particularly badly affected, as its exports of sugar, wheat, beef, dairy products, canned fruits, and fresh apples and pears to the United Kingdom were decimated (Harris, Swinbank, and Wilkinson, 1983, p. 280). Britain’s Labour government, newly elected in 1974, was hostile to U.K. membership and sought to renegotiate the terms of entry. But high world prices for many agricultural products in 1973 and 1974 blunted Britain’s criticisms of the CAP, and the reform opportunity was lost (Harris, Swinbank, and Wilkinson, 1983, p. 43). From the perspective of the EC’s farm lobby, Spain’s accession to the EC in 1986 created problems precisely because it raised the prospect of trade creation in horticultural products at the expense of EC producers. Furthermore, it had the potential of displacing higher-cost suppliers from other Mediterranean states with preferential access to the EC market (Swinbank and Ritson, 1991, p. 289). As a result, a ten-year transition period was agreed to before Spain was to have completely free access to the markets of its EC partners. From the U.S. perspective, the Iberian enlargement posed the clear threat of trade diversion as import levies were placed on maize and other cereal imports into Portugal and Spain. The United States was particularly incensed that this enlargement was consummated before Article XXIV.6 negotiations had been concluded (Swinbank and Tanner, 1996, p. viii).

EFTA AND THE EXCLUSION OF AGRICULTURE FROM THE FREE TRADE AREA

In contrast to the experience of the EC, agriculture was largely excluded from the European Free Trade Association, although some bilateral trades were liberalized. This was a key provision for the United Kingdom—originally EFTA’s pivotal member—in the 1960s.3 How the agricultural sector came to be excluded, despite Article XXIV.8’s insistence that “duties and other restrictive regulations of commerce … are eliminated on substantially all the trade between the constituent territories on products originating in such territories,” is of interest because of the current debate within the WTO Committee on Regional Trade Agreements over the meaning of these words. During the GATT Working Party examination of the Stockholm Convention (which established EFTA), there was considerable discussion of the meaning of the phrase “substantially all trade,” and the Working Party was unable to reach agreement. There is both a quantitative and qualitative perspective. The first relates to the proportion of trade between the partners and how it should be measured.4 The second concerns sectoral

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coverage. A hotly debated issue was whether or not EFTA met the requirements of Article XXIV.8 if trade in agricultural products was largely excluded from the general free trade provisions of the agreement and only partially covered by bilateral agreements between individual EFTA members. The EFTA states argued that the drafting history of Article XXIV was important. The Article had been drafted against the background of the possibility of a free-trade area being established in Europe in which the United Kingdom, in particular, might wish to retain some barriers against certain imports from its partners mainly as a result of its preferential arrangements. It was envisaged, therefore, that an individual member of a free-trade area should have a certain latitude in respect of some products; this latitude would be permitted by the phrase “substantially all the trade.” In view of the preferential arrangements of the United Kingdom, there was an inference that this latitude would be used particularly with respect to agricultural products. It was important to note that the phrase used in Article XXIV was “substantially all the trade” and not “trade in substantially all products.” Some members might wish to avail themselves of this latitude in respect of different products. (WTO, 1995, p. 825)

The Uruguay Round’s Understanding on the Interpretation of Article XXIV failed to resolve this issue, although WTO members did recognize that the contribution that customs unions and free trade areas can make to the expansion of world trade “is increased” if the provisions extend to all trade “and diminished if any major sector of trade is excluded” (GATT, 1994, p. 31).

AGRICULTURE AND THE EUROPEAN UNION’S WEB OF PREFERENTIAL TRADE AGREEMENTS

The rather equivocal statement above caused concern in farm-policy circles in Brussels, where the then-EU trade commissioner, Sir Leon Brittan, had expressed his wish to press the WTO “to tighten its rules on regional trade agreements, to ensure that they comply fully with multilateral principles and do not discriminate against non-members” (Financial Times, July 25, 1996). This was despite the fact that over the years the European Union had negotiated a network of regional trade agreements that largely excluded agriculture. Within Europe, they included free trade agreements with each of the EFTA states, which were later bundled into the European Economic Area (EEA), comprising the European Union and those EFTA countries (other than Switzerland) that remained outside the European Union. Regional trade agreements had also been put in place with most of the

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countries bordering the Mediterranean, and in due course Greece, Portugal, and Spain became EU members. Cyprus, Malta, and Turkey are current applicants.5 In assessing the situation following the conclusion of the Uruguay Round, the European Commission noted that “to date, the … agreements concluded by the Union have been restricted in terms of product coverage. In particular, they have generally excluded all or most agricultural trade” (Commission of the European Communities, 1995, p. 4).6 Furthermore, during its presidency of the Council of Ministers in 1996, the Italian government had commented: It seems clear that, following the Marrakesh declaration, the … room for manoeuvre … has been considerably reduced. In particular, the exclusion of the agricultural sector from the regional free trade agreements … can only be temporary. Under the criterion of “substantially all the trade” … it is doubtful whether it will be possible to exclude all sensitive agricultural products, since it should be remembered that there are also “sensitive products” in the industrial sector, such as textiles, for example. (Italian Government, 1996, p. 8)

Despite these concerns, the European Union has pressed ahead with free trade agreements with MERCOSUR, South Africa, and Mexico that exclude key agricultural products. The agreement with South Africa, for example, excludes sugar and red meats, and canned fruits and juices are subject to tariff quotas. Commenting on this agreement, a senior European Commission official said that “as further reforms of the CAP are implemented, notably in relation to the next round of multilateral trade talks, it may become possible to consider additional concessions in the future” (Lowe, 1999). There is no suggestion here that the political imperative to negotiate free trade agreements will trigger reform of the CAP. Instead, we suggest that in appeasing the EU farm lobby free trade area agreements need to accommodate the reality of the CAP, despite Article XXIV’s insistence that GATT-legitimate free trade areas must include substantially all trade.

EASTERN ENLARGEMENT

The substantial growth in the number of regional trade agreements in the period since 1992 is associated with political restructuring within Europe following the collapse of the Soviet empire. It triggered a realignment of EC–EFTA trade relations in Western Europe; the formation of a customs union between the Czech and Slovak Republics following the rupture of Czechoslovakia; and the creation of a Central European Free Trade

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Agreement (CEFTA) and a Baltic Free Trade Agreement (BFTA), which in 1997 was extended to include agriculture.7 The European Union concluded a series of Europe Agreements with the ten CEECs, something that was seen as a step toward full EU membership. The ten aspirants negotiated a series of free trade areas with the residual states of EFTA, then set about establishing a series of bilateral free trade agreements with each other to cover the remaining bilateral trade flows. Following the Helsinki Summit, there are thirteen candidate states (see Table 10.2).8 During the 1990s it became evident to the European Union that the promise of eventual membership that it had extended to the CEECs could place considerable strain upon its existing institutions, its budget, and its policies—including the CAP. The ten are poor and still highly dependent upon agriculture, as is clear from the summary data in Table 10.2. If all ten were to join, the European Union’s land area would increase by 33 percent. Thus, it seemed that enlargement, with existing policies intact, would be beyond the resources of the European Union; if enlargement were to

Table 10.2

Basic Data on Applicant States from Central and Eastern Europe and the Mediterranean

Area Population (1,000 km2) (millions) Bulgaria 111 Cyprus 9 Czech Republicb 79 Estoniab 45 Hungaryb 93 Latvia 65 Lithuania 65 Malta 0.3 Polandb 313 Romania 238 Slovakia 49 Sloveniab 20 Turkey 775 EU-15 (1995) 3,236

8.3 0.7 10.3 1.4 10.1 2.4 3.7 0.4 38.7 22.5 5.4 2.0 63.4 371.6

GDP per Head in PPS,a as % of EU Average 23 77c 60 36 49 27 31 na 39 27 46 68 32 100

Agriculture Inflation: as % Annual of Total Average Employment 22.3 2.2 10.7 8.2 14.3 4.7 5.1 2.4 11.8 59.1 6.7 7.9 84.6

25.7 9.6 5.5 9.4c 7.5 18.8 21.0 1.8 19.1 40.0 8.2 11.5 42.3 5.3

Source: European Commission, 1999, annex 2; for EU15: Commission of the European Communities, 1997. Notes: a. PPS: purchasing power standards. b. The five “first-wave” countries initially identified. c. 1997. Otherwise the data is presumably for 1998, although the source does not specify.

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proceed, existing policies (including the CAP) would need to change. In previous enlargements the basic idea had been that the new members would quickly adopt the existing EU legislation (its acquis communautaire), but in this instance it seemed possible that enlargement might trigger CAP reform (Buckwell and Tangermann, 1997, p. 309). A series of studies was commissioned by the European Commission, and although they “expressed a range of views about the capacity and likelihood of agricultural recovery” in the CEECs, they “all agreed that because of potential difficulties with commitments made in the Uruguay Round and with the EU budget, to make enlargement feasible it would be advisable to continue to reform the CAP along the lines started in the 1992 MacSharry reforms” (Buckwell and Tangermann, 1997, p. 309). Had this been the outcome—and it might yet come to pass—we could cite a clear example of the process of expanding a regional trade agreement triggering agricultural policy reform. However, as yet the limited reforms adopted by the European Union in Agenda 2000 do not allow this conclusion to be drawn. (We discuss Agenda 2000 below.) Given the limitations of space, we will focus our analysis of Eastern enlargement on two studies (see, e.g., Liapis and Tsigas, 1998, and Hertel, Masters, and Gehlhar, 1999). Peter Liapis and Marinos Tsigas used the Global Trade Analysis Project (GTAP) general equilibrium model to assess the impact of accession of seven of the CEECs and adoption of the pre–Agenda 2000 CAP.9 Their base data show the agricultural sector in the seven to be less heavily protected, and the industrial sector marginally more protected, than in the existing European Union. Thus, farm production in the CEEC-7 expands, and “EU enlargement is trade-diverting in agricultural products as EU-15 imports from third countries are displaced by imports from CEEC-7” (Liapis and Tsigas, 1998, p. 62). Third-country exports of agricultural products to the CEEC-7 “decline significantly” except for wheat, for which import demand increases to provision the expanded livestock sector. Nonetheless, the overall impact on world trade is small, because the CEEC-7’s share of world trade is small (Liapis and Tsigas, 1998, p. 61). The impact on the EU budget, however, is dramatic. Even though the authors do not allow for the payment of arable area or headage payments in the CEECs, expenditure on the EU agricultural budget is forecast to increase by 35 percent (Liapis and Tsigas, 1998, p. 63). Thomas Hertel, William Masters, and Mark Gehlhar (1999, p. 293), having noted that in the past the CAP “has created a strong tendency to substitute intraregional imports for extraregional ones—in some cases nearly eliminating the latter altogether,” report on empirical work suggesting that, provided area and headage payments are not extended to the CEECs, “the potential for integration to lead to global welfare gains is quite good.” This is because “low-cost CEEC agricultural output” substitutes “for higher-cost EU15 produce.” However, “if the CAP were to be fully extended to the

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CEECs and if EU15 producers were to avoid full adjustment to the new entrants’ comparative advantage in agriculture, the CAP would become much more expensive.” This they believe to be unsustainable, and they consequently conclude that “enlargement will require reform of the CAP itself.” Although budget considerations may prove important, in the following sections we focus upon the potential problems that adoption of the CAP by the applicant states raises with respect to the enlarged European Union’s obligations in the WTO. These concern, first, tariff bindings and Article XXIV.6 negotiations, and, second, the Aggregate Measurement of Support (AMS) and export subsidy constraints of the Agreement on Agriculture. The latter, in particular, we believe is a more potent threat to the CAP than an inflated budget. Tariff Bindings and Article XXIV.6 Negotiations Article XXIV.5 specifies that the import duties and “other regulations of commerce” of a legitimate customs union should not “on the whole be higher or more restrictive than the general incidence of duties and regulations of commerce applicable in the constituent territories prior to the formation” of the union. The intention is not that each tariff line be subject to this test, “but merely that the whole level of tariffs of a customs union should not be higher than the average overall level of the former constituent territories” (WTO, 1995, p. 803). The Uruguay Round Understanding on the Interpretation of Article XXIV has attempted to define more clearly the methodology to be followed: it is to be based, for example, on weighted average tariff rates, and customs duties collected, using applied rather than bound rates (GATT, 1994, p. 32). As a result of the Uruguay Round, tariffs on most agricultural products are now bound. Article XXIV.6 recognizes that the formation of a customs union might involve revocation (under Article XXVIII) of a bound tariff rate by one or more of the constituent territories, in order to consummate the union. Article XXVIII provides for consultations with the supplying countries with a view toward negotiating “compensatory adjustment” for those adversely affected. The new Understanding now specifies that Article XXVIII negotiations “must be commenced before tariff concessions are modified or withdrawn upon the formation of a customs union” and that the “negotiations will be entered into in good faith” (GATT, 1994, p. 32). For the last enlargement of the European Union (Austria, Finland, and Sweden), Article XXIV.6 negotiations did not take place until after the event; the enlargement and the inauguration of the new WTO system both occurred on January 1, 1995. Negotiations then took place within the new WTO framework and, despite the Uruguay Round’s attempts to clarify the rules, there was still debate over their meaning (Swinbank, 1996, p. 396).

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For example, if a bound tariff is increased by one of the constituent parties to the customs union, and this adverse effect is not offset by a reduction of the “corresponding duty” of other members of the customs union, then Article XXIV.6 provides for “compensatory adjustment.” The Understanding attempts to clarify this in suggesting that such compensation “may take the form of reductions of duties on other tariff lines.” However, this has to be agreed, with “the Members having negotiating rights in the binding being offered or withdrawn.” If the compensatory adjustment offered by the parties to the customs union proves unacceptable, “negotiations should be continued.” Ultimately, following a “reasonable period,” the customs union may proceed, but the “affected Members” are then “free to withdraw substantially equivalent concessions” (GATT, 1994, pp. 32–33). The Article XXIV provisions as now articulated will make it very hard, if not impossible, for applicant states with low bound rates of duty to unilaterally increase those tariffs in order to mimic the CAP in the period immediately prior to membership.10 Thus, a “big bang” accession, under which the CAP is applied in full on day one of membership, seems infeasible unless the European Union has substantially lowered its own border protection by then. There is a further complication. Prior to Helsinki, the European Union was negotiating with five CEECs and Cyprus, and it was possible to envisage most, if not all, of these states joining the European Union on a single future date (say, January 1, 2004). This would have allowed the European Union to embark upon one set of Article XXIV.6 negotiations within the WTO, possibly rolled into the Millennium Round. Although the European Council (1999) has declared that “Candidate States which have now been brought into the negotiating process will have the possibility to catch up within a reasonable period of time,” it is difficult to envisage uniform progress and a single date for enlargement. Instead, it seems more likely that the European Union will be enlarged in piecemeal fashion over the next ten to fifteen years, prompting a series of Article XXIV.6 negotiations extending beyond the Millennium Round and exposing the CAP to searching scrutiny on each occasion. The Binding Commitments in the Agreement on Agriculture The Agreement on Agriculture imposes constraints on WTO members in respect of the overall level of support granted the farm sector (the AMS) and product-specific limits on the volume of subsidized exports and expenditures on the same (see Swinbank and Tanner, 1996, chap. 7). Although the AMS constraint is not problematic for the EU-15 for the immediate future, the export subsidy constraints are, and indeed this was a significant consideration for the European Commission in crafting its proposals for

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CAP reform in Agenda 2000 (Swinbank, 1999b). The WTO agreements give no guidance on “the methodology to aggregate and/or negotiate nontariff agricultural commitments … when establishing/enlarging a customs union” (WTO, 1996, p. 2). However, what was ultimately agreed for the 1995 enlargement was a simple addition of the AMS constraints of the partners, as well as an aggregation of their export subsidy constraints “netting out all intra-trade between the acceding countries and the EU” (Leetmaa, Jones, and Seeley, 1998, p. 125). As some of the EU-15’s subsidized exports are currently directed to the applicant states, and as the applicant states’ export subsidy entitlements are for the most part very modest, it would appear that the enlarged Union’s export subsidy commitments will be inadequate to allow continued operation in the enlarged Union of an unreformed CAP. Agenda 2000 Agenda 2000 was a policy initiative focusing on a whole series of issues related to enlargement, not just CAP reform. It was launched by the European Commission in July 1997 and resulted in a series of policy reforms adopted unanimously by the European Council in Berlin in March 1999.11 In 1992, under the then–farm commissioner, Ray MacSharry, and faced with deadlock in the Uruguay Round, the European Union had enacted a significant CAP reform, partially shifting support from consumers to taxpayers. Thus, as intervention prices for cereals and beef were reduced, farmers received area and headage payments to compensate for the expected fall in sales revenue (Swinbank, 1997; Coleman and Tangermann, 1999). In Agenda 2000 the European Council agreed to a further 15 percent cut in intervention prices for cereals, rather than the 20 percent proposed by the European Commission and agreed by the Council of Agriculture Ministers.12 It is debatable whether or not this will be sufficient to allow the European Union to export wheat without subsidies through the next decade. Arable area payments are increased. For beef, intervention prices are to be cut by 20 percent, rather than by the 30 percent proposed by the European Commission. As with cereals, export subsidies will continue to be used. Headage payments will be increased, but by more than necessary to compensate farmers for the expected fall in prices (MAFF, 1999a, p. 12). Milk quotas are rolled forward to 2008 but with a midterm review in 2003, which could decide that the current quota regime should be abandoned in 2006. Intervention prices are to be cut by 15 percent in three 5 percent steps from 2005 rather than from 2000 as proposed by the European Commission, or 2003 as agreed by the Council of Ministers. Despite these price cuts, import tariffs remain unchanged, thus expanding the amount of redundant tariff protection and making trade diversion a more likely out-

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come of enlargement. However, the cuts in support prices will make it easier for the European Union to offer significant tariff cuts on these products (and on pig and poultry products) in the upcoming WTO negotiations. This is not so with respect to sugar, which was untouched by the Agenda 2000 reforms. However, the sugar regime is due for review in 2001. Member states have to introduce an element of cross-compliance to ensure that farmers meet minimum environmental standards before area and headage payments are made in full. Member states are entitled to “modulate” (i.e., reduce) a farm’s area and headage payments if the labor force deployed on the farm falls below a predetermined norm, the overall prosperity of the farm exceeds a regional norm, or the total payment “exceeds limits to be determined by the Member State” (Regulation 1259/99, art. 4). 13 The CAP’s structural policy components were refashioned into the so-called second pillar of the CAP. Agenda 2000 did nothing to simplify the CAP, which had been one of the original aims of the European Commission. Instead, the various “sweeteners” and side deals introduced into the package by ministers (e.g., the special deals on arable base areas, reference yields, and drying subsidies) further increased the policy’s complexities as ministers strove to accommodate rent-seeking behavior (Swinbank, 1999b, p. 391). Furthermore, the retention of milk quotas and high support prices through 2008, with no clear commitment to remove quotas thereafter, can only signal to the CEECs that they too need to prepare for life under a quota regime. Second, the Agenda 2000 decisions further consolidated the arable area and headage payments, originally introduced by the MacSharry reforms of 1992, as a permanent feature of the CAP, rather than as temporary compensation payments for those farmers who suffered revenue losses as a result of the price cuts. Unless the Council of the European Union adopts further legislation, they will be paid in full forever; and the legitimate expectation of farmers in the CEECs can only be that they, too, will receive these payments in full upon accession. This will create the same distortions regarding land use and land prices in the new member states as currently apply in the EU-15 and will add considerably to the budgetary costs of the CAP. There is, however, no provision within the budget, agreed for the period 2000 to 2006, for such payments to farmers from the CEECs. Furthermore, it could create problems with Article 13(b)—the so-called peace clause—of the Agreement on Agriculture in that these are blue-box payments that could be challenged after 2003 upon the expiration of its provisions and, in any event, could be said to increase the level of support that CEEC farmers had received in 1992 (GATT, 1994, p. 52). Third, Agenda 2000—despite the rhetoric—did not fundamentally change the CAP. European agriculture remains highly protected, and although the support mechanisms have been partially switched from con-

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sumer-funded to taxpayer-funded systems, for many products (e.g., sugar) EU prices remain well above world market prices. This means that export subsidies will continue to be deployed. This could cause difficulties for the EU-15 if it is to meet its WTO obligations under the existing restraints, let alone the problems an enlarged European Union would face under the even tighter constraints following further reductions in export subsidies negotiated under Article 20 as provided for in the Agreement on Agriculture (GATT, 1994, p. 55). Furthermore, given high tariff barriers, trade diversion rather than trade creation remains the most likely outcome of enlargement. For the fragile economies of the CEECs, recently released from central planning and state control, it seems futile to ask them to gear up for the highly wasteful CAP, only to subject the CAP to a genuine fundamental reform a decade from now. It would have been far more efficient and logical to send clear signals about the future of European farm policy rather than pretend that the existing CAP can be sustained for more than a few years into the new millennium. Budgetary Pressures and CAP Reform? The introduction of milk quotas in 1984 was undoubtedly triggered by a budgetary crisis, but that was an isolated example, despite the fact that from time to time commentators have suggested that the constraints on public finance would bring about fundamental reform of the CAP. The MacSharry reforms of 1992 were not, in our view, driven by budgetary considerations; indeed, the package finally agreed had the effect of increasing EU expenditure on the CAP (see Swinbank and Tanner, 1996, chap. 5). In the Agenda 2000 package, budgetary constraints actually hindered CAP reform. One dominant theme in the overall Agenda 2000 debate related to the funding of the EU budget in the period 2000–2006, as well as the significant financial transfers between the member states occasioned by the budget (Jenkins, 1999, p. 15). The United Kingdom wished to retain its budget rebate negotiated by Prime Minister Margaret Thatcher in the early 1980s, Germany wanted to relinquish its “paymaster” role, and net beneficiaries (notably Spain) were insistent that their net receipts should not be diminished to fund payments to the East. But CAP reform is expensive, as a switch from consumer to taxpayer support will inevitably increase budget expenditure if farm revenues are to be sustained. Thus, reform of the sugar regime could not be included in Agenda 2000, and the European Commission’s original proposals on milk were very modest. As the debate progressed, a budget ceiling was placed on CAP spending over the sevenyear financial horizon (2000–2006). Three mechanisms were considered: first, to introduce some element of cofinancing of area and headage pay-

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ments (i.e., the payments would have been funded in part from national treasuries rather than in full from the EU budget); second, to reduce the payments by, say, 3 percent per year (“degressivity”); or third, to delay and weaken the price cuts to minimize the need for “compensation” payments. It was the third strategy that was adopted. Thus, the European Commission’s timid proposals in Agenda 2000 were watered down by the Council of Agriculture Ministers. By February 1999 the Council had reached agreement and, had the German presidency been willing to press ahead with a vote, undoubtedly the package would have been adopted by a qualified majority despite French opposition. However, at France’s insistence, in March 1999 the debate was reopened at the European Council in Berlin, and the CAP reform package was further diluted as member states strove to reach a unanimous agreement (Swinbank, 1999b, p. 393). This weakened the authority of the Council of Ministers, through the rejection— in this instance—of qualified majority voting as the method of CAP decisionmaking, but it reflects the political realities of the European Union. For the United Kingdom, the undoubted prize was the continuation of a budget rebate. Nonetheless, one of the participants, the U.K. minister of agriculture, has conceded that he shares the views that “further CAP reform is needed to facilitate enlargement and the [WTO] negotiations … will provide further impetus for reform” (letter from the minister in House of Commons, 1999, p. 1). The Berlin Summit did agree on annual limits for CAP expenditure, and “the Agriculture Council and the Commission were requested by the Berlin European Council to pursue additional savings if necessary to ensure that the budget stability target is respected” (MAFF, 1999a, p. 11). What impact this agreement will have upon the CAP, if expenditures threaten to exceed the limits, is unclear.

CONCLUSION

Agenda 2000 should not be seen as the European Union’s final stance on CAP reform, either in the context of the continuing WTO negotiations on agricultural trade liberalization as provided under Article 20 of the Agreement on Agriculture (GATT, 1994, p. 55), or in response to the challenges of Eastern enlargement. New reform proposals will undoubtedly be tabled before long, and a genuine reform of the CAP could be only a few years away. Trade liberalization would generate significant economic benefits for the European Union and for the wider world economy. In the past such reforms have been blocked by a combination of the arcane decisionmaking procedures of Brussels, which require a qualified majority vote in

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the EU’s Council of Ministers in favor of reform, and the effective manipulation by powerful lobbying groups of the public’s concerns about, inter alia, the environment, food safety, food security, the power of transnational corporations, and the unaccountability of the WTO. Following the debacle in Seattle, these concerns are in the ascendancy, and those of us who would like to see a further liberalization of trade in food and farm products have the major task of convincing skeptical members of civil society of the intellectual merit of our arguments. The MacSharry reforms of 1992 were, in our view, prompted by the international pressures brought to bear upon the European Union in the Uruguay Round. The CAP reforms in Agenda 2000 were not driven by the challenges of enlargement, or the prospect of a Millennium Round, but rather by the need to constrain the European Union’s subsidized exports to match its WTO commitments. In particular, it is the export subsidy limits that imply that the existing CAP cannot simply be transplanted into the CEECs. It may be that rational argument will prevail and that the European Union will accept the merit of real and radical reform of the CAP early in the first decade of the twenty-first century, prompted in part by the challenges of enlargement. Our fear, however, is that if WTO members fail to launch a Millennium Round, protectionist pressures within the European Union will scuttle the prospect of an early agreement on agricultural trade liberalization in the Article 20 negotiations. Then, with the prospect of the expiry of the peace clause in 2003/04, the CAP will be subject to hostile challenge in the WTO. In this scenario, the European Union will be placed in the invidious position of having to make radical changes to its CAP if it is to comply with adverse rulings of WTO dispute settlement panels and remain a committed member of the WTO’s rules-based system.

NOTES In part this chapter derives from as yet unpublished research undertaken at the University of Sydney in September-October 1999. The financial support of the Leverhulme Trust, and the hospitality of the Universities of Sydney and Göttingen, are gratefully acknowledged. The authors, however, retain sole responsibility for any errors, omissions, or misrepresentations present in the text. 1. There were three treaties: the European Coal and Steel Community (ECSC) of 1951 and the European Economic Community (EEC) and the European Atomic Energy Community (EURATOM) of 1957. It is the EEC Treaty (sometimes known as the Treaty of Rome) that provided for a common agricultural policy and a common trade policy. Although based upon three treaties, the European Communities had common institutions and acted as a single entity. The treaties have been amended on several occasions, most notably by the Single European Act and the Maastricht Treaty (which came into effect on November 1, 1993) and, most recently, by the Amsterdam Treaty.

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2. The Amsterdam Treaty renumbered many of the articles of the Treaty of Rome: Articles 38 and 39 have become Articles 32 and 33. 3. On the problems of including agriculture in a free trade area if one or more parties protect their farm sectors, see, e.g., Josling (1993) and Tanner and Swinbank (1998). 4. At various times, thresholds of 80 or 90 percent of trade between the partners have been mentioned. Of course, where tariffs are prohibitive, trade volumes will by definition be nonexistent or negligible, and thus important sectors of the economy could legitimately be excluded from the scope of a regional trade agreement by the arbitrary application of such a rule. Thus, the Australian government has suggested that the test should be whether or not the agreement covers 95 percent of all six-digit tariff lines (WTO, 1998, p. 2). 5. On the difficulties faced by the European Union in entering into customs union agreements with the Mediterranean states given the CAP, see Swinbank and Ritson (1991). 6. Since November 1993 the Commission of the European Communities has called itself the European Commission, except on official documents. In the text we refer to the European Commission, but the bibliography reflects both usages. 7. CEFTA currently comprises the Czech Republic, Hungary, Poland, and the Slovak Republic (the original Visegrad Four), and now Slovenia and Romania. Membership is open to WTO members that have signed Europe Agreements with the European Union. Although some agricultural products are included in CEFTA, coverage is limited. 8. At the Luxembourg meeting of the European Council in December 1997, as part of the Agenda 2000 process, the European Union decided to embark on negotiations with five “first-wave” CEECs and Cyprus. At the December 1999 meeting of the European Council in Helsinki, it was decided to proceed with negotiations with all ten CEECs, as well as Cyprus and Malta, and that Turkey was “a candidate State destined to join the Union on the basis of the same criteria as applied to the other candidate States” (European Council, 1999). 9. The Baltic Republics are excluded. The analysis does not constrain milk production by quota or impose a set-aside requirement on arable production (Liapis and Tsigas, 1998, p. 59). 10. This is particularly the case for Hungary, the Czech Republic, and Slovakia. By contrast, Romania has bound many of its tariffs on agricultural products at rates well in excess of those applied by the European Union (see graphs 34 to 43 of annex 2 of European Commission, Directorate-General for Economic and Financial Affairs, 1999). 11. For further discussion on the proposals for CAP reform, see Swinbank (1999a and 1999b). 12. The European Council is the twice-yearly meeting of the EU heads of state. It has no legislative powers with respect to the CAP, but it does determine EU strategy, launch new policy initiatives, and broker agreements among member states. It is the Council of Ministers (known as the Council of the European Union) that enacts legislation (for the CAP, by qualified majority vote). When CAP measures are involved, ministers of agriculture attend the Council of Ministers on their countries’ behalf. 13. For England, the British government has decided that under this latter provision all payments will be reduced to release funds for spending on rural development and environmental policies (MAFF, 1999b).

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BIBLIOGRAPHY Buckwell, Allan, and Stefan Tangermann. 1997. “The CAP and Central and Eastern Europe.” In Christopher Ritson and David R. Harvey, eds., The Common Agricultural Policy. 2d ed. Wallingford, U.K.: CAB International. Coleman, William D., and Stefan Tangermann. 1999. “The 1992 CAP Reform, the Uruguay Round, and the Commission.” Journal of Common Market Studies 37, no. 3: 385–406. Commission of the European Communities (CEC). 1976. The Agricultural Situation in the Community 1975 Report. Luxembourg: Office for Official Publications of the European Communities. ———. 1977. The Agricultural Situation in the Community 1976 Report. Luxembourg: Office for Official Publications of the European Communities. ———. 1995. Free Trade Areas: An Appraisal. SEC(95)322. Brussels: CEC. European Commission. 1997. Agenda 2000: Volume II—Communication: The Effects on the Union’s Policies of Enlargement to the Applicant Countries of Central and Eastern Europe (Impact Study). Brussels: CEC. ———. 1999. Composite Paper: Regular Report from the Commission on Progress Towards Accession by Each of the Candidate Countries, October 13, 1999. Brussels: CEC. . ———. Directorate-General for Economic and Financial Affairs. 1999. “The CAP and Enlargement: Agrifood Price Developments in Five Associated Countries.” European Economy. Reports and Studies No. 2. Luxembourg: Office for Official Publications of the European Communities. European Council. 1999. “Presidency Conclusions: Helsinki European Council, 10 and 11 December 1999.” Press Release No. 00300/99. Brussels: Council of the European Union. General Agreement of Tariffs and Trade (GATT). 1994. The Results of the Uruguay Round of Multilateral Negotiations: The Legal Texts. Geneva: GATT Secretariat. Harris, Simon A., Alan Swinbank, and Guy Wilkinson. 1983. The Food and Farm Policies of the European Community. Chichester, U.K.: John Wiley and Sons. Hertel, Thomas W., William A. Masters, and Mark J. Gehlhar. 1999. “Regionalism in World Food Markets: Implications for Trade and Welfare.” In G. H. Peters and Joachim von Braun, eds., Food Security, Diversification, and Resource Management: Refocusing the Role of Agriculture? Proceedings of the TwentyThird International Conference of Agricultural Economists. Aldershot, U.K.: Ashgate. House of Commons. Select Committee on Agriculture. 1999. Reply by the Government to the Seventh Report from the Agriculture Committee, Session 1989–99, “Outcome of the CAP Reform Negotiations” (HC 442). Sixth Special Report. Session 1998–99. HC 825. London: HMSO. Italian Government. 1996. “Establishment of Free Trade Areas and Their Effects on Community Agriculture.” Presidency working document. Informal Meeting of Ministers for Agriculture of the European Union. Otranto, May 5–7, 1996. Brussels: Council of the European Union. Jenkins, Charles. 1999. Paying for an Enlarged European Union. London: Federal Trust for Education and Research. Josling, Timothy E. 1993. “Agriculture in a World of Trading Blocs.” Australian Journal of Agricultural Economics 37, no. 3: 155–179.

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Josling, Timothy E., Stefan Tangermann, and Thorald K. Warley. 1996. Agriculture in the GATT. London: Macmillan Press. Leetmaa, Susan E., Elizabeth A. Jones, and Ralph Seeley. 1998. “Enlargement of the European Union to Central and Eastern Europe: Obstacles and Possible Consequences of Policy Harmonization.” In Mary E. Burfisher and Elizabeth A. Jones, eds., Regional Trade Agreements and U.S. Agriculture. Agricultural Economic Report No. 771. Washington, D.C.: U.S. Department of Agriculture. Liapis, Peter S., and Marinos E. Tsigas. 1998. “CEEC Accession to the EU: A General Equilibrium Analysis.” In Mary E. Burfisher and Elizabeth A. Jones, eds., Regional Trade Agreements and U.S. Agriculture. Agricultural Economic Report No. 771. Washington, D.C.: U.S. Department of Agriculture. Lowe, Philip. 1999. “Assessing the EU-SA Agreement Main Parameters of the EU– South Africa Partnership.” SAIIA Conference. September 1999. Brussels: European Commission. . Marsh, John S., and Christopher Ritson. 1971. Agricultural Policy and the Common Market. European Series No. 16. London: Chatham House and PEP. Ministry of Agriculture, Fisheries, and Food (MAFF). 1999a. Agenda 2000 CAP Reform—Economic Impact. London: MAFF. ———. 1999b. MAFF Press Release 435/99. December 7. London: MAFF. Neville-Rolfe, Edmund. 1984. The Politics of Agriculture in the European Communities. London: Policy Studies Institute. Panagariya, Arvind. 1999. “The Regionalism Debate: An Overview.” World Economy 22, no. 4: 477–511. Pomfret, Richard. 1997. The Economics of Regional Trading Arrangements. Oxford, U.K.: Clarendon. Swinbank, Alan. 1996. “Capping the CAP? Implementation of the Uruguay Round Agreement by the European Union.” Food Policy 21, nos. 4/5: 393–407. ———. 1997. “The New CAP.” In Christopher Ritson and David R. Harvey, eds., The Common Agricultural Policy. 2d ed. Wallingford, U.K.: CAB International. ———. 1999a. “EU Agriculture, Agenda 2000, and the WTO Commitments.” World Economy 22, no. 1: 41–54. ———. 1999b. “CAP Reform and the WTO: Compatibility and Developments.” European Review of Agricultural Economics 26, no. 3: 389–407. Swinbank, Alan, and Christopher Ritson. 1991. In Christopher Ritson and David R. Harvey, eds., The Common Agricultural Policy and the World Economy. 1st ed. Wallingford, U.K.: CAB International. Swinbank, Alan, and Carolyn Tanner. 1996. Farm Policy and Trade Conflict: The Uruguay Round and CAP Reform. Ann Arbor: University of Michigan Press. Tanner, Carolyn, and Alan Swinbank. 1998. “Agricultural Trade Liberalization: Regionalism Versus Multilateralism.” In Amnon Levy-Livermore, ed., Handbook on the Globalization of the World Economy. Cheltenham, U.K.: Edward Elgar. World Trade Organization (WTO). 1995. Analytical Index: Guide to GATT Law and Practice. 6th ed. (CD-ROM). Geneva, WTO. ———. Committee on Regional Trade Agreements. 1996. Checklist of Points on Reporting on the Operation of Regional Trade Agreements. Note by the Secretariat. WT/REG/W/3. Geneva: WTO. ———. Committee on Regional Trade Agreements. 1998. Communication from Australia. WT/REG/W/22. Geneva: WTO. .

11 APEC and Agriculture: Integrating Liberalization and Capacity-Building Policies JOHN GILBERT, ROBERT SCOLLAY, AND THOMAS WAHL

The Asia-Pacific region is widely regarded as the world’s most economically dynamic region. The effects of the Asian financial crisis of the late 1990s appear to have been shrugged off with considerably less difficulty than most analysts predicted, and several of the economies in the region have returned to double-digit growth. The Asia-Pacific Economic Cooperation (APEC) initiative aims to utilize this dynamism to promote the cause for concerted unilateral trade and investment liberalization among the economies of the Asia-Pacific.1 The world’s largest food exporting and importing countries are within APEC, and no other regional grouping has such widely diverse members. This implies that the potential gains for the region from agricultural trade based on the principle of comparative advantage are enormous, as several recent studies have confirmed (see Scollay and Gilbert, 2000, for a recent survey). However, making progress in the area of agricultural reform has proved to be difficult within the APEC context. In fact, agriculture almost did not make it onto the APEC agenda at all. In the lead-up to the Osaka meetings in 1995, Northeast Asian economies lobbied strenuously to have agriculture excluded from the liberalization program. Their push was eventually countered by adopting “comprehensiveness” as one of the principles of APEC liberalization, thereby acknowledging that no sector should ultimately be excluded. However, the counterbalancing principle of “flexibility” leaves it open to member economies to delay agricultural liberalization well beyond liberalization in other sectors. What factors lie behind the unwillingness to make meaningful progress on agricultural reform in the region? In part the difficulty may be a reflec215

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tion of the APEC process itself: the need for consensus-based decisionmaking can make for protracted negotiations and lead to resolutions that might charitably be described as vague. However, the APEC process is not alone in having problems dealing with agriculture. Other, more traditional regional arrangements such as the North American Free Trade Agreement (NAFTA) and multilateral forums such as the World Trade Organization (WTO) have also had, and continue to have, considerable difficulty in making progress. Rather than being a fundamental problem of APEC’s approach, agricultural liberalization difficulties in the region are, like the problems found in other forums, largely a consequence of the acute political impediments to agricultural trade liberalization. In the Asia-Pacific these political impediments often manifest themselves in the form of food security concerns and, more recently, multifunctionality arguments. However, without denying the validity of these concerns, underlying the political impediments are the high levels of protection often found in the agricultural sector, and the corresponding fact that the expected adverse effects of trade liberalization on agricultural incomes are severe. This problem is further compounded if resources in the agricultural sector cannot be readily transferred to other sectors with greater economic potential. Cultural, social, and political factors tend to combine to encourage the community to accept the view that severe reductions in agricultural incomes, along with any associated decline in the rural sector, are outcomes to be resisted. Furthermore, in many developing economies poverty tends to be heavily concentrated in the rural sector, so the prospect of further declines in agricultural incomes may be a matter of grave concern. Management of the political implications of these distributional effects is the biggest challenge confronting governments in implementing trade liberalization. Does this mean that agricultural liberalization under APEC is a lost cause? Although the collapse of the Early Voluntary Sectoral Liberalization (EVSL) agreement in Kuala Lumpur has raised considerable concern, in the 1999 Auckland meeting the concept of an APEC Food System (AFS) was endorsed. This concept integrates agricultural liberalization with capacity-building, particularly in rural areas, and other policies. It is hoped that by making the proposed system more comprehensive, and explicitly dealing with issues that the WTO and other institutions might regard as “nontrade,” genuine progress on agricultural liberalization can be made. In this chapter we explore how the concept of AFS can help to alleviate some of the political difficulties surrounding agricultural reform in the Asia-Pacific region, by integrating the trade reform process with a comprehensive capacity-building agenda. We present the results of applied general equilibrium (AGE) simulations that illustrate the complementarity of these

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policies, as well as their ability to help overcome some of the income distribution problems that lie at the heart of the political obstacles facing liberalization of agriculture in the region. In the following section we present brief details of the proposed AFS. Next, the methods we use to analyze the proposal are described, followed by the results of the analysis and the policy implications. Finally, a summary and concluding comments are presented.

THE APEC FOOD SYSTEM PROPOSAL

The AFS proposal underwent several identity changes, going from “APEC Open Food System” to “APEC Efficient Food System” before settling on its current title. Currently being driven by the APEC Business Advisory Council (ABAC), the concept evolved from earlier calls for an open food system in various forums (Brookins, 1996; U.S. National Center for APEC, 1996). The call is for a comprehensive approach to food and agriculture policy, the foundations of which are set out in the following five elements: 1. emphasis on infrastructure that promotes the rapid, safe, and efficient processing and transportation of food, both between and within economies; 2. commitment to nondiscriminatory food trade within the food system; 3. alignment of food prices with world market values and free trade in food; 4. nondiscriminatory investment in the food sector; and 5. regional cooperation to ensure that technological advances in food production and processing reach all economies. Elements three and four reflect the desire to see trade and investment barriers in the region lowered, whereas element two addresses the concern in some APEC member economies over food security issues. Within elements one and five, extensive scope is seen for capacity-building initiatives among APEC economies to complement the efforts of governments in individual economies as well as those of multilateral agencies such as the World Bank. The common purpose of these initiatives is to build capacity to ensure that the food sector develops in ways that contribute to the achievement of overall development objectives in APEC economies, as well as to ensure that trade and investment liberalization and facilitation in the food sector contribute to those objectives through a wider spread of benefits both within and among economies. In the APEC context the com-

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prehensive approach advocated by ABAC thus involves an integration of trade and investment liberalization and facilitation (TILF) and economic and technical cooperation (Ecotech) elements. It is important to emphasize that the AFS envisages agricultural liberalization and reform in a very broad context. In particular, it does not preclude pursuing effective rural policies to meet the needs of individual economies, as long as those policies are not designed to distort production or marketing decisions. The catchphrase of the proposal is that although food policy is sensitive, delay is costly. A time frame well in advance of the free trade deadline for developed APEC countries (2010) and the 2020 deadline for developing countries is suggested for achieving the implementation of the system.

AN OVERVIEW OF THE MODELING APPROACH

We use applied general equilibrium techniques to simulate the effects of liberalization and AFS capacity-building measures and provide a policy commentary on the AFS proposal. Our model is based on T. Rutherford (1998), and calibrated to an extended aggregation of the GTAP version four database. It is recursive dynamic, consisting of a static intraperiod model and a set of interperiod linkage equations that alter the stocks of productive factors and the rate of technical progress. In this class of model, agents are myopic, optimizing within each period but not intertemporally. The model thus generates a series of static equilibria, solving annually for the years 1996–2005. The following subsections describe the main features of the model specification and data. Intraperiod (Static) Model Because the intraperiod model is of a well-established class, we present only brief details. Perfect competition and full employment prevail. Factors are mobile within each economy but not internationally. There are limits on labor mobility within economies in the intraperiod model, such that rural (i.e., agricultural) unskilled labor in the developing economies and Japan can only move between agricultural production sectors, and urban unskilled labor can only move between industrial production sectors (further movement is allowed interperiod). Factor supply is perfectly inelastic within each period. Production is specified using constant elasticity of substitution (CES) functions. All factors enter in the production functions in variable proportions, with a single elasticity for each production sector governing rates of substitution. All intermediate inputs enter in fixed proportions.

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International trade in the model is modeled using the Armington approach—imperfect substitution among imported goods originating from different geographical areas. The aggregation functions at both the sourcesource and the source-domestic levels take the CES form. Imports are not tracked to different agents within the economy; aggregation takes place at the border. We do not incorporate the Armington assumption on the export side. On the demand side, government expenditure is fixed, and households maximize a Cobb-Douglas utility function. Savings are assumed to be a fixed proportion of income. We close the model by fixing the current accounts of each economy, the balances identity being left to determine the total level of investment within each economy. The model is implemented in levels form using the Mathematical Programming System for General Equilibrium Analysis, which operates as a subsystem within the General Algebraic Modeling System (MPSGE/GAMS). Interperiod (Linkage) Model The interperiod linkages of the model describe how endowments of factors of production and technology change over time and generate a growth scenario. The treatment of capital and productivity improvements is much the same as in other models of this class. Investment in each period augments the capital stock according to the capital accumulation equation: Krt+1 = (1 – δr)Krt + Irt (1) where a subscript r designates the region, δ is the depreciation rate, and I is new investment. The function is calibrated to the desired growth rate in the base year and thereafter left endogenous. The approach allows the model to capture, albeit somewhat crudely, the dynamic changes in income that result from investment expansion with trade liberalization. The steady-state properties of the model do, however, imply that shifts in the growth rate are temporary. Productivity growth is modeled as Hicks-neutral technological change, with (initially) the same rate of progress applied across all industries in a given region. Hence, the shift parameter on the production functions (a) in each period adjusts at the growth rate λ: t ar = eλr t (2) We make a departure from the standard specification by not allowing technological progress to continue at a constant rate in all economies. One of the well-known features of historical growth patterns is a slowdown as economies become more developed. There are many explanations for this phenomenon in the development literature, the most common being dimin-

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ishing opportunities for catch-up by adopting new technologies. We choose to incorporate this stylized fact into our model structure by adjusting the λ parameters for developing economies according to the following rule: (λs0 – λ*)ϕ λts = λ* + _____________ϕ (GDPst / POPst )

(3)

U

where s r represent the subset of developing economies in the region, λ* is the target rate of productivity growth (equal to developed economy levels), and GDP/POP is real gross domestic product (GDP) per capita. As incomes per capita increase, the rate of technological progress declines, at a rate determined by the convergence parameter ϕ. We calibrate these parameters so convergence occurs as the developing economies approach current developed country real income levels. The paths of the λ parameters are determined in a base simulation with no liberalization and are thereafter fixed exogenously for the liberalization scenarios. Labor growth is where our model differs most from others. In the model we have three categories of labor: skilled (S), rural unskilled (A), and urban unskilled (L). Underlying changes in the labor endowments over time, we thus have the following equations: Srt+1 = Srt (1 + ∆rt )(1 + Λrt ) (4) Art+1 = Art (1 + ∆rt )(1 + Ωrt )

(5)

Lrt+1 = (1 + ∆tr)(Ltr + (w0L / w0A) Atr Ω tr – (w0L / w0S) S rt Λtr) (6) where ∆ is the growth rate in the overall labor stock, Λ is the incremental growth rate in skilled labor, and Ω is the incremental growth rate in rural labor.2 Equation 6 governs the level of unskilled labor. This grows at the economywide rate, as do the other factors, but is drained by movements to the skilled category (up-skilling) and augmented by rural-urban migration. This basic approach has been implemented in several recursive dynamic studies (see, e.g., Coyle and Wang, 1998).3 We make two amendments. First, as in productivity growth above, we adjust the rate of labor growth in developing economies as their per capita real incomes approach the current average developed country level. Hence: ϕ

(∆ s0 – ∆*) ∆ts = ∆* + _____________ ϕ (GDP st / POP st )

(7)

where ϕ is a convergence parameter. This equation has the same interpretation as Equation 3 above and again is incorporated as a reflection of a widely accepted stylized fact of development. Once again, the paths of these parameters are determined in a base simulation with no liberalization and are thereafter fixed exogenously for the liberalization scenarios.

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Second, although the basic specification has the significant advantage of being very simple to implement, movement across labor categories is exogenous. Because factor returns depend on the endowment levels of factors, both directly and indirectly, significant changes in these returns can result from diverging growth rates. Fundamentally, agents should choose the labor category to which they wish to belong in response to these emerging wage differentials. Hence, in this model we incorporate the following, very simple and transparent, approach: ρ

Λ rt

=

Λ 0r

t t [1 – (w______ L – wS ) _______ [1 – (wL0 – wS0 )ρ

(8)

and similarly, ψ

Ωrt

=

Ω0r

[1 – (wLt – wAt ) _____________ [1 – (wL0 – wA0 )ψ

where ρ and ψ are convergence parameters. Setting ρ = ψ = 0, nothing is changed from the basic specification. With positive values of these parameters, we have a parsimonious means to adjust the responsiveness of labor movement across categories in response to wage differentials. The higher the values for the parameters, the more responsive the differential growth rates. As the wage differentials approach zero, the differential growth rates approach zero.4 This specification has several attractive features. First, migration between labor categories is explicitly a function of relative returns, but because the response is in the interperiod equations, changes in relative wages take place slowly over time. Second, returns to factors of production remain endogenous and are subject to shocks in the intraperiod model. However, the impact of shocks is dampened over time, as factor supplies respond to changes in relative returns in subsequent periods, as we would expect them to do. The disadvantage is that we do not explicitly model the choice problem that labor faces. Data and Parameter Values The primary source of the input-output and protection data for this model is the GTAP-4 database (described in McDougall et al., 1998). The base year for the simulations is 1995. Factor-returns data in the GTAP database are normalized to unity in the base year. For our purposes the actual (per unit) returns are required for the three categories of labor. We supplement the GTAP data with information on agricultural and nonagricultural labor body counts from the FAOSTAT database and the Taiwan Agricultural Yearbook, using the skill breakdowns in J. Liu et al. (1998) to obtain consistent meas-

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ures of the average unskilled rural wage, unskilled urban wage, and skilled wage. Production elasticities in the model range from 0.2 to 1.2. The elasticities for the Armington aggregation functions have been obtained from the GTAP-4 database but are doubled at both the source-source and sourcedomestic levels. As in K. Anderson et al. (1997a) and Y. Yang et al. (1998), this is justified on the grounds that the existing elasticities in the database are too small to accurately predict changes in trade shares in backcasting exercises. In the model they range from 3.8 to 6.6 at the source-domestic and 7.6 to 13.2 at the source-source level. The data used in specifying the dynamic growth path of the model are from several sources. Productivity growth rates have been obtained from the existing literature. The primary source for labor force growth projections is the World Bank. Where available, World Bank projections are used for skilled labor growth; otherwise we use historical trend (full details are depicted in the Appendix to this chapter). Both capital stock growth and rural labor growth are based on historical rates over the preceding ten-year period.5 The ρ and ψ parameters introduced above are given the value of three (the cubic specification has the useful property that it corrects for overshooting). As with other models of this type, the main purpose of the growth path exercise is to establish a baseline to which the experimental simulations can be compared. Reference and Alternative Scenarios Our baseline simulation implements the growth path as described above and also accounts for the major existing liberalization agreements that will have an influence on the region, the completion of the Uruguay Round, NAFTA, and the ASEAN Free Trade Area (AFTA). Each of these agreements is modeled as a sequence of linear reductions in the appropriate tariff and nontariff barriers over the appropriate implementation period. The results of our simulations thus capture only the additional impact of APEC liberalization. APEC is unique among regional trade liberalization initiatives in being based on the principle of open regionalism, understood to mean that APEC member economies are to encourage intraregional trade without discrimination to outsiders. Although several commentators, in particular those from non-APEC economies, have seen the phrase open regionalism as an oxymoron, the more substantive issue within APEC has been how the term is to be interpreted. An interpretation favored by analysts in some economies (notably New Zealand, Australia, Japan, and Singapore), and by some governments, is that liberalization should take place on a mostfavored-nation (MFN) basis and that APEC should remain at all times con-

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sistent with GATT Article I and in a supporting role to the WTO. Yet officials in certain countries—for example, the United States and China—have argued that without discrimination to outsiders should mean that the benefits of liberalization are to be made available to others on the same terms and conditions as for APEC members. In other words, nonmembers are free to enjoy the benefits of APEC only if they reciprocate. Alternatively, APEC could remain a forum for preliminary discussions and negotiation, with all actual liberalization agreements being implemented under the auspices of the WTO. Thus, there are three potential APEC scenarios of interest: AFS liberalization on an intra-APEC–only preferential basis (preferential), MFN liberalization without requiring reciprocation (unconditional), and MFN liberalization requiring reciprocation (conditional). Also of interest is how APEC reform compares to comprehensive global liberalization under the WTO (global), both from global and APEC-member perspectives. Simulations involve the removal of all import tariffs, export subsidies, and production subsidies on all agricultural and food products within the appropriate region set. Ecotech and capacity-building measures are simulated using technological progress shocks to emulate the possible impact of technology transfer, as well as by shocking mobility parameters to consider the possible effect of expanding rural mobility/skill formation. These simulations are, by their nature, somewhat arbitrary. They are also, however, suggestive of the likely impact of some of the policies that fall under the Ecotech component of the AFS proposal. All AFS policies are assumed to be implemented over the period 2001–2005.

RESULTS AND POLICY IMPLICATIONS

Agricultural Liberalization—AFS and TILF The overall welfare implications of the proposal are summarized in Figure 11.1, with more detailed results presented in Figure 11.2. All figures are the equivalent variation, in billions of 1995 U.S. dollars, as a deviation from baseline. They can thus be interpreted as the additional income available to the economy, at constant prices, relative to where the economy was otherwise expected to be. From the summary figure, several results are clear. First, despite the achievements of the Uruguay Round Agreement on Agriculture, it is clear that there remain significant benefits from agricultural reform—approximately $200 billion globally in the case of full multilateral reform. These figures are probably conservative given the perfect competition assump-

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Figure 11.1

Summary of Welfare Effects of Agricultural Reform

APEC Developed

APEC Developing

APEC Developed

APEC Developing

Europe

Europe

ROW

ROW

200.00 200.00

150.00 150.00

100.00 100.00

50.00 50.00

0.00 0.00

–50.00 -50.00 Preferential Preferential

Unconditional Unconditional

Conditional Conditional

Global Global

tions that underlie the model. Second, despite the fact that global and APEC gains are clearly largest under arrangements where the rest of the world and Europe can be encouraged to reciprocate, a substantial proportion of those gains are available to APEC regardless of what nonmember economies do. This result is a reflection of the high levels of intra-APEC trade in food, suggesting that there is no strong reason for APEC to hold out for a multilateral agreement in the face of European intransigence. Two additional results demonstrate that there appears to be little opportunity for free-riding by nonmembers in the case of APEC-only liberalization. Nonmembers (especially in Europe) are expected to gain substantially only if they open their own markets. Again, this result indicates that there should be no strong reason to hold back reform. Moreover, there appears to be little difference between APEC reform on a preferential basis and APEC reform on an unconditional MFN basis. Since unconditional MFN reform is certainly easier to implement, the results suggest that APEC should take this path. Finally, it is clear from the results that the AFS proposal is also good development policy. The developing members of APEC have much more to gain in proportional terms than the developed members (0.64 percent of baseline GDP in the case of unconditional MFN for developing APEC members, as compared to 0.34 percent for developed APEC members). A more detailed picture emerges from the results presented in Figure

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Figure 11.2

225

Regional Breakdown of Welfare Effects of Capacity-Building

United States

11.2. It becomes clear that the largest gainers in absolute terms from reform are Japan and the United States (and Europe if the reform is extended globally). In proportional terms, New Zealand, Australia, Thailand, and Malaysia experience the greatest gains. Major food exporting economies such as New Zealand, Australia, and the United States are better off under a preferential agreement than an unconditional MFN agreement, whereas the

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opposite pattern holds for major importing countries (Japan, Korea, and China). These results reflect the impact of preferential access and trade diversion under the alternative scenarios. Although welfare improves in most APEC economies, some experience small welfare declines under some scenarios. In the case of Mexico, this is likely to be a consequence of more economies having preferential access to the U.S. market. In the case of China, it may represent the termsof-trade consequences of liberalization in a large economy. The losses are very small in proportional terms and could easily be compensated for by other APEC members, possibly through the Ecotech components of the AFS. Rural Capacity-Building Policy—AFS and Ecotech The AFS proposal leaves considerable scope for implementing policies that may mitigate some of the more painful aspects of reform and also contribute in a positive way to APEC’s overall capacity-building objectives. In our model it is not possible to specify in detail how capacity-building measures are implemented, and they are therefore represented by means of plausible but arbitrary assumptions as to their effects on key variables in the model. By treating each type of measure separately we are able to isolate and compare the direction and possible magnitude of the effect that each type of measure may have in the various APEC economies. In all experiments, the measures are incorporated in conjunction with AFS liberalization (using the unconditional MFN case as our base). We consider the following possibilities: 1. Technology transfer (TT). A central component of the AFS proposal is the dissemination of knowledge and policies to ensure that technological advances in food production, processing, and distribution can improve the lives of all APEC citizens. By bringing about improvements in the performance of previously protected agricultural sectors, TT may partially offset the negative impact of trade liberalization on agricultural incomes, as well as help to improve the overall performance of the economy. To illustrate the possibilities in our model, we simulate the impact of improving agricultural and food processing technology in developing APEC economies, as the result of an assumed technology transfer from developed members. We shock the base rate of Hicks neutral technical progress in the agricultural and food processing industries by 10 percent over the AFS implementation period. 2. Promotion of off-farm activities (OFA). This may refer to policies designed to supplement on-farm incomes by providing jobs during the offseason (Oshima, 1998), or to more permanent measures to shift labor out of

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agriculture and into other activities. We take the latter interpretation. Encouraging rural-urban migration may not sound like a policy that would find favor among many development economists, as flows from the rural sector overwhelm the limited urban infrastructure in some APEC economies. Our model is not designed to deal with these issues but rather with the incentive structure that underlies rural-urban migration and the long-run income changes that we expect to be a consequence. Hence, the appropriate interpretation of encouraging migration is increasing the opportunities for the rural population to be employed in industrial activities in rural or urban areas. Developing rural infrastructure along these lines is an area of significant current interest (Brookins, 1999), and a central component of the AFS. We consider the impact of increasing the base rate of migration by 25 percent over the AFS implementation period (2001–2005). 3. Promotion of skill formation (SF). Promotion of SF and schooling can be thought of as an extension to the promotion of OFA, as both are concerned with improving the opportunity of rural workers to move into other occupations. Hence, our approach to modeling the potential impact of rural education policies is similar. The model dynamics are altered by relaxing the initial assumption that up-skilling occurs only among nonagricultural unskilled workers. Instead, we consider a situation where the rate of upskilling among rural workers is equal to that among nonagricultural workers. This can be interpreted as the effects of an “equal opportunity” rural education policy providing for access to higher education equivalent to that available among nonagricultural groups. These policies may be implemented as part of APEC-wide projects under the food system banner, as part of other APEC working group projects, on the part of individual governments, or in cooperation with other multilateral development institutions such as the World Bank. In all cases the implementation costs need to be weighed against the benefits presented here. The net welfare results of the experiments are presented in Figures 11.3 and 11.4. Consider the summary provided in Figure 11.3 first. At constant prices we expect a neutral technical change to improve welfare and rural incomes, although there is the always the potential for this to be diminished by endogenous declines in world prices, or by the effects of other distortions present in the system. TT of this form substantially improves the net welfare situation of developing APEC members and APEC as a whole. The rural education policy also raises APEC-member net welfare, but not by as much. Rural-urban migration has little effect on net welfare. Also of particular note is that none of the policies have a substantial net welfare effect on developed APEC members. The more detailed results presented in Figure 11.4 offer further insights

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Figure 11.3

Summary of Welfare Effects of Agricultural Reform with Capacity-Building

APEC Developed

APEC Developing Europe APEC Developed APEC Developing Europe ROW

ROW

120.00 120.00

100.00 100.00

80.00 80.00

60.00 60.00

40.00 40.00

20.00 20.00

0.00 0.00

–20.00 -20.00

Unconditional Uncondi tional

UC+Tech UC+Tech

UC+OFA UC+OFA

UC+SF UC+SF

into the effect of these policies. Of particular note is the fact that Ecotechtype policies can ensure that all APEC members benefit from the AFS program. In those countries where liberalization alone results in small welfare declines, Ecotech policies (especially technology transfer) can ensure net welfare improvements. China is an excellent example. Overall the net welfare results of the simulations suggest that Ecotechtype policies can help to ensure a more even distribution of gains across APEC members and that all APEC members benefit from the AFS. They can therefore contribute in a positive way to APEC’s development objectives without penalizing developed APEC members. By promoting a more even distribution of gains across APEC members, the Ecotech components of the AFS may help to lessen any perception that agricultural liberalization benefits mainly the developed, food exporting economies and thus reduce resistance to reform. Within-Economy Income Distribution Although most of the AGE literature has focused on net welfare effects, it is clear that within-economy income distribution effects of liberalization are very important in helping to understand the political obstacles to reform. Here we are interested primarily in the effects of reform on agricul-

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Figure 11.4

229

Breakdown of Welfare Effects of Agricultural Reform with Capacity-Building

United States

tural labor relative to industrial labor. Figure 11.5 presents the estimated agricultural wage as a percentage of the industrial wage under various liberalization scenarios. The first point to note from these results is that the model projects declining income inequality between these two groups under the baseline.

Figure 11.5

Agricultural/Industrial Wages with Agricultural Reform

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231

This is largely a consequence of labor moving out of agriculture and indicates that the political imperative to protect agricultural labor should decline as the labor force declines and the discrepancy between the wages of the different labor types dissipates. Second, in most of these economies liberalization does result in a decrease in relative agricultural wages compared to the baseline. These decreases are substantial in some cases (notably Japan and Malaysia). Third, the decreases are smaller (and in some cases become increases) in the case of comprehensive global liberalization. Can capacity-building policies like those envisaged in the AFS proposal help to lessen the declines in relative wages that are expected to result from liberalization? The effects of the Ecotech experiments described above on relative agricultural wages are presented in Figure 11.6, which compares unconditional MFN liberalization alone to liberalization with the various Ecotech measures. It is clear from the results that all three policies can have a positive impact on wage divergence, although in some cases the effects are relatively small. Most important in this respect are the policies that encourage movement of agricultural labor into other activities, for migration flows drive convergence of rural and urban wages over time. The skill formation scenario provides the most substantial result. The reason is that we have provided for greater movement out of agriculture—increasing the rate at which agricultural labor is becoming scarce and hence driving up its price. At the same time, because the increase in skilled labor is increasing at the same rate as before, less unskilled urban labor is being drawn into this category. This keeps the unskilled urban wage down. The net effect is a substantial improvement in rural-urban wage divergence. The results therefore suggest that policies designed to improve the access of rural communities to higher education, when added to other policies designed to improve their ability to move into nonagricultural activities, can have a substantial impact on wage inequality and net economic welfare in APEC and should thus form a core component of the AFS agenda. Technology transfer also has a generally positive impact on rural-urban income divergence, but the effects are small. The results thus suggest that although there is a role for technology transfer in APEC as a capacitybuilding strategy, it should be combined with other measures (such as enhancing rural mobility and rural education) if the objective is to reduce rural-urban income divergence. Fiscal measures—those designed to mitigate adverse income distribution effects through welfare policies—may also form part of the AFS. Since the overall welfare results of AFS liberalization are positive for most countries, a redistribution strategy that leaves no group worse off is possible. In cases where the decline in income is severe and does not seem to respond

Figure 11.6

Agricultural/Industrial Wages with Agricultural Reform and Capacity-Building

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well to other measures, direct measures may be appropriate. From the perspective of neoclassical trade theory, direct income support payments are the ideal means of effecting redistribution because they do not distort production and consumption decisions and thus are “efficient.” However, lump-sum taxes and transfers are rarely available, and as H. Oshima (1998) points out, care should be taken to ensure that the incentive structure is not altered to the detriment of future growth potential. Nonetheless, it is clear that carefully designed fiscal measures can form part of an appropriate overall strategy for APEC in implementing agricultural reform.

CONCLUSION

The potential gains from agricultural reform in APEC are substantial, and this chapter has highlighted several important policy results for the AFS. First, the absence of free-riding and the large proportion of intra-APEC food trade imply that there is little reason for APEC members to hold out for a global reform package. Second, it is possible to design a reform program along the lines of the AFS in such a way that all members of APEC wind up as winners. Third, it is possible to utilize an appropriate combination of rural capacity-building policies along with liberalization that helps to offset the declines in agricultural incomes that can be expected to accompany reform in some economies. In so doing, capacity-building programs can play a key role in overcoming political resistance to the AFS proposal. Numerous policies of the type considered in this chapter are already in place in many APEC economies and can be extended to deal with the challenge of liberalization. Fourth, the results also highlight the positive impact that capacity-building measures can have on overall welfare—particularly for the developing economies of the region—without serious welfare consequences for developed APEC members. This suggests that they should not be viewed as the price that must be paid in order to achieve liberalization but rather as an integral part of APEC food policy.

NOTES 1. APEC brings together twenty-one economies in the Asia-Pacific region: Australia, New Zealand, Japan, Korea, Taiwan, China, Hong Kong, Brunei, Indonesia, Malaysia, Philippines, Singapore, Thailand, Vietnam, Russia, Canada, the United States, Mexico, Chile, Peru, and Papua New Guinea. 2. In our model we cannot distinguish agricultural sectors from rural areas. Because we do not distinguish between rural and agricultural labor, “migration” corresponds to movement from agricultural to nonagricultural activities. Hence, it includes increasing the level of industrial activity in rural areas, which has formed a

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significant part of rural policy in recent years in several APEC economies, such as China. 3. Coyle and Wang (1998) use this approach for movement between unskilled urban and skilled labor. In the case of rural-urban migration flows, which are also accounted for in their model, they set the relative rural/urban wage exogenously interperiod, using an exponential convergence function. Relative wages converge over time to unity along a fixed path. Their approach is therefore not suitable where the actual relative wage is of policy interest. 4. The specification can easily be adjusted to allow for a long-run divergence between expected returns for different classes of labor. We do this for Canada, where the data indicates that unskilled labor is paid a premium relative to skilled labor. See Liu et al. (1998) for discussion of this data anomaly. 5. The exception is China, where until recently agricultural labor has been unable to move to urban sectors as a matter of government policy. It is only since the 1990s that significant rural-urban migration flows have developed. We therefore use a five-year average.

Appendix:

Region Australia Canada China Europe Indonesia Japan Malaysia Mexico New Zealand Other APEC Philippines ROW South Korea Thailand United States

Assumptions Used in the Projections, Annual Percentage Growth Rates

Labora

Rural Laborb

Skilled Laborc

0.80 0.60 0.90 0.00 2.10 –0.03 2.80 2.30 0.40 1.00 2.50 1.70 1.20 0.90 0.70

–0.68 –4.54 –0.39 –3.35 –0.26 –4.20 –3.77 –1.88 0.57 –2.14 –1.23 –0.50 –6.05 –0.43 –2.00

6.65 4.67 2.58 9.30 7.64 4.73 7.30 2.93 7.07 4.95 3.22 4.92 4.94 6.34 4.57

Capitald 3.00 4.80 10.70 5.10 7.10 5.90 9.20 1.40 2.40 7.90 2.20 3.50 7.80 6.60 3.20

TFPe 0.30 0.30 1.60 0.30 1.60 0.30 0.70 0.90 0.30 1.60 0.50 1.00 1.60 1.60 0.30

Notes: a. World Bank (1999) projections for 1997–2010. b. Cumulative rates of growth based on trend in preceding ten-year period (five years in China). Figures from FAOSTAT, except Taiwan from Taiwan Agricultural Yearbooks. c. Cumulative rates of growth based on projections of Ahuja and Filmer (1995) and trends from UNESCO (1997). d. Growth rate based on projections in Anderson et al. (1997a) and historical trend in preceding ten-year period (Penn World Tables). Depreciation rates on capital selected to calibrate to this rate in base year; thereafter growth rates endogenous. e. Implemented as a Hicks neutral change across all inputs. Figures based on estimates from Chen (1977), Young (1994), Drysdale and Huang (1997), and World Bank (1997).

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BIBLIOGRAPHY Ahuja, V., and D. Filmer. 1995. “Educational Attainment in Developing Countries: New Estimates and Projections Disaggregated by Gender.” World Bank Policy Research Paper 1489. Anderson, K., B. Dimaranan, T. Hertel, and W. Martin. 1997a. “Economic Growth and Policy Reform in the APEC Region: Trade and Welfare Implications by 2005.” Asia-Pacific Economic Review 3, no. 1: 1–18. ———. 1997b. “Asia-Pacific Food Markets and Trade in 2005: A Global, Economy-Wide Perspective.” Australian Journal of Agricultural and Resource Economics 41, no. 1: 19–44. Anderson, K., and M. Pangestu. July 7–8, 1997. “Structural Changes in a Reforming World Economy: Implications for Indonesia’s Food and Non-food Sectors.” Paper presented at the Second Workshop of the ACIAR Indonesia Research Project on Agriculture, Trade, and the Environment, Bogor, Indonesia. APEC Business Advisory Council (ABAC). 1998a. “An Efficient Food System for APEC: A Proposal from the APEC Business Advisory Council.” Photocopy, Chinese Taipei (September). ———. 1998b. 1998 Report to the APEC Economic Leaders. Kuala Lumpur. Brookins, C. 1996. “Gaining Consensus on Initiatives to Build the Pacific Food System.” In U.S. National Center for APEC and Washington State University, Toward a Pacific Rim Food System. Proceedings of the forum on U.S. Agricultural and Food Trade Policy in APEC. Oak Brook, Ill.: Farm Foundation. ———. March 1999. “Building the APEC Food System’s Infrastructure: Regional Integration for Sustainable Economies (RISE), Extending the Marketplace Beyond Urban Boundaries.” Paper prepared for the PBEC/ABAC Strategy Conference on the APEC Food System, Manila. Chen, E.K.Y. 1977. “Factor Inputs, Total Factor Productivity, and Economic Growth: The Asian Case.” Developing Economies 15, no. 2: 121–143. Coyle, W., and Z. Wang. 1998. “Economic Integration and Open Regionalism in APEC: The Gains for U.S. Agriculture.” Photocopy. U.S. Department of Agriculture. Drysdale, P., and Y. Huang. 1997. “Technological Catch-up and Economic Growth in East Asia and the Pacific.” Economic Record 73, no. 2: 201–211. Gilbert, J., R. Scollay, and T. Wahl. 1999. “The APEC Food System Proposal: Effects of Liberalization and Ecotech Measures on Welfare and Rural-Urban Incomes.” Washington State University APEC Study Center for Food Systems Working Paper 1. Hertel, T. 1997. Global Trade Analysis: Modelling and Applications. Cambridge, U.K.: Cambridge University Press. Johnson, R. 1996. “APEC and the Global Food System.” In U.S. National Center for APEC and Washington State University, Toward a Pacific Rim Food System. Proceedings of the forum on U.S. Agricultural and Food Trade Policy in APEC. Oak Brook, Ill.: Farm Foundation. Liu, J., N. van Leuween, T. Vo, R. Tyers, and T. Hertel. 1998. “Disaggregating Labor Payments by Skill Level.” Chapter 18 in R. A. McDougall et al., eds., Global Trade, Assistance, and Protection: The GTAP 4 Data Base. West Lafayette, Ind.: Center for Global Trade Analysis, Purdue University. McDougall, R.A., A. Elbehri, and T.P. Truong, eds. 1998. Global Trade, Assistance,

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and Protection: The GTAP 4 Data Base. West Lafayette, Ind.: Center for Global Trade Analysis, Purdue University. Nehru, V., and A. Dhareshwar. 1993. “A New Database on Physical Capital Stock: Sources, Methodology and Results.” Revista de Analisis Economico 8, no. 1: 37–59. Oshima, H. T. 1998. “Income Distribution Policies in East Asia.” Developing Economies 36, no. 4: 359–386. Rutherford, T. 1998. “GTAPinGAMS: The Dataset and Static Model.” Photocopy. Scollay, R., and J. Gilbert. 2000. “Measuring the Gains from APEC Trade Liberalization: An Overview of CGE Assessments.” World Economy 23, no. 2. United Nations Educational, Scientific, and Cultural Organization (UNESCO). 1997. Statistical Yearbook. Paris: UNESCO. U.S. National Center for APEC. 1996. “Toward a Pacific Rim System: Building an Open, Efficient Food System on the Pacific Rim: A Call for APEC Action.” Forum on Agriculture and Food Trade Policy in APEC, Seattle. Wahl, T. 1998. “An APEC Open Efficient Food System? Implications for Agricultural Policy.” Washington State University. Photocopy. Wang, Z., and F. Zhai. 1998. “Tariff Reduction, Tax Replacement, and Implications for Income Distribution in China.” Journal of Comparative Economics 26, no. 2: 358–387. World Bank. 1997. “Global Economic Prospects and the Developing Countries.” Washington, D.C.: World Bank. ———. 1999. Labor Force Statistics. Washington, D.C.: World Bank. Yang, Y., R. Duncan, and T. Lawson. 1998. “Trade Liberalisation in the European Union and APEC: What If the Approaches Were Exchanged?” In P. Drysdale and D. Vines, eds., Europe, East Asia, and APEC: A Shared Global Agenda? Cambridge, U.K.: Cambridge University Press. Young, A. 1994. “Lessons from the East Asian NICs: A Contrarian View.” European Economic Review 38: 964–973.

PART 4 Nontrade Concerns

12 Multifunctionality: An Examination of the Issues and Remedies JAMES RUDE

The idea of multifunctionality entered into the agricultural policy debate in the early 1990s and more recently has spread to trade policy discussions. The word multifunctionality came to the public’s attention late in 1999 through the press reports on the World Trade Organization (WTO) ministerial meeting in Seattle.1 Inclusion of the concept of multifunctionality was one of the negotiating demands for agriculture by the European Union (EU) and Japan. This demand met stiff resistance from the United States and the Cairns Group of agricultural exporters.2 Multifunctionality, however, is a new name for an old idea. The idea is that agriculture produces unpriced spillover benefits that occur in addition to the provision of food and fiber. These benefits range from environmental benefits, to rural employment and development, to food security. The ideas that agriculture is integral to the rural community, that it shapes the landscape, or that the sector is necessary to feed the nation would not be out of place in any coffee shop in rural Saskatchewan or Montana. Related to the concept of multifunctionality is the view that trade agreements constrain a nation’s sovereign right to pursue domestic policy objectives. The concern over the loss of national sovereignty has been central to all prior eight rounds of negotiations on the General Agreement on Tariffs and Trade (GATT). Multifunctionality and the potential loss of national sovereignty will be central to the upcoming WTO negotiations on agriculture trade. The Uruguay Round Agreement on Agriculture (URAA) introduced a unique commitment that quantified the amount of support that can be provided to domestic agriculture production and subjected such support to reduction commitments. This discipline was introduced because the negotiators rec239

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ognized that domestic support programs could induce production, distort trade by increasing exports or reducing imports, and depress world prices. The twin concerns of multifunctionality and the loss of policy sovereignty, however, provide a rationale for exempting domestic support programs from the reduction commitments of the URAA. This chapter attempts to address the question of whether the promotion of the multifunctional nature of agriculture is a legitimate domestic policy objective or simply an attempt by some WTO members to circumvent their WTO commitments on limiting domestic support. To this end, I examine what multifunctionality is; outline the positions of major WTO members; describe the state of negotiations on this issue to date; and examine the economic validity of the case for multifunctionality. Three multifunctional aspects of agriculture are identified, and appropriate policy instruments are discussed.

WHAT IS MULTIFUNCTIONALITY?

The preamble to the URAA calls for agricultural trade reform to be equitable, “having regard to non-trade concerns, including food security, and the need to protect the environment.” Article 20 of the URAA calls for an ongoing process of substantial progressive reductions to support and protection while taking into account nontrade concerns. Several commentators have equated nontrade concerns with multifunctionality. They define agriculture as multifunctional where it has one or several roles or functions in addition to its primary role of producing food and fiber. These roles include food security, maintaining the population and ensuring the viability of rural areas, rural amenities (e.g., landscape), and environmental protection (Lindland, 1998). The formal economic argument pertaining to multifunctionality is that these by-products are externalities. An externality arises when the actions of one economic agent influence the well-being of a consumer or the production possibilities of a producer and there is no mechanism for compensation. For the most part, proponents of multifunctionality offer examples of positive externalities and are silent about negative externalities. The proponents of multifunctionality make two additional economic arguments to advance their case. First, they argue that environmental protection, food security, and rural viability are joint products with agricultural production. Jointness implies that the production of one output affects the production of another output. The economic implications of jointness will be discussed in another section. The second argument is that nonfood byproducts are also public goods. The attributes of public goods are that they are nonrival and nonexcludable (Cornes and Sandler, 1996). When econo-

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mists describe something as nonrival they mean the consumption of a good by one individual will not reduce the consumption possibilities of other individuals. Nonexcludability means that no individual can be denied access to the good (or exclusion is very costly). An example of this type of good might be a scenic vista where one person’s enjoyment cannot be reduced by the enjoyment of others and access to the vista cannot be denied. The policy implication of public goods, and positive externalities, is that the market fails to provide an adequate amount of the good. The proponents of multifunctionality argue for public intervention to increase the provision of these goods (Lindland, 1998). Because they claim that the nonfood by-products and agricultural production are joint products, increased agriculture production will result in increased nonfood by-products. The policy prescription is a subsidy coupled to domestic production. The trade policy implication is that because the URAA disciplines domestic support, it also constrains the provision of nonfood by-product public goods. The critics of multifunctionality point to a series of limitations. Agriculture has both positive and negative externalities. For example, agricultural production creates negative side effects such as soil erosion and nitrogen leaching. The negative spillovers need not be confined to the boundaries of one country. For instance, coupled production subsidies increase domestic production, create surpluses that are then disposed of on world markets, and depress world prices. The negative spillovers of promoting multifunctionality in one country depress agricultural production in other countries with a comparative advantage. Thus, even though the multifunctional benefits of agriculture may be promoted in some countries, the policy reduces similar benefits to other countries. The positive externalities attributed to agriculture may also flow from other sectors. For instance, rural employment may be as much or more dependent on the service and manufacturing sectors as on agriculture. The critics of multifunctional agriculture counter that the proposed remedies for positive externalities are indirect, not effective at correcting the problem, and costly. The most appropriate remedy for any policy problem is to target the problem directly with instruments designed to get at the source of the problem. The critics of multifunctionality see the WTO concept of nontrade concerns as much more limited in scope and therefore as less potentially distorting.

WHAT IS THE STATE OF THE NEGOTIATIONS WITH RESPECT TO MULTIFUNCTIONALITY?

The major proponents of including the concept of multifunctionality in the next round of agricultural trade negotiations are Norway, Switzerland, the

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European Union, South Korea, and Japan. These countries, led by the European Union, have asked to explicitly include multifunctionality in the negotiating agenda for the next round of trade talks. The United States and the Cairns Group resist the inclusion of multifunctionality in the negotiating agenda. Under the URAA, all domestic support programs are categorized either as subject to reduction (amber programs) or not subject for reduction (green- and blue-box programs).3 For nonexempt amber programs, the level of support is measured with a quantitative calculation, called the Aggregate Measure of Support (AMS), which is an index that measures the monetary value of government support to the entire agriculture sector. Developed country WTO members were required to reduce their AMS to 80 percent of their 1986–1988 levels by the end of 2000. Generally, most countries are not in danger of exceeding their AMS commitment. Figure 12.1 shows 1996 AMS expenditures as a percentage of WTO commitments for several WTO members. Switzerland, the European Union, Norway, Japan, and South Korea have the least room to increase their current amber support without violating reduction commitments. These are also countries arguing that multifunctional goals are legitimate and that production-coupled subsidies are the appropriate way to promote nonfood by-products. Therefore, they are advocating that the URAA be

Figure 12.1

How Full Is the Amber Box?

Korea South Korea Norway Norway Switzerland Switzerland Japan EuropeanUnion Union European UnitedStates States United

Australia Australia New Zealand New Zealand

0

20

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percent of ceiling Source: Bohman et al., 1999.

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reformed to recognize the legitimacy of a multifunctional role of agriculture and to exempt coupled production subsidies from reduction commitment. The negotiations leading up to the WTO’s December 1999 Seattle ministerial meeting involved a vigorous debate on multifunctionality. The ministerial meeting was suspended. The latest draft ministerial text, dated December 3, 1999, excluded explicit reference to multifunctionality. However, the text instructs the negotiators to continue to take into account nontrade concerns in the negotiating process. Furthermore, these nontrade concerns are to be addressed through targeted, transparent, and non–trade distorting measures. Regardless of whether the WTO ministers can agree to begin a new round of multilateral trade negotiations, Article 20 of the URAA required that negotiations on agricultural trade rules start in 2000. Multifunctionality, explicitly identified or not, will play a role in these negotiations.

WHAT ARE THE ECONOMIC IMPLICATIONS OF MULTIFUNCTIONALITY?

The proponents of multifunctionality assume that positive spillovers occur as joint products with agricultural production. They also claim that this joint relationship allows multiple objectives to be addressed with one instrument. The market alone does not provide enough incentives to produce sufficient nonfood agricultural by-products. Therefore, they claim that the appropriate policy is a price-support subsidy to agricultural production. Does this argument stand up to economic scrutiny, and is it consistent with the principles of good policy design? Good policy design requires the stipulation of a specific objective. The objective must be measurable in order to determine if the policy instruments are effective at achieving their goals. Alternative means of achieving a policy objective must be devised and evaluated. The evaluation should include the assessment of costs and benefits associated with each instrument. J. Tinbergen (1952) has devised a rule where the number of objectives should equal the number of instruments. The appropriate method of addressing economic externalities is to first identify the externality and attempt to measure it. Several alternative corrective policy instruments should be devised and evaluated. The instrument must be targeted at the externality generating mechanism and not at associated activities. One example of a case of not targeting the externality mechanism is an output tax aimed at reducing pesticide runoff. The tax would induce a farmer to reduce output, but the tax would not necessarily lead the farmer to change behavior with respect to the application of the pesticide. If

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the incentives are aimed appropriately, the farmer will try to reduce the amount of the negative externality generated per unit of output rather than simply decreasing output. The reason that targeting is necessary for efficiency is that nontargeted instruments typically produce unintended byproducts because of the lack of precision in identifying the source of the problem. As a result, the costs of the remedy frequently exceed its benefits. Measurement becomes one of the most important determinants in the choice of corrective instruments. Measurement of external activities is, however, problematic because the affected agents frequently do not have incentives to reveal the true benefits of the appropriate provision of the externality. This is especially true where public goods are involved. The nonrival aspect of these goods tends to lead affected agents to underestimate the benefits of the public good, and nonexcludability leads to free-riding (Cornes and Sandler, 1996). It does not cost anything for an additional individual to enjoy the benefits of the public good. For example, it costs no more to defend a country of a million and one individuals than to defend a country of a million. If the national defense policy is successful in diverting attacks from abroad, then all citizens benefit, and there is no way to exclude any single individual. Jointness between nonfood by-products and agriculture is used as a rationale to (1) target production rather than the externality; and (2) to use one instrument to achieve more than one objective. Assessing these policy prescriptions requires determining what jointness is. There are three types of jointness. The first type is fixed-proportions technical jointness, like the type of relationship between the production of meat and hides. The fixed relationship remains the same no matter what the level of production or process. The fixed-proportions relationship is also known as technical jointness. In addition to technical jointness there is also economic jointness. Joint products, in the economic sense, can either be complements or substitutes. The interdependency between economically joint products is much less rigid than technical jointness (Chambers, 1988). Wheat and canola are examples of economically joint substitutes. The production of wheat and canola is economically joint, because of a shared input: the fixed supply of land. With joint substitutes incentives to increase one product will lead to less of the other product. Jointness resulting from a shared fixed input is a short-run relationship. Over the longer run, the interdependencies between outputs should diminish as the shared fixed input becomes variable and as technology changes. Furthermore, in the longer run technological improvements allow greater substitutability among inputs, which in turn reduces the degree of jointness. If joint production processes exist, then when is it appropriate to target the incentives for nonfood by-products at agricultural production? The answer is only in the very limiting case of fixed-proportions technical joint-

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ness. In this case, as agricultural production increases, the production of nonfood by-products will increase in lockstep. However, with variable-proportions relationships subsidies that are coupled to agricultural production may not be effective in promoting the nonfood benefits from agriculture. In the case of joint substitutes, coupled subsidies will have the opposite to the desired effect. Increased agricultural output will result in less of the desired by-product. Even with joint complements, although both products will increase together, they do not increase in the same proportion. Increasing agriculture production may not have the desired effect on the multifunctional by-product. Furthermore, the joint relationship may vary over the range of possible outputs. A positive by-product may become a negative by-product. For instance, low-intensity agriculture may promote positive environmental benefits, but intensive agriculture can lead to environmental degradation. A second argument made by proponents of multifunctionality is that the one-to-one relationship between instruments and objectives breaks down when the objectives are joint. However, this statement holds true only for the special case of fixed-proportions technical jointness, where there is a linear dependency between objectives. In fact, proponents of multifunctionality have been criticized for changing objectives in order to maintain the same instrument. The jointness argument tends to fall apart when agriculture production is not the only source of the by-product and the nonfood output can be produced independently of agriculture. For example, a pastoral setting can be associated with dairy production, but it can also be associated with a golf course or a park.

THREE MULTIFUNCTIONAL ASPECTS OF AGRICULTURE

In order to help sharpen the discussion on the role of multifunctional agriculture and the appropriate remedies, consider three examples of possible multifunctional roles for agriculture: food security, rural development, and environmental externalities. Food Security The multiple functions of agriculture are considered by some countries to include food security.4 Although most countries agree that food security is a legitimate national concern, there are differences of opinion as to whether food security is an agricultural by-product, and as to the appropriate policies to achieve food security. J. Lindland (1998) argues the Norwegian case that food security is a by-product of domestic agricultural production and argues for coupled production subsidies to promote food security. Lindland

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postulates that there is a national feeling of well-being associated with food security, which is an externality to agricultural production. In order to determine the validity of this argument, it is necessary to identify (1) the externality associated with food security, (2) the externality generating mechanism, and (3) the relationship of this mechanism to agricultural production. The externality associated with food security may be a feeling of national well-being associated with knowing that there is a secure supply of food. However, this feeling of well-being is difficult if not impossible to measure. A more concrete example of an externality associated with food security relates to health concerns. If a large proportion of a nation’s population does not have a proper diet, it can lead to disease that potentially affects the entire population. This externality is generated by the consumption of food, not by domestic food production. If consumption is sufficient, there will be no associated health externality. Consumption is related to domestic agriculture production through a supply/disposition identity that states that consumption may be sourced from domestic production, imports, or beginning stocks and that exports reduce the amount of food available for domestic consumption. Agricultural production is a substitute for other sources of supply such as imports and stocks. So domestic production is not joint with food consumption; neither can it be joint with any externality associated with consumption. At best, domestic production is associated only with the externality generating mechanism. Furthermore, a policy that promotes domestic production will not work to increase food security without adequate inputs. The country must either be self-sufficient in all farm inputs, or it must have a guaranteed supply of such inputs. Even adequate domestic production alone cannot guarantee food security unless an adequate food distribution system also exists. Viability of Rural Areas The creation of jobs in rural areas and the maintenance of viable rural communities constitute the primary objectives of rural development.5 The proponents of multifunctionality advocate promoting rural viability by subsidizing agricultural production. However, it is questionable just how effective such subsidies would be in achieving their goal. In Canada, as in other developed markets, agriculture’s ability to directly sustain rural employment and, in turn, rural populations has declined as agriculture has become more capital-intensive. Since 1981, Canadian farm size has increased by almost 20 percent while the number of farms has decreased by 13 percent. In Canada, only 20 percent of all farms produce 73 percent of total primary agricultural output (Statistics Canada, 1996). In terms of rural employment, agriculture contributes a small share. In Canada, agriculture’s

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share of rural employment has declined to only 16 percent. For other advanced OECD countries, the share of agricultural employment in predominately rural areas ranges from 2 percent in Germany, 6 percent in the United States, 8 percent in Norway, 11 percent in France, to 14 percent in Japan (Bohman et al., 1999). These statistics suggest that nontargeted general production subsidies will not be particularly effective in increasing rural employment. As agriculture production becomes more efficient, less labor input is generally required. This in turn implies a smaller populace to support rural communities. Several European proponents of multifunctionality (e.g., Lindland, 1988) maintain that culture and traditions are deeply rooted in the rural lifestyle and that increased social and environmental problems often follow in the wake of urbanization. These aspects are externalities to the viability of rural communities and are not direct externalities to the agricultural production process. Describing all the spillover effects associated with rural development as externalities is somewhat misleading. Rural communities have several spillover, or external, effects that reflect the market at work rather than market failures. It may be appropriate to describe these side effects as pecuniary externalities, which are external economies or diseconomics that result as factor prices change.6 Pecuniary externalities are not a cause of inefficiency but rather an essential feature of the efficient functioning of the price system. For instance, the multiplier effect associated with rural employment is a spillover effect, but its value is reflected in the market. Thus, to the extent that there are legitimate externalities, what is important to consider is the mechanism by which they are generated. Rural employment is one such externality generating mechanism. Increased employment supports a larger populace, which in turn supports rural communities and their associated benefits. So what is the relationship between rural employment and agricultural production? Rural employment comprises both agricultural and nonagricultural employment. These two types of employment typically compete for the same labor supply. Labor is only one input in an agriculture production process, and competing inputs can be substituted for labor as wage rates (or other factor prices) rise or as technology changes. Thus, increased agricultural production will not necessarily lead to increased overall employment in a rural community. Intensified production may become less labor-intensive. To the extent that agricultural employment increases as a result of increased production, labor may be drawn from other rural uses. The best remedy for promoting the positive externalities associated with rural employment is to address the employment issue directly. Promoting agricultural production is an imprecise instrument that does not

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have a one-for-one impact on employment and may have the unintended consequence of actually reducing rural employment. Environmental Protection Several proponents of multifunctionality cite the positive environmental benefits associated with agricultural production as a rationale for supporting the agricultural sector. For example, both Japan and South Korea cite flood control as a positive externality that comes from rice production (MAFF, 1999; Republic of Korea, 1999). Is agricultural production the best method to promote these positive environmental externalities? What are the negative environmental externalities associated with agricultural production? What weight should be placed on the negative externalities relative to the positive externalities? In order to determine the validity of the environmental-externality argument, it is necessary to answer several questions. What is the externality, what is the externality generating mechanism, and what is the relationship of this mechanism to agricultural production? Consider the example of flood control. The externality is the property damage and potential loss of life associated with flooding. The externality generating mechanism is the buffering effect of rice paddies. However, other methods to buffer floodwaters, such as dams, are available. Furthermore, only a portion of rice production occurs in the water basins that contribute to flooding, so not all rice paddies assist in flood control. Is rice production merely associated with flood control mechanisms, or is rice production synonymous with flood control mechanisms? The answer is that rice production is an associated activity. It is an empirical question whether rice production is more effective and less costly than other flood control mechanisms. This example illustrates the necessity of conducting cost-benefit analyses of alternative methods for correcting for externalities. Agriculture is responsible for several negative environmental externalities. For example, rice production is responsible for 20–25 percent of the world’s methane gas production. These gases contribute to global warming (United Nations Framework Convention for Climate Change, 1999). Of the multifunctional aspects of agriculture identified above, environmental protection is the most clearly associated with the traditional externality problem. However, there are both positive and negative environmental externalities arising from agricultural production. Both types must be taken into consideration, and the social trade-offs weighed, before a correction is made. Furthermore, a single environmental externality can change from being positive to negative depending upon the intensity of agricultural production. Consider the externality of landscape effects. To a certain

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degree, promotion of agriculture production will foster a scenic pastoral landscape, but at some point the landscape effect will be lost as large buildings and silos are erected and marginal marsh/forest areas are brought into intensive production. It must also be remembered that agriculture is not the only generator of environmental externalities in the economy.

WHAT ARE THE APPROPRIATE POLICY INSTRUMENTS TO ADDRESS THE MULTIFUNCTIONAL ASPECTS OF AGRICULTURE?

When are market solutions feasible, and when is it necessary for the government to intervene? Market solutions work best when the externality is depletable, or rival. Thus, when one agent experiences an externality, there is less to be experienced by other agents. Nondepletable externalities have a public good characteristic. The necessary conditions for a market solution to work are (1) there is only a small number of agents associated with the externality; (2) the transactions costs of bargaining are minimal; and (3) property rights can be enforced (Gravelle and Rees, 1981). The government’s role in achieving the market solution is merely to foster conditions under which the two sets of parties can reach a mutually beneficial agreement. The major advantage to market-based solutions is that this approach requires little knowledge on the part of the government in order to work. Private agents, however, must know one another’s preferences and must have equal information. Information asymmetries between agents can confound the market negotiating process (Mas-Colell, Whinston, and Green, 1995). Quasi-market solutions are feasible for impure public goods or cases where exclusion is enforceable. So-called club goods are relatively nonrival but are excludable (Cornes and Sandler, 1996) and provide an alternative provision mechanism. Private nature preserves are an example of club goods. The potential for private-sector provision of these goods takes away the rationale for government intervention. If a market-based solution is not appropriate, governments have two choices. One choice is to intervene indirectly to affect prices, thereby affecting the incentives of the individual agents. This is a preferred option as long as pricing directly affects the incentives to produce the externality. The optimal pricing of externalities, both depletable and nondepletable, requires a different price to be set for consumers (victims/beneficiaries) of the externality than is set for its producers. This two-price system can be created using taxes for negative externalities and subsidies for positive externalities. The government requires a great deal of information in order to set optimal tax/subsidy levels. The optimal solution requires the tax/subsidy to be exactly equal to the marginal value of another unit of externality.

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This implies that it must be possible to measure the amount of externality being produced, and that it must be possible to measure the benefits and costs of both the recipients and generators of the externality. It is essential that the tax/subsidy be applied directly to the externality generating activity and not to associated activities (Baumol and Oates, 1988). The alternative choice for governments is to intervene directly by either providing the goods themselves in the case of positive externalities or by restricting activities in the case of negative externalities. Again, for the government intervention to be effective it has to aim right at the generator of the externality and not at associated activities. The advantage of the regulatory approach is that it can often be targeted more specifically than other interventions. In certain cases, the regulatory approach can be combined with a partial market-based approach. This approach is being used with increasing frequency to address pollution problems. For example, quotas are specified for the total acceptable level of pollution, and the rights to the use of the quota are then marketed through tradable externality permits. Success of this approach depends on whether the externality is measurable. The appropriate choice of an instrument depends upon several factors, including the availability of information and the cost of implementation. In some circumstances, the goals of food security and viability of rural areas can be conflicting. To the extent these goals are self-conflicting, different instruments will be needed to achieve each goal, and society will have to determine the appropriate trade-off among goals. The national feeling of well-being associated with food security can be generated in several ways. Methods include providing the public with better information regarding the excess of global food capacity relative to global food demand; the development of secure access of imported production inputs and food supplies to complement competitive domestic sources; and public/private stock holding. Because food security and the associated feelings of well-being are not joint with agricultural production, coupled production subsidies are neither appropriate nor effective interventions. The viability of rural areas is seldom, and decreasingly, dependent on agricultural production alone. It can be facilitated in several ways. The methods include special measures to ensure that rural, remote, and less populated areas are not disadvantaged relative to their more urban and centralized counterparts. Rural communities must have equal access to public services and facilities (e.g., transportation, communication, and education). Policy development should include an ongoing review of government policies, programs, and services to ensure that there are no unintended and negative impacts on rural areas. Targeted and time-limited initiatives may be aimed at mobilizing local resources to exploit sustainable economic development opportunities based on local competitive capability. Support for an

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increasingly productive and efficient agricultural sector is not an effective approach to realizing viable rural areas, and indeed it often works against this realization unless other nonprimary agricultural employment opportunities are developed. More efficient agricultural production usually implies less labor input, which in turn implies less population to support the rural communities. There are both positive and negative externalities associated with the environmental consequences of agricultural production. Again, trade-offs between conflicting goals have to be determined. Once the trade-offs are determined, policies need to be designed to address the specific problems. Although there may be a positive correspondence between agricultural production and landscape attributes, the correspondence is not one-to-one, and there is a point beyond which the correspondence becomes negative. This implies that if subsidies are chosen to correct for this landscape externality, then they need to be tied to the particular attribute of agricultural production that gives the scenic value. If the scenic value comes from a technological practice, then any coupled payments should be focused on the technological practice rather than on output. If the scenic value comes only from the fact that the land is in agricultural employment, then a per unit output subsidy is not needed. An income supplement pegged to a certain minimal level of effort with cross-compliance regulations may be sufficient. If biodiversity is the environmental goal, then it could be more effectively addressed through regulations for protection of habitat, cross-compliance regulations linked with direct income supplements/tax concessions, and, in some cases, direct payments tied to the number of select species of interest located on the farm.

CONCLUSION

Promoting the nonfood outputs of agriculture represents a legitimate domestic policy objective. There is, however, a very real concern that pretense for correction for externalities may become a justification for protectionist interventions. This concern is especially pertinent when the proposed remedy is a blunt instrument aimed at promoting agricultural production rather than a targeted instrument that is aimed directly at the externality. The WTO respects member countries’ sovereignty over domestic policy objectives. Members have the right to target any objective they wish as long as they do not distort trade or the policy is within the country’s amberbox limits. There is no single appropriate method of government intervention to correct for externalities. The appropriate choice of instrument depends on

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the circumstances under which the externality occurs. Any policy formation exercise must clearly define the objectives, then target the instruments to meet the objective. The instrument must be targeted directly at the externality generator and not at associated activities. Measurement becomes one of the most important determinants in the choice of policy instrument. Adequate measurement requires both defining and valuing the external activity. The costs of the corrective mechanism can outweigh the benefits from the change in the level of the externality. If this is the case, no action should be taken to correct for the externality. The method chosen for correcting an externality can create additional externalities. Both positive and negative externalities are associated with agricultural production, and addressing externalities creates conflicting objectives. The same instrument cannot be used to address conflicting goals. Trade-offs among goals need to be made. It is important to recognize that not all externalities are market failures requiring government intervention. Neither is it good policy to maintain an instrument while searching for new objectives to justify its continued use.

NOTES 1. See, e.g., Michael Smith, “Negotiators Face a Difficult Task,” Financial Times, November 29, 1999. 2. The Cairns Group of fifteen agricultural exporting countries was formed in 1986 to influence agricultural negotiations within the World Trade Organization. The group includes Argentina, Australia, Brazil, Canada, Chile, Colombia, Fiji, Indonesia, Malaysia, New Zealand, Paraguay, Philippines, South Africa, Thailand, and Uruguay. 3. Annex 2 of the URAA (the so-called green box) exempts programs that are “deemed to have no, or at most minimal trade distorting effects, or minimal effects on production.” The green box includes general requirements that (1) the program must be government-financed, and (2) the program does not provide price support. In addition, there is an illustrative list of eligible policies. Article 6.5 of the URAA, the so-called blue box, exempts direct payments from reduction commitments when the payments are provided under production-limiting programs. 4. The Food and Agriculture Organization of the United Nations (1992) defines food security as “access for all people at all times to enough food for an active, healthy life” where the system is characterized by (among other things) the capacity to produce, store, and import sufficient food to meet the basic needs for all members of society. 5. Considerations of rural viability include reversing out-migration, reducing rural poverty, stimulating rural employment, and protecting rural amenities. 6. J. Viner (1931) labeled any external economies or diseconomies, which are simply the outcome of changes in factor prices, as “pecuniary.” These effects are essential features of the efficient functioning of the price system and can be considered to general equilibrium effects of the workings of the economy

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BIBLIOGRAPHY Baumol, W. J., and W. E. Oates. 1988. The Theory of Environmental Policy. New York: Cambridge University Press. Bohman, M., J. Cooper, D. Mullarkey, M. A. Normile, D. Skully, and E. Young. November 1999. “The Use and Abuse of Multifunctionality.” Economic Research Service/USDA. Chambers, R. 1988. Applied Production Analysis: A Dual Approach. New York: Cambridge University Press. Cornes, R., and T. Sandler. 1996. The Theory of Externalities, Public Goods, and Club Goods. 2d ed. New York: Cambridge University Press. Food and Agriculture Organization. December 1992. Final Report of the Conference and World Declaration and Plan of Action for Nutrition. International Conference on Nutrition, Rome. Freeman, F., and I. Roberts. 1999 “Multifunctionality: A Pretext for Protection.” ABARE Current Issues 99, no. 3: 1–6. Gravelle, H. M., and R. Rees. 1981. Microeconomics. London: Longman, esp. pp. 503–535. Inside Washington Publishers. 1999. “Draft Ministerial Text.” Inside U.S. Trade 17, no. 49, and “Special Issue” (December 10, 1999). Lindland, J. 1998, “Non-Trade Concerns in a Multifunctional Agriculture: Implications for Agricultural Policy and the Multilateral Trading System.” OECD COM/AGR/CA/TD/TC/WS(98)124. Mas-Colell, A., M. D. Whinston, and J. R. Green. 1995. Microeconomic Theory. New York: Oxford University Press. Ministry of Agriculture Forestry and Fisheries of Japan (MAFF). 1999. “Environmental Externalities of Japan’s Paddy Fields Farming.” . Republic of Korea Ministry of Agriculture and Forestry. 1999. “Non-trade Concerns in Net Food Importing Countries.” . Statistics Canada. 1996. Census of Agriculture. Ottawa: Statistics Canada. Tinbergen, J. 1952. Theory of Economic Policy. Amsterdam: North-Holland. United Nations Framework Convention for Climate Change. 1999. “Information Fact Sheet No. 22.” . Viner, J. 1931. “Cost Curves and Supply Curves,” Zeitschrift für Nationalökonomie III: 23–46. World Trade Organization. Agreement on Agriculture. Geneva. .

13 Rural Policy KENNETH J. THOMSON

The topic of this book—globalization—and the title of this chapter—rural policy—demand that I define what is and is not being discussed here. After doing that, I will identify specific effects that globalization, and WTO agricultural trade liberalization in particular, can be expected to have on rural areas and, hence, on rural policies in developed countries, with occasional examples from the European Union.

GLOBALIZATION

Globalization is a relatively new term and, in the view of most, a relatively new phenomenon. Seen as an economic process rather than the end result, it involves the restructuring of production and consumption in terms of location, ownership, and exchange (i.e., trade) such that international links and flows become more and more important. M. Storper (1997) has analyzed how this is related to “territorialization,” in which economic activity is based on location-specific resources and institutions, and/or to “deterritorialization,” in which such activity is dispersed due to low economies of scale or high transport costs or regional consumer preferences. Yet deterritorialization can emerge as production or consumption is relocated to more convenient centers due to low transport costs and high-scale economies. Globalization and liberalization are leading to the realignment of production and consumption patterns. With cheaper labor and transport costs, some manufacturing is moving out of Western Europe, North America, and Japan to regions such as Central Europe, Central America, and South Asia. This is noticeable in textiles, where the Uruguay Round enforced real policy change. Largely due to technological advances, services—from finance 255

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through retailing to the media—are fast internationalizing despite regulatory concerns. For agriculture, globalization is of course being driven in part by the process of international trade liberalization under the General Agreement on Tariffs and Trade/World Trade Organization (GATT/WTO), with the production side taking advantage of new technologies in farm production (e.g., horticultural development, and the new biotechnology) and cheaper transportation. However, equally important is the crucial role played by the demand side, in terms of rising purchasing power in various parts of the world, and the internationalization of food retailing. Whatever the various opinions about the nature, novelty, and even existence of globalization as a significant new economic phenomenon, there can be no doubt as to the financial and political strains being set up in farming by current price trends. 1 Whether or not agricultural globalization is old or new, and whether or not the Uruguay Round has actually led to major shifts in policy arrangements and trade flows, there are real forces for change in agricultural economies around the world. Thus, globalization is the result of several underlying processes, some (e.g., new technologies) more fundamental than others (e.g., tariff commitments). The economic point of view, that changes in consumer demand are generally taken as given, leaves unanswered the question of how these demands are affected by wider experiences, new marketing campaigns, and general cultural development—all of which are affected by globalization. In general, perhaps all that can be said is that both supply and demand opportunities are expanding while transport/transaction costs are reducing. Together, these promise substantial gains in economic welfare through the traditional channels of productivity gains and specialization (i.e., reallocation of resources). Yet negative environmental externalities such as global climatic change and localized environmental damage are being exacerbated as production moves to less regulated regions, and as consumer valuation of such damage increases with rising incomes. However, even here we must be careful: Europeans at least have become suspicious of certain new foods, cheap global communication allows very fast transmission of “scares,” and—as the nineteenth-century European reaction to liberalization showed—there is nothing irreversible about globalization. However, the general thrust is clear: wider markets, stronger competition, and stricter explicit and implicit constraints on national policies, including those in rural areas. RURAL AREAS

Moving to rural policy, we are indeed on contested ground. Given the many alternative definitions surrounding the terms urban and rural—particularly

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in the international context of the WTO—there is endless scope for discussion of what any “policy” might affect. Also, it is universally acknowledged that rural areas vary tremendously, and some rural policies are addressed to that diversity itself, either to maintain it (cultural, ecological) or to reduce it (health, farm incomes). The approach of the Organization for Economic Cooperation and Development (OECD) to rurality is to define rural areas in developed countries in territorial terms. According to the OECD definition, rural areas represent 90 percent of the land area and almost one-third of the population of OECD member countries (OECD, 1996, p. 9). Some countries (such as Canada) have more or less equal shares of national population in the three regional categories (predominantly rural, significantly rural, and predominantly urbanized). In contrast, the Nordic countries have about half their population in predominantly rural regions, whereas Britain and Germany have only about 10 percent in such areas. Of course, population density, although a useful indicator, is a narrow basis for definition. From an economic point of view, what matters more is the overall availability of resources such as employable people, land, and infrastructure, in addition to the demands for products and services that those resources can provide. In the latter respect, the traditional farm and forest products in some rural areas are being increasingly supplemented or even overshadowed by tourism and residential possibilities as the base of a new rural economy upon which local supplies, services (public and private), and construction sectors depend. The OECD’s spatial definition ignores much of an economic character but encourages the adoption of the so-called new economic geography (NEG; see Krugman, 1997), which focuses on remoteness (or dispersion), scale economies, and transport costs as a framework for explaining rural economies and devising strategies for rural economic development. Based on the classical von Thünen model of land use zones, rural areas are characterized in NEG terms by: • extensive land use; • low population densities and/or incomes; • high rates of economic specialization due to internal and external scale economies; and • capital shortage (e.g., low-salvage, or second-hand) values. It is to be noted that all these are not characteristic only of agriculture but apply to any component of a rural economy (e.g., tourism, food processing, residence, etc.). Within this framework, the pattern of land use and rural settlements is determined according to transport costs and scale economies:

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• zero transport costs and ever-present scale economies lead ultimately to agglomeration into a single city; and • high transport costs and few scale economies lead to (or maintain) dispersed economic activity. Technological change, communications—physical and electronic—and government interventions are pervasive in all developed countries and have created a huge number of spatial interconnections. There is no hope of defining a truly separate “rural world” (let alone an “agricultural community”) with a small number of well-defined links to and from the “outside.” Instead, we must define somehow the focus of our attention, then consider how internal and external forces (i.e., globalization and WTO-led liberalization) can affect that focus.

RURAL POLICY

Is there such a thing as “rural policy,” other than the all-embracing interpretation “all policies in rural areas”? And if there is, what does it cover, in terms of economies, communities, the environment, and so on? Do we mean or include rural development policy, rural administration, agrienvironmental nature conservation, and antipollution measures? Policy is government intervention, not the economy or society or the environment. With the failure of Marxist socialism, policy has only one main role in regard to economic efficiency: to reduce market failure, whether by correcting for externalities or by providing public goods (or preventing public bads). It can attempt this by executive means (government itself providing the public good), or by regulation (enforcement or prohibition), or market intervention (taxes and/or subsidies, i.e., price manipulation), or exhortation (education, propaganda). In other words, the state itself acts or enforces, or pays (or taxes), or asks. It can, of course, set up or modify institutions to do these things—hence marketing boards, environmental agencies, and universities. Economists tend to favor the market approach but admit that regulation or even direct action can be simpler and more effective in some cases. Whatever the approach, economic policy in the modern world is regarded as merely complementing or adjusting much larger and more pervasive market-based activities. And because that activity is continually changing due to technical and social forces such as globalization, policy is trying to deal with a moving target or a set of targets. Rural policies can try to move more quickly toward desired ends or try to compensate for the undesired effects of other forces. These forces include, very often, other policies, so that rural policies become a kind of second or third tier of

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measures brought in to offset the effects of primary policy instruments (farm production quotas in the context of agricultural price support are an excellent example). Indeed, with the reduction in clear strategic national goals such as food self-sufficiency and the reduction of farm poverty, many rural policies have become reactive to underlying change or complementary to other, broader policies. The main area where this is not true is environmental policy, where market failure is now so clear that measures to conserve and enhance wildlife and other natural resources are positively sought out. Especially in the more nonurbanized countries, rural policy could include a great deal normally considered under headings such as “agriculture,” “environment,” and “transport” and could hardly come under the remit of a single ministry. Thus, promoters of rural policy (e.g., Bryden, 1999) have had to resort to recommending “integrated,” “harmonized,” or “joined up” policymaking—with various interpretations about whether this involves, for example, interdepartmental consultation, joint funding, or nonsectoral measures. There has been talk of implanting the “rural gene” throughout the OECD’s work (OECD, 1996), and Canada’s “rural impact test” is designed with the same intention. In Britain, proposals have recently been made (Cabinet Office, 1999) to move the Agriculture Ministry’s policy-related responsibilities for EU Structural Funds and the Rural Development Regulation into the central government’s regional offices, with “rural-proofing” carried out by the Countryside Agency, a semi-independent executive agency. In the European Commission, the Agriculture Directorate-General has fought many a battle to attach, and keep, “rural development” in its portfolio. J. Hite (1997) gives the following policy implications of the NEG analysis for rural areas: • encourage/facilitate emigration; • subsidize new investment to achieve critical mass, especially by taxes on local beneficiaries (e.g., business and landowners); • exploit specific local natural and cultural resources; and • improve the chances of capturing floating inward investment. Together, these constitute a valid, if somewhat bleak, menu of recommendations in place of the old and expensive strategy of agricultural protection and support. However, by focusing directly on the use of rural land and other resources, the NEG analysis ignores the consumption side of the many modern rural economies. Easier physical and electronic communications, growing urban problems of crime and congestion, and higher incomes are attracting and enabling more and more people to live in and work in (or from) countryside areas. At first, this phenomenon occurred

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fairly close to the major conurbations, but now it is observable increasingly farther away—across the English Channel, for example, or weekly commuting between Brussels and Italy. Retirees are increasingly willing to shift to distant locations to enjoy at least some of their remaining years, often in places they earlier visited as tourists. Together with short-term visitor and tourist arrivals, incomers to rural areas express new demands that rural economies and policies must address. Some of these demands can be met—with suitable adaptation—in the marketplace by existing businesses: domestic construction and repairs, household deliveries and services, and shops. Others require new enterprises: computer specialists, ecotourism guides, fast-food outlets. But where public action is called for, rural policies must adapt not only to the universal demands for education, health, and other social services but also to the special characteristics of the environment in rural areas. In many locations (and in an increasing number of policy appraisals), rural economic policy and rural environmental policy are linked together, either to consider the conflicts between the two areas of concern, or to promote a mutually supportive combination such as ecotourism and locational food labeling. This, of course, is the very stuff of sustainable development.

AGRICULTURE AND RURAL POLICIES

However, in other cases there are more or less direct conflicts between the views and behavior of land production managers and those of much of the rest of society. Nonfarmers perceive the loss of valued environmental features and practices and express new demands in terms of animal welfare, public access to rural land, and so on. In some cases, these latter conflicts can be resolved through the marketplace, premiums for organic produce (or discounts on genetically modified crops), charges for farm-based recreation, and the like. But many require state action through regulation or cross-subsidy in order to bring about a more desirable position, and it is here that “modern” rural environmental policies are being developed. In Europe, the complex and manmade nature of the countryside has often proved vulnerable to the forces of technological and social change, especially when they are reinforced by many decades of agricultural protectionism in the shape of the Common Agricultural Policy (CAP). An increasing number of measures, initially for special sites and areas of natural interest but increasingly for wider “countryside stewardship” operations (Van Huylenbroeck and Whitby, 1999), have been introduced. The federal nature of the European Union, as well as the highly variable nature of the rural environment across Europe, have complicated the design and delivery of these measures, which are typically funded jointly from EU and national

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budgets and must satisfy Unionwide rules about unfair competition and subsidization. So far, they occupy less than 5 percent of the overall CAP budget,2 but their extent is spreading, most recently via the Agenda 2000 decision to allow “modulation” (i.e., transfer) of standard CAP direct payments to agrienvironmental (and “rural development”) schemes. In WTO terms (see Damianos and Barlas, 1999), current agrienvironmental measures in the European Union can be regarded as minimally or even non–trade distorting in producer subsidy equivalent terms (the monetary value of policy transfers to farmers). However, qualitative analysis suggests that some of these policies are poorly targeted and not very cost-effective. Returning again to food production—still (along with forestry) the primary land use in most rural areas—further confusion over terminology awaits us. In many policy documents—particularly in the European Union but by no means confined there—“rural development” turns out to embrace a good deal of what in fact is farm or agricultural development. Thus, the recent Agenda 2000 decisions taken in Berlin in March 1999 include a much-trumpeted “second pillar” of the CAP in the form of the Rural Development Regulation. This piece of legislation actually includes a wide range of measures, but all are targeted at farmers or farm families, not the rural population at large.3 Only the agrienvironmental measures are compulsory, but most member states are choosing to implement many of the others, which include agricultural investment subsidies, livestock headage payments in “less favored areas,” young and outgoer farmer schemes, processing and marketing assistance, and afforestation of farmland. Of course, in a narrow sense these are rural development measures, but their agricultural flavor, in both law and spirit, is unmistakable. If effective, they will have an impact on European rural areas and economies by releasing and attracting resources—land, labor, and capital—from farming into new rural enterprises. Farm structural policies in most developed countries have been more or less explicitly designed in response to the pain of rural restructuring (Apedaile and Harrington, 1995). Although some of these measures have promoted structural adjustment through early retirement schemes and investment subsidies, they have mostly tried to ensure the survival of farming units threatened by technological obsolescence in the face of domestic and international competition. The reasons for such defensiveness are many and varied and include the usual political rent-seeking by income- and asset-affected interest groups, the protection of agrienvironmental assets, and the sustaining of sociocultural values considered to attach to smallscale and often remote farm holdings and their families. The situation is further confused by the ability of policymakers to use “structural” measures, such as annual headage or area payments, as a means to offset shortterm price and income instability. Underlying all this is the usual conflict or

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confusion between measures that promote market efficiency and those that seek to secure a desired level of social equity. The Uruguay Round Against this backdrop of globalization and rural affairs, we can now move toward the focus of this chapter. The main achievements of the Uruguay Round—apart from clearer and stronger institutions and procedural rules— were: • the establishment of constraints on import barriers and export and domestic subsidies for farm and food products; • the winding-up of the Multi-Fibre Agreement (MFA) through relaxing the “voluntary export restraints” (VERs) for textiles and clothing; and • “industrial” agreements on services, intellectual property rights, and “trade-related investment measures.” There have been many analyses of the economic effects of the Uruguay Round agreements, but one analysis (Blake, Rayner, and Reed, 1996) estimates that the three components above should together increase global economic welfare by at least U.S.$67 billion4 in roughly similar shares (28 percent, 34 percent, and 40 percent, respectively). About a third of this (net) gain accrues to Japan, from reduced industrial protectionism, and a similar amount results from textiles and clothing production in Southeast Asia and China, and/or lower-cost consumption in the United States and European Union. As just noted, overall welfare gains from agricultural liberalization are smallest of the three, but for certain regions, including Australia, New Zealand, and Canada, as well as Latin America, they outweigh the other two effects. The main welfare losses at regional levels are the impacts on textile sectors in newly industrializing countries in East Asia and elsewhere, and to Japanese agriculture. It is widely recognized that the agricultural liberalization of the Uruguay Round was strictly limited and has not yet had much impact on domestic policies and agricultural trade. Some major disputes have evolved, but with relatively minor effect: perhaps the largest is the WTOauthorized action by the United States (and Canada) against certain EU imports in protest at the latter’s refusal to accept hormone-produced beef. However, by reinforcing the pressures of market competition, trade liberalization emphasizes the problems of structural and other policies generally. For agriculture in most countries, with long-established and substantial arrays of government interventions, such problems are acute, made

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more so by the need to assess others’ policies in the WTO context. The obvious dangers are in fact at two levels. First, trade liberalization leads to loss of farming units that provide significant public goods, such as traditional farming landscapes and practices, as well as a social and cultural heritage. Second, we see the undermining of trade commitments by governments in their efforts to minimize such losses, and possibly of the entire process of trade liberalization and its potential market-economy gains by private-sector resistance to liberalized trade, as exhibited recently at Seattle. Given the virtual certainty that such dangers emerge in trade disputes, the WTO settlement procedure arises naturally for consideration. But thus far the enhanced procedure introduced with the Uruguay Round Agreement provides little evidence relevant to the issue. Indeed, it may never do so, since the enhancements were mainly procedural (hastening the pace of decisionmaking) and do not alter the basis for potential settlements. The Uruguay Round green box (which contains structural measures) has not so far come under much scrutiny, and dispute settlements to date have focused, as in the past, on the mechanisms of tariff arrangements and product definition. Moreover, the “due restraint” peace clause of the Uruguay Round, which covers green- and blue-box payments and export subsidies and is in force until the end of 2003, has inhibited the full testing of the new disputes procedure. It may be asked whether farm households are in a special position to resist, or adjust to, the forces of globalization and trade liberalization. It seems fairly clear that production of standard raw commodities and manufactured mass-brand products is becoming open to regional specialization, with low-cost producers able to outcompete those sheltering behind protectionism, whether explicit or implicit (e.g., consumer tastes, long-standing market arrangements, etc.). A small or remote monoactive farm unit cannot hope to survive in the face of such developments. However, globalization itself provides some counteracting forces. First, the communications revolution has reduced physical isolation and allowed farms to benefit from transportation improvements undertaken for nonagricultural motives, such as shifting manufactures or consumer products. In fact, this reverses the nineteenth-century process in which railroads and roads were initially provided to serve the farming sector but soon became used by others for retailing and tourism. Second, the Internet allows small farmers to promote their specialized products (and to search for farm and household inputs) more cheaply. Of course, niche markets have to be created and nurtured, but organic products and farmer markets have shown the way, as has electronic auctioning of livestock and crops. Third, the markets for nonagricultural products and services—particularly

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tourism and rural residence but also wines, craft products, and the like—are widening significantly as buyers (including final consumers) are able to find and visualize items that until now could be discovered only by accident, experience, or costly search. The relatively high educational and occupational status of rural tourism as a special-interest niche market (OECD, 1995) facilitates this process. Finally, by its very pervasiveness globalization may provide a policy push that encourages exit from farming (full-time or part-time) in semiorganized and subsidized ways (e.g., by early retirement and outgoer schemes retraining initiatives, and other “adjustment” measures). Some (see Oliviera, Whitener, and Bollman, 1995) have argued (mainly in a U.S.-Canadian context, but the OECD provides a similar framework) that globalization of agricultural trade also applies to increased trade of agricultural data itself. Alternatively, or additionally, it can be argued that national and international awareness of environmental values provided by continued farming practices is being enhanced by modern publication and education media, so that governments find it easier to agree to agrienvironmental support schemes that counteract reduced farm incomes. Thus, globalization—rather than simply agricultural trade liberalization—offers benefits as well as threats even to the small farmer on poor, remote land. Of course, such opportunities have to be exploited, which requires skills (e.g., information technology competence and customer care) as well as new resources (e.g., a website). And sometimes larger, better-placed farmers may be able to outcompete or hijack initiatives promoted by those most in need of effective responses to harsher competition in old markets. But a balanced approach—both in analysis and in rural areas— seems appropriate.

THE MILLENNIUM ROUND: SOME CONCLUSIONS

In reopening international negotiations on agriculture, the nontrade concerns to be taken into account5 include food security and the need to protect the environment, but they do not explicitly exclude anything else. This has left the door wide open to various interpretations as to issues that may be fairly argued over, most notably multifunctionality as represented (for example) by the European model of agriculture promoted from Brussels, as well as rural policy in the round. However, some rural issues, such as food safety and animal welfare, are unlikely to be handled adequately within the WTO. There is simply not enough agreement, or trust, between the 130-odd members—in particular among the major players such as the European Union and United States, and between the developed and developing world—for consensus to be

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reached on these topics. Against this background, what are the implications of the new (and “successful”) WTO round for rural areas in developed countries? First, such a round will accelerate the globalization of the general economy, thereby reinforcing long-term economic and social forces that have operated over many years—in some cases despite rural policies to oppose them. Labor and capital from a wider geographical range of sources will become available to entrepreneurs, and in many cases their output can be sold in wider markets. However, whether these businesses will be located in, or be attracted into, rural areas depends on whether their costs are sufficiently low, or their goods and services sufficiently high-priced. For standard manufactures in the rural parts of highly developed countries, the prospects must be bleak: not only will companies be able to operate more easily elsewhere, but scale economies also suggest continued closure of branch plants. The same can be said of some services, although high-quality and locally available human resources will always be crucial in this sector and may be more available (though perhaps relatively immobile) in rural areas. Second, agriculture faces further global internationalization and specialization, as long-standing trade barriers (and disruptive mechanisms, such as export subsidies) are reduced or eliminated. This means there will be even fewer people farming, even in “successful” farming areas, because expansion and enlargement of existing farm operations often means structural change, which displaces more labor than it generates. In farming areas unable to compete in global markets, the changes will be more severe, and land transfer to other uses or simply abandonment must be contemplated.6 Current modeling work for the European Union suggests further contraction of its food-producing area, with the surplus land being available for forestry, recreation, or possibly bioenergy and biomaterials. In rural areas with significant numbers of high-income, non–land-dependent people as visitors or residents, diversification of farm family activities—meaning more part-time farms—will be the obvious strategy. This will further undermine the use of average farm income levels as a policy indicator (Cahill, Fulponi, and Moreddu, 1993). Third, environmental concerns—in rural areas, as well as globally— will not be handled well within the WTO. For European and other countries where the countryside is truly multifunctional, and where subsidized agriculture is considered necessary to preserve much-valued features and practices, there will be perennial disputes over whether green-box measures in fact distort international trade and, if so, what constraints or compensations should be applied. Luckily, this may not matter too much if agrienvironmental measures can be designed better, targeting their objectives in terms of habitat preservation and land and water conservation, because in this

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case there will be less overspill into unwanted farm output. In this way, the problems of rural areas—whether environmental or social—can be tackled in ways freed from the complexities of agricultural policy.

NOTES The author is grateful to his colleague Dr. Bill Slee for a set of penetrating and helpful comments on an earlier draft, and for assistance from Dr. Jill Hobbs and others. Responsibility for the content is, of course, the author’s alone. 1. Real EU farm-gate prices declined by 4.6 percent in 1999, after falls of 4.5, 3.7, and 2.6 percent in the previous three years. The real terms of trade have deteriorated by 9.4 percent since 1995 (Agra Europe, January 21, 1999, p. EP/6). 2. Cofunding from national and other sources might double this proportion. 3. A flavor of the EU approach can be gained from the reported words of the chief responsible official (Laurent van Depoele, quoted in Agra Europe, July 2, 1999): “We’re not taking away from the farmer to give to the hairdresser.” 4. Actually, it was a rather modest 0.29 percent of global income, in line with other studies. However, these are comparative-static results; the dynamic effects of liberalization are generally thought to be greater. 5. Preamble to Article 20 of the 1994 Uruguay Round Agreement on Agriculture. 6. More than thirty years ago, Commissioner Sicco L. Mansholt advocated the reduction of utilizable agricultural land in the European Community (then of Six) by 5 million hectares, or about 7 percent of the 1970 total. Despite the outright rejection of that plan, and the huge efforts made to support European agriculture in the 1970s, about 4.2 million hectares of farmland was in fact “lost” by 1980, and more has been reallocated since.

BIBLIOGRAPHY Apedaile, P., and D. Harrington. 1995. “Structural Policies for Trade Harmony.” Canadian Journal of Agricultural Economics 43 (special issue on Farms, Farm Families, and Farming Communities): 241–253. Blake, A. T., A. J. Rayner, and G. V. Reed. 1996. Decomposition of the Effects of the Uruguay Round. CREDIT Research Paper no. 96/16. Nottingham, U.K.: University of Nottingham. Bryden, J. 1999. “Policymaking for Predominantly Rural Regions: Concepts and Issues.” Paper for the Organization for Economic Cooperation and Development. Paris. Cabinet Office. 1999. Rural Economies. London: Stationery Office. Cahill, C., L. Fulponi, and C. Moreddu. December 1993. “The Total Income Situation of Farm Households in the OECD: Linkages to the Rural Economy.” Paper presented to the U.K. Agricultural Economics Society, London. Damianos, D., and Y. Barlas. 1999. “Analysis of Trade Distortions.” In G. Van Huylenbroeck and M. Whitby, eds., Countryside Stewardship: Farmers, Policies, and Markets. Amsterdam: Elsevier, chap. 8. Hite, J. 1997. “The Thunen Model and the New Economic Geography as a

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Paradigm for Rural Development Policy.” Review of Agricultural Economics 19, no. 2: 230–240. Krugman, P. 1997. Development, Geography, and Economic Theory. Cambridge: MIT Press. Midmore, P. 1999. “Globalization and the Rural Economy.” Inaugural lecture, University of Wales, Aberystwyth, December 1. Oliviera, V., D. Whitener, and R. Bollman. 1995. “Farm Structure Data: A Canada–U.S. Comparative Review.” Canadian Journal of Agricultural Economics 43 (special issue on Farms, Farm Families, and Farming Communities): 29–45. Organization for Economic Cooperation and Development (OECD). 1995. Better Policies for Rural Development. Paris: OECD. ———. 1996. Niche Markets and Rural Development. Paris: OECD. Storper, M. S. 1997. “Globalization of the Institutions of Economic Development.” In K. R. Cox, ed., Spaces of Globalization: Reasserting the Power of the Local. New York: Guilford, pp. 19–44. Van Huylenbroeck, G., and M. Whitby, eds. 1999. Countryside Stewardship: Farmers, Policies, and Markets. Amsterdam: Elsevier.

14 Labeling and Consumer Issues in International Trade JILL E. HOBBS

Labeling of food products has rapidly become an important international trade issue. The issue incorporates questions of national sovereignty, the right to know of consumers, different social priorities, and the risk of creating new barriers to trade. These issues combined have the potential to make labeling a quagmire for international trade negotiations. This chapter identifies different types of labeling and explores different perspectives on the purposes of food labels. International agreements and institutions governing labeling are outlined. Finally, the implications of labeling regulations for international trade, agrifood industry competitiveness, and the structure of supply chain relationships are discussed.

THE ROLE OF LABELING

The contentiousness of this trade issue stems from the varied roles of food labeling. There is potential for disagreement over the de facto effect of a label, regardless of the role it is supposed to play. Three types of labeling can be identified: consumer-focused labeling, producer-focused labeling, and social/cultural–oriented labeling. Consumer-Focused Labeling The usual purpose of consumer-oriented labeling is to inform consumers about product or process characteristics important to their purchase decision. Accurate labeling should reduce consumers’ information and search costs and facilitate the flow of market signals from consumers to producers. Labeling may also serve to protect consumers, for example, in warnings 269

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about potential allergens contained in a food product or health warnings about the product itself, such as cigarette packages. One insight (see Lancaster, 1966)—that the demand for a good consists of the demand for the set of attributes of that good—is important to understanding the role of labeling and to appreciating why there is so much scope for trade disagreements. In many cases, labels are justified because a good has experience or credence attributes that are important to consumers. It is useful to distinguish between search, experience, and credence attributes (Nelson, 1970; Darby and Karni, 1973). The search attributes of a good can be evaluated by consumers prior to purchase (e.g., the color of a car or the marbling on a steak). Experience attributes can be evaluated only after the good has been purchased and experienced (e.g., the fuel efficiency and mechanical performance of a car, or the taste and tenderness of a steak). Finally, credence attributes are those that the consumer cannot evaluate accurately even after use due to insufficient information and/or the consumer’s lack of expert knowledge. Examples include the services of a mechanic or doctor, or bovine spongiform encephalopathy (BSE) contamination in beef. If an experience or credence attribute is important to a consumer’s purchase decision, a method of signaling the presence of that attribute is required; labeling is one such method. Without labeling, consumers face higher information costs in determining whether the attribute is present. Labeling transforms an experience or credence attribute into a search attribute (Caswell, 1997). The case for labeling may be weaker for experience attributes if repeat purchases are important and a reputation effect exists. Sellers have an incentive to provide products with positive attributes (or without negative attributes) if they value the consumer’s repeat business. Also, private-sector alternatives to providing product information may arise if consumers enter the market sequentially and use their experiences to inform other consumers (Caswell, 1997). The publication of product evaluations in consumer information magazines is one example. Nutrition labeling, quality certification, and a variety of types of process labeling fall under the rubric of “consumer-focused” labeling. Nutrition labeling is seen by governments in higher-income countries as an important tool in the battle against health problems related to poor diet. The specific nutrient content of a processed food is a credence characteristic that can be signaled to consumers through labeling (Caswell, 1997). Nutrition labeling has two objectives. The first is to improve public health by providing the necessary information upon which consumers can base decisions about their diet. The second is to prevent the capricious use of labels to mislead consumers as to the nutritional content of a food (e.g., regulations concerning the use of low-fat and diet claims on food products).

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Food labeling rules differ between countries. The United States has an extensive system of labeling, including mandatory nutrition information panels and closely regulated voluntary nutrient and health claims. In Canada and the European Union (EU), nutrition labeling is voluntary but becomes mandatory if a nutrition claim is made (Caswell, 1997). Standards may differ between countries because of different social or cultural priorities. The Codex Committee on Labeling has issued guidelines for labeling of nutrition content and nutrition claims on foods. However, as yet there is little coordination of nutrition labeling regulations among countries. Quality assurance labeling is also used to assure consumers that a product meets certain quality standards. Often this is a private industry standard with accreditation by third-party private-sector players or by government. For example, the ISO9000 quality marks assure consumers that certain practices have been followed and certain standards achieved in the production of the product. In the absence of significant public-sector involvement, such labels are unlikely to become trade restricting measures. The Codex Alimentarius Commission plays an important role in establishing common international standards. Process labeling is a broad category encompassing a range of different types of labeling. It is the aspect of consumer-focused labeling with the greatest trade-disruption potential. Often, disagreement arises as to whether labeling of process attributes is primarily for the benefit of consumers or is a trade measure designed to protect the interests of domestic producers. Consumer demands for process labeling stem from ethical and human health motivations. Animal welfare labeling addresses ethical concerns over treatment of farm animals, an issue that has become important, particularly in some European countries. Whether a product was produced using animal welfare–friendly production practices is a credence attribute that can be signaled to consumers through labeling. If there is sufficient demand for this information, we can expect a private-sector response to provide farm welfare assurances to consumers (e.g., the use by food retailers of farm animal welfare labels on meat products). To date, trade disputes over the use of animal welfare labeling have not arisen. Generally speaking, labeling is not a regulatory requirement, although it may be a private-sector one. Differences do exist, however, in animal welfare regulations between countries. Any differences place those producers from countries with more stringent regulations at a relative cost disadvantage. However, such regulations tend to reflect national preferences, and other World Trade Organization (WTO) members would look dimly upon any attempts to impose those preferences more widely by requiring similar standards for imports. That being said, countries wishing to impose animal welfare label-

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ing standards on imports may be able to do so if these labeling regulations are applied in equal measure to domestic products, as was the case with the labeling of dolphin-friendly tuna by the United States. Ecolabeling, or environment-friendly labeling schemes, also allow a market-based response to the desire of some consumers to express their ethical preferences through food purchases. WTO members, through the Committee on Trade and Environment (see Kerr, Chapter 3 in this volume), have formally acknowledged the positive role that ecolabeling can play in informing consumers (Sampson, 1999). Ecolabels sometimes describe the life cycle of a product, including the raw materials used and the nature of the product’s production, consumption, and disposal. Consumers are then able to determine which products have been beneficial to, or have harmed, the environment. A concern of some WTO members is the extent to which this type of labeling is subject to abuse and could be used to restrict trade for protectionist purposes. Some developing countries argue that ecolabeling imposes unnecessary costs on their industries if it requires the provision of large amounts of information to meet the standards adopted in developed countries. They protest that different countries have different priorities regarding the environment and that adopting a universal ecolabel would be tantamount to imposing the social preferences of one country upon another (Sampson, 1999). Organic labeling reflects how labeling can be both an ethical and a human health issue. On one level, labeling of products as organic is a form of ecolabeling if consumers choose organic food because of the benefits that they believe these products provide to the environment. Other consumers may choose organic produce for direct personal health reasons if they believe that the products are safer or healthier because they are produced without the use of agricultural chemicals. Based on scientific evidence (Caswell, 1997), there is likely to be little or no safety difference between organic and conventionally grown food (conventional produce must meet domestic regulatory standards to be approved for sale). It is not necessary for foods labeled as organic to demonstrate a safety differential. Thus, organic labeling is a process standard; it does not specify performance standards such as the level of food safety. Many consumers, however, use organic labeling as an indicator of perceived safety (or real safety for the individual if they believe the government standards to be inadequate; see Caswell, 1997). From an international trade perspective, problems arise because different countries have different standards for an organic designation. Some countries allow food containing genetically modified organisms (GMOs) to still carry the organic designation, whereas others expressly forbid this. The Codex Committee on Labeling has not resolved these issues.

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Social activism labeling allows the expression of other ethical preferences by consumers. Issues include labor standards, notions of fair trade, and human rights in general. These concerns may reflect preferences over how the product was produced or how the company conducts its business transactions in other countries. Clearly, ecolabeling could also be placed in this category. Generally speaking, this type of labeling is applied voluntarily in the private sector as a marketing tool. Governments may regulate the types of claims that can be made or may require evidence that these claims are credible. Labeling of genetically modified food is probably the most important trade issue with respect to process attributes at the moment. For various ethical, environmental, and food safety reasons, some consumers do not wish to consume genetically modified (GM) food (Hobbs and Plunkett, 1999). The credence nature of GMOs means that a method of signaling their presence to consumers is required so that those with concerns can exercise their right to choose by avoiding genetically modified food. If one accepts consumer sovereignty as the basis of consumer choice theory, then there may be a need to inform consumers regardless of whether there is scientific validity to their concerns. It is ambiguous as to whether a GMO is a characteristic of the product itself or a process attribute. In some cases, the processing method used to produce the final food may actually remove the GM trait, as is apparently the case with canola oil. However, some consumers still object to the food because it originated from a GM plant. The argument that the labeling of GMOs is designed to protect vested producer interests is weak. Consumer surveys suggest that, among some European consumers in particular, there is a strong mistrust of GM food and a desire to see that food labeled (Perdikis et al., 1999). The trade implications of GM labeling are discussed later in this chapter. Producer-Focused Labeling Unlike genuine consumer-focused labeling, which should reduce transaction costs and enable markets to operate more efficiently, producer-focused labeling is undertaken with the objective of protecting vested producer interests. Unfortunately, the distinction between these two types of labeling is often blurred, and herein lies the trade problem. Producer-focused labeling protects domestic producer interests by (1) raising costs for imported products because of labeling requirements; (2) preventing the use of specific product names, usually to protect producers using “traditional” production methods; or (3) implying quality differences where none exist. An example of the second type of label is appellation labels, most

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often associated with French products. Usually these are used to identify products from specific regions where traditional production methods are used. They are more generally known as geographical indications (GIs). Producers using an appellation are required to follow certain production practices. These may make the products less cost-competitive, and hence producers wish to reap higher returns from the market by preventing imitation products from claiming they are from the same region. It can be argued that this type of labeling is consumer-focused because it prevents consumers from being misled as to the origin (and therefore process attributes) of the product. In effect, it enables consumers to ensure that they are receiving the genuine article. Although there may be some truth to this argument, in large part the primary objective appears to be the protection of producers. These labels are most commonly applied in the wines and spirits sectors (e.g., Champagne, Bordeaux, etc.). There is interest in extending GIs to food products. An example would be a requirement that only feta cheese produced in mountainous regions of Greece according to traditional production methods could be labeled as “feta cheese.” Labels that can imply quality differences where none exist include country-of-origin labeling. If regulatory standards for food safety or processing standards differ between countries, a country-of-origin label could conceivably signal quality differences to consumers. However, this measure is usually proposed in an attempt to boost domestic sales for the benefit of producers. For example, facing low beef prices in 1998, U.S. beef producers lobbied their government to introduce country-of-origin labeling for all imported beef, hoping that it would encourage U.S. shoppers to choose U.S. products rather than imported products. The proposal was unsuccessful, with U.S. meatpackers and the food industry arguing that country-oforigin labeling would increase costs without providing any substantive benefits to consumers (Western Producer, 2000). Another example of a label that implies quality differences when there are none is the French montagne label. This simply means that the food has been processed in a facility above a certain altitude—a fact that tells the consumer nothing about the true quality of the good. Social/Cultural Labeling Labeling is sometimes carried out for social or cultural reasons that differ between countries—for example, a requirement that food labels be bilingual or multilingual in a country with more than one official language, as in Canada. These labels are specific to the social or cultural environment of the country in question. The regulations are applied equally to domestic and imported products and do not constitute a trade restricting measure under the WTO.

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INTERNATIONAL INSTITUTIONS AND REGULATIONS

Food labeling regulations have been crafted in several international arenas, including GATT/WTO, the Codex Alimentarius Commission, and the UN Biosafety Protocol. Responsibility for trade-related labeling issues is divided among different WTO agreements according to the issue. For the most part, the Agreement on Technical Barriers to Trade (TBT) covers product labeling, although whether the TBT or the WTO Agreement on the Application of Sanitary and Phytosanitary Measures (SPS Agreement) has jurisdiction becomes somewhat blurred for some food safety labeling issues. Geographical indications are dealt with under the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS Agreement) of the WTO. A problem arises with respect to many of the labeling issues outlined above because a cornerstone of the WTO is that countries cannot apply national standards to processes used in the production of foreign products (except when it violates intellectual property rights). This is to prevent discrimination between nations in the use of trade measures, a fundamental principle of the WTO system (Sampson, 1999). The most-favored-nation principle of the WTO requires that countries treat like products of all nations the same. The national treatment principle requires that foreign goods, once in a market, be treated no less favorably than like domestic products. A core question, therefore, is what constitutes a “like” product? In the past, when tangible product attributes mattered most, this was a relatively simple issue. With labeling based on intangible product attributes—namely, process attributes—the issue is more complex. For example, current scientific evidence suggests that GM and non-GM canola oil are “substantively equivalent,” that is, there is no discernible difference in the risk levels between these two products. However, are they still like products if the presence or absence of the GMO attribute causes some consumers to consider them as different? If they are not like products, then the principles upon which the WTO is founded are no longer firm arbiters of what is and is not an acceptable trade measure. Accepting that these are no longer like products, however, could open the floodgates to capricious use of trade-restricting measures based on nefarious consumer concerns. From the economists’ perspective, evaluation of what constitutes a like product may require that we revisit Lancaster’s characteristics approach to consumer theory and focus more narrowly on product attributes rather than on homogeneous commodities. The TRIPS Agreement Rules over the labeling of geographical indications, including appellations of origin, are determined under the TRIPS Agreement, which protects intellectual property rights. Article 22.1 of TRIPS defines GIs as:

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indications which identify a good as originating in the territory of a Member, or a region or locality in that territory, where a given quality, reputation or other characteristics of the good is essentially attributable to its geographical origin. (WTO, 2000)

Ostensibly, the objective of GIs is to prevent consumers from being misled as to the true origin of a product, although in practice the main beneficiaries appear to be producers. Additional protection is afforded wines and spirits, even in cases where the public is not being misled by the label. Article 23 requires that countries provide “interested parties” with the legal means to prevent the misuse of a GI for wines and spirits, regardless of whether the true origin is indicated on the label. This holds even if the geographical indication is supplemented with terms such as like or style or type. In Canada, enforcement is provided by the Trade Marks Act, through the “common tort law of passing off” and the Quebec Civil Code (DFAIT, 1999). Under the TRIPS Agreement, signatories also agreed to conduct negotiations for the establishment of a multilateral system of notification and registration of GIs for wines. These are ongoing. Exceptions are granted to origin names that have become generic descriptions of a product. For example, Cheddar cheese has become a generic term and does not just refer to cheese produced in the village of Cheddar in Somerset, England. There is also a prior-use exception that grandfathers GIs currently in use for certain periods of time. Some WTO members are interested in extending GI protection to products other than wines and spirits. There is support for this position among several EU countries, although Canada and the United States are, in general, opposed. The TBT and SPS Agreements Product standards, such as food safety regulations, are dealt with under the SPS Agreement and should be based on science. The TBT Agreement is a weaker arbiter of international trade disputes, because it deals with issues of packaging and labeling rather than the actual safety of the product; hence, scientific principles may not be appropriate. Standard General Agreement on Tariffs and Trade (GATT) principles still apply, however. For example, a 1991 GATT panel ruled against Mexico and in favor of the United States’ right to allow dolphin-safe labels on tuna products. This was deemed not to be a nontariff barrier because both U.S. and imported tuna were treated alike. This form of ecolabeling allowed consumers, not the government, to discriminate among suppliers (Krissoff et al., 1996). The European Union has announced its intention to introduce manda-

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tory labeling of all foods containing genetically modified material above a 1 percent threshold. This came into effect during the year 2000. Japan, Australia, and New Zealand announced similar plans. The official stances of the United States and Canada have been to oppose mandatory labeling in favor of voluntary labeling of GMO-free foods. They have argued that mandatory labeling constitutes an unnecessary technical barrier to trade because there is no scientific evidence of a difference in the safety of GM and non-GM products. There is debate over whether this should be considered as an SPS or a TBT issue. If GMOs are considered safe, then, within the WTO framework, the evaluation of any trade measures taken to restrict the use of GMOs, or to require labeling of them, falls under the TBT Agreement. However, whether GMO labeling is a TBT or an SPS issue depends on the goals and actual outcomes of the labeling. If GMO labeling is intended to achieve SPS goals, the risk analysis trinity of assessment, management, and communication, and the SPS Agreement can be applied to the program. If it does not have these goals, the framework of analysis of the TBT Agreement applies.... Clear classification of labeling of GMOs as a SPS or TBT issue presumes agreement on their safety, which has yet to be achieved. (Caswell, 1999, p. 11)

The ambiguity surrounding WTO rules on labeling, particularly with respect to this issue, needs to be clarified. The current lack of clarity is creating uncertainty in the international commercial environment—something the WTO was created to avoid. At the heart of the matter is the change in focus that these issues bring to the WTO. Historically, the GATT, then the WTO, were established to deal with trade-restricting measures focused on producer interests. What we have now is a new set of trade issues based on consumer—not producer—demands for protection. Clearly, the potential for manipulation of “consumer interests” to protect producers is a very real problem. For that reason, the scientific principle is a core part of existing WTO agreements— there must be scientific evidence that a product will harm consumers or the environment to allow the imposition of trade restrictions. However, what if there is a genuine change in consumer preferences that results in consumers demanding protection from perceived undesirable imports? The existing WTO institutions were not set up to deal with consumer demands for protection. The United States and Canada would be particularly opposed to reopening existing WTO agreements, such as the SPS Agreement, to include consumer preferences as a legitimate reason for restricting trade. This suggests the need for a separate agreement dealing with consumer demands for protection (Perdikis et al., 1999).

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Codex Alimentarius Commission The Codex Alimentarius Commission was established by the UN Food and Agriculture Organization in 1961. The objective of Codex is to encourage the formulation and harmonization of food standards around the world. International discussions over rules for labeling of food products are taking place within the Codex Committee on Food Labeling. Although the general philosophy of the Codex approach is widely accepted, in practice getting countries to accept and implement Codex standards has been more difficult. Differences in legal and administrative systems, different political and social environments, and diverging national objectives have impeded global harmonization and acceptance of Codex standards. Codex standards are internationally agreed guidelines, but they are not enforceable by Codex itself. However, the adoption of Codex Alimentarius standards as the arbiter of disputes within the SPS Agreement has increased the impact of Codex standards significantly. It is hoped that the Committee on Food Labeling can provide similar guidance to disputes under the TBT Agreement. In 1999, the twenty-third session of the Codex Alimentarius Commission adopted its “Guidelines for the Production, Processing, Labeling, and Marketing of Organically Produced Foods.” Organic is defined as food produced in accordance with organic production standards established by the official certification bodies in each country. Although the guidelines specify which types of inputs may or may not be used in organic production, they do not deal with the issue of whether genetically modified foods can be considered organic. In fact, a definition of genetic engineering or genetic modification is not agreed upon in the guidelines; this issue was left for review by other Codex committees. Thus, considerable uncertainty still surrounds the issue. The Committee on Food Labeling met again in May 2000. It recommended that the presence of an allergen in foods obtained through biotechnology be labeled. The committee made no further recommendations with respect to labeling products obtained through biotechnology. This is not a new issue to the Codex Commission; previous discussions of this issue have ended in stalemate (Caswell, 1997). In a separate but related development at its twenty-third session, the Codex Commission agreed to establish the Ad Hoc Intergovernmental Task Force on Foods Derived from Biotechnology. The biotech task force will develop standards, guidelines, or recommendations for foods derived from biotechnology. These discussions will focus on scientific evidence, risk analysis, and “other legitimate factors relevant to the health of consumers and the promotion of fair trade practices” (Codex Alimentarius Commission, 1999, p. 53). The task force is due to complete its work by

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2003 and will coordinate with other Codex committees, such as the labeling committee, as appropriate. With trade disputes looming over market access for products containing GMOs and whether or not to label these products, the international community will be looking to Codex for guidance. It remains to be seen whether international agreements through Codex will be forthcoming in a timely fashion to respond to trade concerns and whether any Codex recommendations that are made will be implemented by national governments and/or through the WTO. The Biosafety Protocol After a previous failed attempt to reach agreement, the UN Biosafety Protocol (or Cartagena Protocol) was agreed to by 138 countries in January 2000. The protocol deals with the safe transfer, handling, and use of living modified organisms resulting from biotechnology. The agreement requires the labeling of commodity shipments that “may contain” GMOs. It is expected that the protocol will take two to three years to come into effect. At that point, new negotiations will begin on more specific labeling requirements, including details on the process by which the food was genetically modified. Canada and the United States participated in the negotiations as part of the so-called Miami Group of agricultural exporting countries. Currently, the agreement must still be ratified by fifty of the participatory countries before coming into effect. Despite having agreed to the labeling of GM food under the Biosafety Protocol, the official positions of Canada and the United States have not been in favor of mandatory labeling. The Canadian government is still in the process of developing its policy on labeling of foods from biotechnology. Official guidelines state that mandatory labeling is required under the Food and Drugs Act only if the nutritional content of the food is changed or if allergens are introduced. The Canadian Food Inspection Agency has openly highlighted the problems it sees with mandatory labeling, including problems of detecting GMOs, cost, and the interpretation of GM labels by consumers (CFIA, 1998). In September 1999, the Canadian Council of Grocery Distributors and the Canadian General Standards Board established a committee to develop voluntary standards for labeling of foods with and without GMOs. This received the official endorsement of the Canadian government with a funding contribution through the Agri-Food Trade 2000 Program of Agriculture and Agri-Food Canada. The official position of the U.S. government has been for voluntary labeling of GMOfree foods, with a disclaimer stating that there is no scientific evidence of a difference in safety between GM and non-GM foods. In national policy

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positions and through their WTO representations, both the United States and Canada have been opposed to mandatory labeling. The contradiction in positions is obvious and raises the question as to which international agreement takes precedence—the WTO or the Biosafety Protocol? It would appear, on paper at least, that the WTO takes precedence, as the Biosafety Protocol contains a “savings clause” emphasizing that the pact does not override countries’ rights and obligations under other international agreements, including the WTO. Nevertheless, the question still remains as to how Canada (and the United States) can agree to one set of international rules with respect to labeling through the Biosafety Protocol while arguing for a different set of rules through WTO and Codex. At the time of writing, it is not at all clear which agreement will take precedence in practice. It would appear that the Biosafety Protocol has preempted a decision on this issue through the WTO. Yet the savings clause provides countries with an out that may enable them to defer to the WTO in the event of trade-disrupting repercussions. Furthermore, unlike the WTO, which provides countries with the right to retaliate against trading partners who abrogate their WTO responsibilities, the Biosafety Protocol is just that—a protocol. It does not have built-in enforcement measures, apart from the domestic and international political pressure, that countries may come under if they break the protocol.

ECONOMIC IMPLICATIONS

As the preceding discussion indicates, the labeling issue is not an issue at all, it is a series of issues—sometimes interconnected, sometimes quite separate. Consequently, different economic implications arise. Labeling of Process Attributes Labeling is a market-based solution to a change in consumer preferences with respect to process attributes. If products were to be labeled as “GM” or “GM-free” or “containing/free of” growth-promoting hormones, consumers could signal their preferences by choosing to consume, or to avoid, such foods. This would be less restrictive, and have a less distortionary impact on markets, than an outright ban on the importation of these products on the basis of consumer preferences. The credence nature of these attributes, however, means that there is an information asymmetry problem. In the case of GMOs and ecolabeling or ethical labeling, consumers and downstream food firms have no way of telling whether food is labeled accurately. Currently, a test to detect the presence of GMOs in processed foods is not commercially available. This

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lies at the heart of the voluntary-versus-mandatory labeling argument: Do firms have the incentive to label GM products honestly if they fear a consumer backlash against genetically modified food? It is partly for this reason that mandatory labeling of GM products has been supported by several countries. In some European countries, the private sector has preempted regulatory moves to require labeling. For example, several U.K. supermarkets publicly stated that they would not allow genetically modified material in their store-brand products or would not sell any products containing GMOs. The requirement that GM material be identified in a product raises transaction costs for downstream food processors and retailers. The firms must ensure that food is accurately represented to the consumer. This increases the information, monitoring, and enforcement costs of occasional supply-chain relationships, providing an additional incentive for closer vertical coordination along the agrifood supply chain (Hobbs and Plunkett, 1999). Ironically, the requirement that food be labeled as genetically modified may impose relatively higher costs on producers of non-GM food. This is because it does not matter that GM canola might be “contaminated” with non-GM canola. However, it matters greatly that non-GM canola not come into contact with GM canola as it passes along the supply chain from farmer to consumer. Proving that your product does not contain a GMO will be a lot more costly than simply acknowledging its possible presence with a “may contain” label. Firms in the non-GM supply chain will incur higher transaction costs and may be less cost-competitive as a result (Kerr, 1999). If these transaction costs are sufficiently high, then food companies may simply label all food as potentially containing GMOs. Hence, instead of providing consumers with choice, mandatory labeling may actually eliminate choice. Allowing consumers to signal their preferences through the labeling process functions effectively only if consumers are not misled by the label. Consumer surveys suggest a great deal of confusion over the meaning of terms such as genetically modified or genetically engineered. A recent survey conducted in Ontario and Quebec by the Angus Reid Group (1999) revealed that even though 84 percent of respondents recognized that inserting genes from one plant to another constituted genetic engineering, they held a much broader (and, in many cases, inaccurate) view of what was meant by the term. Around 60 percent of respondents considered crops sprayed with hormonal agents or chemicals to be genetically engineered, and 42 percent considered irradiated foods to be genetically engineered. This suggests that a sizeable proportion of people associate the terms with any food technology with which they are not familiar or are not comfortable.

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Analogous to nutrition labeling, information is not necessarily knowledge (Riemenschneider and Bonnen, 1979). There is little point in providing information labeling if consumers do not know how to interpret it. This suggests an important public role for governments in the provision of unbiased, objective information and education so as to inform consumer purchasing decisions. Proposed future negotiations under the Biosafety Protocol to include more specific labeling of GM food should consider carefully how this information is communicated to consumers and whether it informs or misdirects the expression of consumers’ true preferences. Country-of-Origin Labels Recurring interest in the adoption of country-of-origin labeling is invariably opposed by trading partners as an unnecessary technical barrier to trade. If this form of labeling is adopted, downstream food processors can no longer use a mix of domestic and imported product without labeling the country of origin. This restricts their flexibility, raising their costs of production because they cannot switch ingredient suppliers as easily in response to changes in relative prices. This was a key concern of U.S. beef processors (as well as the Canadian beef industry) with proposed countryof-origin labeling for beef imported into the United States. Different labeling requirements for different markets also affect the cost-competitiveness of firms because it becomes more difficult to move inventory if there is a downturn in demand in one market, as a change in packaging or labeling may be required to supply alternative markets. However, it is less restrictive to trade than are differences in actual product standards that require product reformulation for different markets rather than simply the use of different labels. Still, if a firm believes its product to be of superior quality, then country-of-origin labeling imposed by a trading partner might present a competitive advantage by facilitating product differentiation. This assumes that consumers recognize the higher quality of the imported good. Introducing country-of-origin labeling can backfire as a strategy to protect a domestic industry. Presumably, this would be lobbied for only if the domestic industry believed that identifying products as domestically produced would boost consumption, either because domestic consumers believed the products to be of intrinsically higher quality or for reasons of national pride, “supporting our farmers,” and so on. Beyond the common nationalism in a “Canadian Made” or “Buy British” label, there would be no common quality standards for products displaying such labels, yet the domestic industry would have considerable reputation invested in them. This is analogous to the brand-name capital a firm has invested in its private label. However, a free-rider problem is created. Poor quality or, worse,

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a highly publicized food safety problem, among a small number of domestic firms could tarnish the image of the entire domestic food industry by association. A good example of this is the worldwide reaction to the Belgian dioxin-tainted animal feed scandal in 1999. In Belgium, and around the world, the image of Belgian food products was severely tarnished by the scandal, with the public and private sectors taking steps to remove Belgian food products from retail shelves. Similarly, even if the BSE problem is eradicated from the British beef herd, the industry faces a long, uphill climb to restore consumer confidence in British beef in export markets.

CONCLUSION

Labeling represents a potential quagmire for international trade negotiations. The challenge will lie in separating genuine domestic consumer issues—in which national sovereignty is overriding—from protectionist trade measures that distort global markets. Economists have an important role to play in this debate. Under WTO rules, a country must show that the benefit to consumers from a technical barrier to trade outweighs the material harm to exporters. In the future, this will require objective measurements of consumer preferences to determine whether there is a genuine change in preferences and whether market failure exists, thereby justifying regulatory intervention for the benefit of consumers. The economist’s toolkit contains several analytical tools with which to measure consumer preferences, including contingent valuation, conjoint analysis, experimental economics, hedonic pricing, and others. These techniques may be useful in determining whether a label is consumer- or producer-focused and, therefore, whether its primary effect is to protect producers or to provide information that is valued by consumers. Cost-benefit analysis also has an important role to play in determining the net effects upon social welfare of different labeling policies. A labeling policy is economically efficient only if the benefits it bestows to some sectors outweigh the costs imposed on other sectors plus its implementation and enforcement costs. A cost-benefit analysis should include the transaction costs that the absence and presence of labeling impose on consumers and producers. This will depend, in part, on the extent to which labeling information is credible and how that information is interpreted given the bounded rationality of consumers and producers. There may be a role for private-sector, third-party provision of information and accreditation of process attributes, which avoids the need for potentially trade-distorting regulatory measures. A difficult juggling act is required. While respecting the sovereignty of

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consumer preferences, we need to do a better job of communicating the potential benefits of international trade to the consuming public. Otherwise, the gains made in previous GATT negotiations will be lost in the misrepresentation of the WTO as “for” business interests and “against” the interests of consumers.

BIBLIOGRAPHY Angus Reid Group Inc. December 1999. “Biotechnology in Foods: Executive Highlights Report.” Canadian Food Inspection Agency (CFIA). May 1998. “Labelling of Genetically Engineered Foods in Canada.” Information Bulletin. Office of Biotechnology, CFIA. . Caswell, J. 1997. Uses of Food Labelling Regulations. OECD Working Papers 5, no. 100. Paris: Organization for Economic Cooperation and Development. ———. June 1999. “An Evaluation of Risk Analysis as Applied to Agricultural Biotechnology (with a Case Study of GMO Labeling).” Paper presented to the NE–165 Conference “Transitions in Agbiotech: Economics of Strategy and Policy.” Washington, D.C. Codex Alimentarius Commission. 1999. Codex Alimentarius Commission 23rd Session Report (June 28–July 3). Rome: FAO Headquarters. Darby M. R., and E. Karni. 1973. “Free Competition and the Optimal Allocation of Fraud.” Journal of Law and Economics 16, no. 1: 67–88. Department of Foreign Affairs and International Trade (DFAIT). May 1999. Intellectual Property Trade Policy Issues. Discussion Paper. . Hobbs, J. E., and M. D. Plunkett. 1999. “Genetically Modified Foods: Consumer Issues and the Role of Information Asymmetry.” Canadian Journal of Agricultural Economics 47, no. 4: 445–455. Kerr, W. A. 1999. “Genetically Modified Organisms, Consumer Scepticism, and Trade Law: Implications for the Organisation of International Supply Chains.” Supply Chain Management 4, no. 2: 67–74. Krissoff, B., N. Ballenger, J. Dunmore, and D. Gray. May 1996. Exploring Linkages Among Agriculture, Trade, and the Environment: Issues for the Next Century. Agriculture Report No. 738. Washington, D.C.: Natural Resources and Environment Division, Economic Research Service, U.S. Department of Agriculture. Lancaster, K. J. 1966. “A New Approach to Consumer Theory.” Journal of Political Economy 74, no. 2: 132–157. Nelson, P. 1970. “Information and Consumer Research.” Journal of Political Economy 78, no. 2: 311–329. Perdikis, N., W. A. Kerr, and J. E. Hobbs. June 1999. “Can the WTO/GATT Agreements on Sanitary and Phyto-Sanitary Measures and Technical Barriers to Trade Be Renegotiated to Accommodate Agricultural Biotechnology?” Paper presented to the NE–165 Conference “Transitions in Agbiotech: Economics of Strategy and Policy.” Washington, D.C. Riemenschneider, C. H., and J. T. Bonnen. 1979. “National Agricultural Information Systems: Design and Assessment.” In M. J. Blackie and J. B.

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Dent, eds,. Information Systems for Agriculture. London: Applied Science Publishers, pp. 145–171. Sampson, G.P. November 1999. Trade, the Environment, and the WTO: A Policy Agenda. ODC Policy Paper. Washington, D.C.: Overseas Development Council. Western Producer. 2000. “Country-of-Origin Labels Not Necessary: USDA.” Western Producer (January 20), p. 60. World Trade Organization. 2000. Part II: Standards Concerning the Availability, Scope, and Use of Intellectual Property Rights. .

15 The WTO Agreement on the Application of Sanitary and Phytosanitary Measures: A Catalyst for Regulatory Reform? DONNA ROBERTS

From the perspective of trade in primary and processed agricultural products, some of the most important disciplines of the Uruguay Round are found in the WTO Agreement on the Application of Sanitary and Phytosanitary Measures (SPS Agreement). It is widely acknowledged that SPS measures that regulate movement of products across international borders are necessary to protect public health and the environment from pests, diseases, and contaminants, but they also can be used to thwart commercial opportunities created by other trade liberalization policies. Although economists have found it difficult to systematically evaluate the impacts of SPS regulations on trade in agricultural goods, and to assess their relative importance in the world trading system, there has long been broad recognition that SPS measures can significantly impede trade. Yet it was not until the 1986–1993 Uruguay Round multilateral trade negotiations that separate disciplines were negotiated for the management of SPS issues in international trade. The challenge before the negotiators of the SPS Agreement was to create a set of rules that would strike the proper balance between allowing health and environmental protection while disallowing mercantilist regulatory protectionism. Discipline in the use of SPS measures was to be achieved through a multilateral set of principles to guide the choice and design of regulations affecting trade. Although unambiguously reaffirming the right of every nation to adopt measures deemed necessary to protect health and life, the SPS Agreement sought to impose procedural and sub-

287

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stantive commitments that would minimize the adverse trade effects of any such regulations. Three of these commitments primarily defined unilateral national obligations: member countries agreed to maintain transparent administrative procedures with respect to adoption and application of SPS regulations; to base their measures on scientific risk assessments; and to recognize the equivalence of other countries’ SPS measures if they could be shown to provide the same level of health or environmental protection. Beyond that, the SPS Agreement sought to minimize trade disruptions by encouraging members to harmonize their measures—specifically by adopting standards set by international scientific bodies. The agreement has recognized the international standards promulgated by the Codex Alimentarius Commission (Codex), the International Organization of Epizootics (OIE), and the International Plant Protection Convention (IPPC) as so-called safe-harbor standards, that is, members adopting standards recommended by these organizations are “rebuttably presumed” to be in compliance with the agreement. Each of these commitments—transparency, risk assessment–based decisions, equivalence, and harmonization—can be viewed as a mechanism for achieving the complex goal of allowing each country the latitude to define its protection standards while facilitating international market access for agricultural goods. Supporting these mechanisms is the SPS Committee, which meets three to four times per year to further implementation of the agreement, as well as strengthened World Trade Organization (WTO) dispute settlement procedures that can be used when disagreements about the merits of specific SPS barriers cannot otherwise be resolved. In this chapter, the preliminary evidence that has emerged during the first five years of implementation of the agreement’s disciplines is examined. Where the agreement defined well-specified institutional innovations, specific accomplishments can be identified. In particular, the transparency provisions of the SPS Agreement have improved the availability of information about applications of sanitary and phytosanitary barriers to trade, and the obligation to base SPS measures on a risk assessment has reduced the degrees of freedom for disingenuous use of health- and safety-related regulations. Progress has occurred because national regulatory authorities have acted unilaterally to modify SPS measures to comply with the substantive obligations of the Agreement, and because informal and formal WTO dispute settlement decisions have resolved some issues and are providing a growing body of outcomes and case law that is defining generally acceptable practices. However, obligations under the SPS Agreement regarding the equivalence of measures and the multilateral harmonization of standards are less prescriptive, allowing wider latitude for interpretation of what actions constitute “compliance,” and only limited progress can be reported toward such objectives.

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There is a prevalent sense among WTO members that disciplining of SPS measures provides an important source of agricultural trade opportunities. This assessment suggests that some benefits have been realized, as the SPS Agreement has engendered reexamination of some measures and opened potential market opportunities for their products. But major challenges to the agreement loom on the horizon. Several developments since the conclusion of the Uruguay Round suggest an unsettled framework for SPS regulatory decisionmaking. Discussion over whether the agreement allows sufficient latitude to manage unfamiliar risks has recently been fueled by adoption of the Convention on Biological Diversity, which explicitly endorses the precautionary principle in risk management. The precautionary principle broadly states that regulatory allowance should be made for risks that are imperfectly understood but that could potentially cause widespread or irreversible harm. Questions about “other legitimate factors” in risk-management decisions have also arisen in the current debate over the Codex Statements of Principle Concerning the Role of Science in the Codex Decision-making Process and the Extent to Which Other Factors Are Taken into Account (known as the “Statement of Principles,” a set of guidelines for SPS regulatory decisionmaking that will strongly influence how members will implement the agreement in the coming years). This debate has generally focused on the appropriate roles of national sovereignty, consumer concerns, and risk assessment in policy formulation, sidestepping the issue of what the costs, benefits, and distributional effects of alternative regulatory regimes may be. The emergence of internationally heterogeneous approaches to regulating genetically modified commodities in recent years has not only increased the urgency of these deliberations but also dramatically increased the stakes of different outcomes for various economic actors and, by extension, national policymakers. Whether these debates will reinforce the principles of equivalence and harmonization and inform efforts to put these principles into practice will, in large part, determine the contribution that the agreement will make to the multilateral trading system over the next few years. At present, it is difficult to foresee whether further SPS regulatory reform will advance, stall, or lapse in the face of these challenges. These issues are reviewed in the final section of this chapter.

IMPLEMENTATION OF THE SPS AGREEMENT, 1995–1999

The SPS Agreement established new substantive and procedural rules for a wide array of sanitary and phytosanitary regulations. The substantive obligations found in the agreement suggest a normative basis for SPS measures, whereas the procedural requirements facilitate decentralized policing

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of members’ substantive compliance. In this section, we examine the SPS Agreement implementation record during 1995–1999 in each of the areas in which discipline is sought: transparency, science-based risk management, equivalence, and harmonization. Transparency Exporters frequently complained that de facto but undocumented regulations were a significant impediment to market access for agricultural products prior to the Uruguay Round.1 In response, the multilateral trading community included provisions in the SPS Agreement requiring WTO members to notify trading partners of new or revised SPS measures that affect international markets at the proposal stage. These notification requirements constitute the cornerstone of the transparency provisions in the SPS Agreement. The significant public policy benefits of transparency have been widely recognized. They include the following range of effects: • • • • •

Bringing into the discussion, the expertise, perspectives, and ideas for alternative actions of those directly affected; helping regulators to balance opposing interests; identifying unintended effects and practical problems; providing a quality check on the administration’s assessment of costs and benefits; and identifying interactions between regulations from various parts of government.2

Although transparency of the regulatory process does not provide a full guarantee against misuse of technical trade barriers, the benefits in the context of a multilateral monitoring system can be broadly summarized as “facilitating complaints and compliance.” The compliance effect occurs when advance notice of new or modified measures provides an opportunity for firms to change production methods to meet new import requirements, thereby minimizing disruptions that such changes can cause to trade flows. The complaint effect occurs when prior notification provides an opportunity for trading partners to raise objections about the legitimacy or design of a proposed measure, possibly averting a trade dispute if the importer takes exporters’ suggestions on board. There is perhaps more systematic evidence available to gauge fulfillment of the notification obligation than for any other commitment under the SPS Agreement. The majority of WTO members who are obliged to do so—including all major agricultural importers and exporters—are now routinely notifying changes in regulations that might affect trade.3 Just over 1,400 notifications were received over the first five years of the agreement (see Figure 15.1). This record represents a substantial improvement over

SANITARY AND PHYTOSANITARY MEASURES

Figure 15.1

291

Notification of SPS Measures Is Increasing the Transparency of Regulatory Regimes (cumulative total of SPS notifications by income category)

earlier efforts: only 168 measures related to protection from all risks to public health and safety were notified between 1980 and 1990 under the Tokyo Round Technical Barriers to Trade Agreement, and fewer than half of those earlier notifications concerned SPS regulations.4 One result of the increased transparency induced by the WTO has been the institutional innovation of cross-notification. A cross-notification occurs whenever a member uses the forum provided by the SPS Committee to air a grievance over a specific measure after technical exchanges among the disputants have reached an impasse. Examination of cross-notifications, in conjunction with notifications, yields evidence about the compliance and complaint effects of increased transparency. There have been 124 crossnotifications since the agreement came into force, which implies an upper bound of 9 percent of notified measures that were challenged by trading partners. Thus, in more than nine out of ten instances over the five-year period, exporting countries indirectly signaled their intent to comply with new or modified regulations, reinforcing the consensus view that the vast majority of sanitary and phytosanitary measures place legitimate restrictions on trade. Closer analysis of the cross-notifications illuminates additional dimensions of the complaint effect. Complaints initiated by developed countries account for nearly three-fourths of the cross-notifications (Table 15.1). This is a larger percentage than might be anticipated on the basis of the proportion of world agricultural exports originating from developed versus developing countries, providing circumstantial evidence for the notion (commonly held) that wealthier countries are better positioned than developing countries to exercise their rights under the SPS Agreement.5 But this conclusion is too facile, as the record also indicates that developing countries

47 (6)

Developing country 1 10

32 (10)

45

29

9

10 (2)

22 (8)

5

40

6

23

124

57 2 38

67

36

Source: WTO Summaries of the Meetings of the Committee on Sanitary and Phytosanitary Measures, G/SPS/R series, 1995–1999, and author’s calculations. Note: a. Entries exclude fifty “repeat interventions” made by WTO members who registered complaints against the same measure more than once.

92 (19)

45 (13)

Total

Complaints by Developing Countries

Issuesa (with Co-complainants Co-complainants Issues (with Co-complainants Co-complainants Total co-complainants) (developed) (developing) Complaints (developing) co-complainants) (developed)

Complaints by Developed Countries

Complaints (Cross-Notifications) in the SPS Committee Against Trade Partners, 1995–1999

Developed country

Respondents

Table 15.1

292

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293

have frequently joined, if not initiated, complaints. In fact, developing countries have registered objections as co-complainants twice as often as developed countries (eighty-three versus thirty-nine interventions) over the five years. Developed as well as developing countries have primarily targeted the measures of developed countries for challenge. The pattern of cross-notifications and co-complaints indicates that in numerous instances developing and developed countries have a mutual interest in the modification of an importer’s regulation, and these shared interests facilitate developing countries’ efforts to exercise their rights under the SPS Agreement. It is perhaps too early to make a strong judgment about whether the transparency provisions of the SPS Agreement will significantly curb misuse of technical measures: responses to cross-notifications have ranged from silence, to explanations, to modifications.6 But the transparency provisions’ simple contribution to promoting symmetry of information should be recognized. Committee discussions have sometimes led to correction of information erroneously interpreted by private-industry sources. In other instances, the opportunity to elucidate the details of a regulation and its enforcement before other members has served to pinpoint the source of disagreement between the involved trading partners and inform others about the substance of the dispute. Thus, the transparency provisions of the SPS Agreement, through both the compliance and complaint effects, are achieving the intended objective of improving the availability of information among all WTO members about applications of sanitary and phytosanitary barriers to trade. Risk Management Based on Scientific Risk Assessment Multilateral rules for SPS regulations are arguably harder to craft than for any other type of trade-restricting measure. These regulations routinely violate most-favored-nation (MFN) and national treatment principles that other trade-restricting measures are judged by, because, among other factors, SPS risks can vary by the sources and destinations of products. Even when risks vary little across countries, regulations may differ due to differences in access to and use of advances in basic science, detection technology, and mitigation methods. Income levels, consumer preferences for food attributes besides safety (such as taste or convenience), and historic occurrences of low-probability, high-consequence emergency incidents can also affect regulatory decisions. Over the years, this complex mosaic of risks, risk-mitigation measures, and other influences has generated uncounted substantive debates among scientists and policy disagreements among regulators. It is in this context that suspicions arise among trading partners that certain SPS measures are of dubious merit and have been implemented as disguised protection for narrow producer or consumer interests rather than

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to address a societal goal related to health or protection of crops and livestock. To provide a substantive basis to determine the legitimacy of SPS measures, Article 5.1 of the agreement makes it a fundamental obligation of members to base their measures on a scientific risk assessment. The assumption underlying this requirement is that full and objective characterization of the probability and consequences of each hazard will narrow informational gaps between exporters and importers and facilitate common judgments about the necessity for and design of any risk-mitigating measures imposed. Other provisions relevant to the risk-related aspects of SPS regulations are also found or reiterated in Article 5 of the agreement. Articles 5.2 and 5.3 contain an indicative list of factors, such as potential production or sales losses and eradication costs, which can be taken into account in risk assessments and risk-management decisions. Article 5.5 disciplines variation in “appropriate level or protection,”7 stating that members shall avoid arbitrary or unjustifiable distinctions in SPS protection levels if such distinctions result in discrimination or a disguised restriction on international trade. Article 5.6 requires SPS measures to apply the leasttrade-restrictive means for achieving an appropriate level of health protection. Article 5.7 addresses uncertainty, stating that if relevant scientific evidence is “insufficient,” members can adopt SPS measures on a provisional basis while seeking additional information to complete a risk assessment.8 Article 5.7 is viewed as embodying a limited precautionary principle. The obligation in the agreement to reference scientific evidence in defense of a trade-restricting measure clearly reduces the degrees of freedom for disingenuous use of SPS regulatory interventions, as intended by the WTO negotiators. Once transparency is achieved, measures that blatantly violate the requirement to base regulatory decisions on a risk assessment are readily open to challenge. Although hard to quantify, the agreement has generated broad-based regulatory review among some WTO members, as major agricultural exporters and importers determine whether they and their trading partners are in compliance with the new procedural and substantive disciplines. Evidence is accumulating to suggest that regulatory authorities in several instances are either unilaterally modifying regulations to comply with the agreement’s substantive obligations or voluntarily modifying regulations after technical bilateral exchanges. Prominent cases include Japan lifting its forty-six-year-old ban on imports of U.S. tomatoes, and the United States replacing its controversial eighty-threeyear ban on imports of Mexican avocados with a protocol that will allow imports subject to regional and seasonal restrictions (over the strenuous objections of the domestic industry).9 But progress has also been recorded in several other, more obscure cases: Mexico now allows poultry imports from Thailand; Chile has lifted its ban on livestock genetic material from

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Switzerland; and Slovakia’s modification of its phytosanitary measures has eased restrictions on apples from the European Union.10 In each of these cases, a finding by regulatory scientists that an import protocol could be designed to reduce risks from increased trade to negligible levels was no doubt a necessary condition for the change in regulation. However, it has likely been easier to enact such unilateral regulatory changes within the new framework of multilateral SPS disciplines that provides policymakers with some assurance that the SPS measures of their trading partners will be obliged to conform to the same principles. Implementation of the disciplines on risk-management practices has also proceeded on a more proactive track. The SPS Committee was mandated by the agreement to develop guidance for members so that they could “avoid arbitrary and unjustifiable variations in appropriate levels of protection.” The phrase “appropriate level of protection” is threaded throughout Article 5 (indeed, the entire agreement). Its reiteration sustains the perception that risk assessment is the agreement’s key frame of reference. Within this paradigm, technical analysts identify measures that will achieve an acceptable level of risk (or appropriate level of protection, to use the language of the agreement). The risk-management decision—in this case, a policymaker’s choice of an import measure or protocol—is determined by the set of actions identified as achieving the risk-protection target. The SPS Committee finally adopted a set of guidelines in June 2000, after struggling with its mandate over the previous five years. The protracted debate can be attributed in part to basic philosophical differences, as well as to the very concept of appropriate level of protection that fuses all the dimension of risk management into one parameter, thereby creating ample scope for confused disagreement. It has thus complicated the committee’s discussions and public debate regarding the legitimacy of incorporating factors other than scientific descriptions of risks into risk-management decisions. Equivalency The equivalency obligation found in Article 4 of the SPS Agreement requires members to accept measures as equivalent to their own, even if they differ, if the exporter objectively demonstrates that its measures achieve the importers’ appropriate level of protection. The rationale for equivalency rests on the recognition that regulatory flexibility can produce benefits, most obviously the ability to allocate scarce resources effectively rather than identically. The SPS Agreement also encourages members to enter into bilateral and multilateral agreements to foster equivalency, a process usually referred to as mutual recognition. In this form of regulatory rapprochement, countries typically require an equivalency assessment of

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national control systems for a particular commodity or industry prior to a determination of equivalency of individual measures. Assessing the equivalency of systems is usually a multiyear process that includes a review of the educational credentials of all regulatory and inspection officials in the relevant sector, as well as a multitude of other factors related to resources and institutional infrastructure. Though lengthy, equivalency assessments can, at a minimum, provide a mechanism for information exchange, and ideally they can reduce redundant control efforts and testing requirements. The determination of equivalency of measures usually applies to process standards, because product standards, which stipulate observable and/or testable attributes of end products, are easily compared. An enormous number—and arguably an increasing proportion—of SPS measures are process standards. One of the principal lessons to emerge from two decades of environmental regulation is that process standards are generally an inefficient means for achieving regulatory goals. But food technologists argue that the unique nature of food hazards—including pathogens (such as salmonella) that can regenerate and cross-contaminate at several points in the chain of production—require regulation of production processes to avoid repeated, expensive tests of conformity with product standards.11 Some analysts have challenged this conclusion, but process standards continue to emerge as components of risk-management programs, notably in Hazard Analysis and Critical Control Point regulations, which are mandatory in an increasing number of countries for a growing number of food products.12 The WTO equivalency obligation therefore has the potential to yield significant benefits in international markets for products (such as cheeses, meats, fresh produce, and seafood) for which process standards are key policy instruments for managing microbial risks. Although the SPS Committee has urged members to submit information on their bilateral equivalency agreements and determinations, there is no systematic account of achievements under the equivalency obligation.13 Anecdotal evidence suggests such arrangements are still rare.14 Possibly the most prominent equivalency accord has been a veterinary agreement signed by the United States and European Union in July 1999, after six years of occasionally high-profile negotiations over matters seemingly as trivial as the colors of wall paint in processing facilities.15 The veterinary agreement reduces, but does not eliminate, the need for inspection for approximately $1 billion of European exports of dairy products, fish, and meat to the United States and $1 billion of U.S. exports of fish, hides, and pet food to Europe. Both the European Union and the United States have recently signed equivalency agreements with other developed countries as well, including Canada, Australia, and New Zealand.16 Equivalency agreements can be desirable when achieved, but experience to date suggests they will be difficult to secure. Problems may stem

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from institutional disorganization, or even conflicts of authority within the respective countries. But bureaucratic intransigence due to institutional vested interests of the regulatory agencies or to organized interest-group political-economy capture will also be factors, as with other regulatory decisions. Numerous regulatory differences affecting equivalency remain in contention even among the so-called high-level countries that are generally recognized as having rigorous regulatory standards that are rigorously enforced. Most notably, of course, the European Union does not recognize genetically modified commodities as equivalent to traditional varieties, in contrast to the United States.17 Conversely, the United States, Canada, Australia, and New Zealand have not allowed imports of raw milk cheeses from Europe on the grounds that the process standards for cheeses in the European Union and Switzerland are not equivalent to the domestic requirements for the use of pasteurized milk. Yet another example is provided by the European Union’s 1997 ban on poultry meat exports from the United States because European authorities do not consider the chlorine decontamination used in U.S. poultry processing plants to be equivalent to lactic acid decontamination, which it regards as safe. More broadly, the variation and stringency of measures for imported poultry meat in these high-level countries serve to illustrate the vast potential as well as the daunting challenge of equivalency. Of the more than 130 countries that are WTO members, only fifteen are currently allowed to export fresh, chilled, or frozen poultry meat to the European Union; three can export to the United States; one can ship to Canada; and none are allowed to export to Australia. If equivalency agreements are difficult to negotiate among developed countries, what prospects do developing countries have for benefiting from this mechanism for integration into world markets? Few equivalency agreements have been reached among developing countries, and some developing countries have expressed concern that those agreements reached among developed countries will remain exclusive (i.e., to the initial negotiating parties) rather than inclusive of others that can show they also meet the equivalence criteria.18 Several equivalency arrangements between developing and developed countries do exist, especially for seafood products.19 However, developing countries (echoing the claims of counterparts in developed countries) have argued that developed countries, in practice, are often requiring compliance rather than equivalence of measures.20 It is usually awkward for regulators in importing countries to excuse foreign producers from specific process requirements that they have imposed on the domestic industry. Regulators in developed countries thus concede that in some instances simply complying with process standards that apply to domestic producers or processors might be less costly for foreign exporters than proving that other measures provide equivalent protec-

298

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tion. Because many pathogens have a low incidence, statistically reliable test results can require large sample sizes of high-value products to objectively demonstrate the equivalency of alternative process standards. These tests can be prohibitively expensive, particularly for exporters in developing countries where public laboratory, inspection, and certification infrastructure is lacking. Compliance rather than equivalence can therefore be both a pragmatic choice for exporters and an expedient result for importers. Yet compliance solutions can unfairly disadvantage foreign producers if the risks are lower in exporting countries than in the home country. In the aftermath of the crisis over bovine spongiform encephalopathy (BSE) contamination in beef, for example, several countries proposed or adopted several new process standards for bovine products that increased costs for exporters in countries where the disease has never been detected. Harmonization Article 3 of the SPS Agreement urges the widest possible international harmonization of SPS measures based on internationally recognized standards and identifies three intergovernmental organizations to promote this objective: the Codex Alimentarius for food safety measures, the IPPC for plant health measures, and the OIE for animal health measures. The endorsement of harmonization in the SPS Agreement stems from repeated complaints by exporters that divergent SPS measures are a serious impediment to trade.21 The potential benefits of harmonization for exporters are usually judged to be large relative to decentralized policing through transparency obligations because it altogether eliminates the need to comply with different regulations. Likewise, the benefits of harmonization relative to equivalency are also judged to be large: harmonization eliminates the need to establish that control systems and measures achieve an importer’s appropriate level of protection on a country-by-country basis. Consumers may also benefit from harmonization if the elimination of regulatory heterogeneity lowers prices and expands product choice. Despite the potential advantages, harmonization of standards appears to be infrequent at the global level. As of 1993, the acceptance rates for Codex commodity standards were only 14 percent by developed countries and 12 percent by developing countries.22 More recent information is available from the WTO notifications. In the majority of cases, members have indicated there is no international standard or do not respond to the question of whether their measure conforms to an international standard.23 Although voluntary equivalency agreements are specifically designed to increase regulatory flexibility, harmonization can reduce flexibility in cases where it is warranted. Differences in actual risks, tastes, and income levels may result in legitimate differences risk targets, as described above,

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299

making harmonization inappropriate. The SPS Agreement and the international standards organizations make allowances for these “good” reasons for departures from harmonization. For example, Article 3 permits a member to maintain an SPS measure that results in a higher appropriate level of protection than would be achieved by international standards, in recognition (for example) that on average consumers in higher-income countries may be willing (and able) to pay for a higher level of food safety. And in recognition of the international variation in risks to animal and plant health, much of the activity of the IPPC and the OIE is directed toward development of common approaches to risk identification, assessment, communication, and management rather than toward setting international standards per se. The SPS Agreement also notes that members, in assessing whether variations in appropriate levels of protection signal a disguised restriction on trade, should make allowance for those risks to which consumers voluntarily expose themselves, such as consumption of foods that are considered part of a nation’s heritage, where tastes and cultural preferences override safety concerns. Chance events, information differences, and interest-group capture are less positive influences that may preclude harmonization. By disseminating information on advances in analytical techniques and mitigation technologies to its members, the international standards-setting organizations narrow knowledge gaps and reduce the probability of chance departures from international norms—“bad” reasons for departure from harmonization. But these international organizations were never intended to expose or correct political-economy capture of national regulatory processes. Historically, they operated in technological obscurity, pursuing their respective missions through technical expert committees, consensus-building, and voluntary compliance. The Codex, for example, was originally created under the auspices of the UN Food and Agricultural Organization and the World Health Organization for the purpose of pooling resources to create standards for developing countries. Instead, some analysts argue that these organizations themselves have been subject to capture. Critics point to examples where international standards “followed ... rather than shaped” national standards to the benefit of politically organized industries from developed countries.24 Representatives of developing countries also report repeatedly that their minimal participation in key committees has resulted in their genuine interests being overlooked.25 In 1997, the SPS Committee adopted a provisional procedure to identify priorities of WTO members for the standardssetting organizations, but to date developed countries have dominated that exercise as well.26 The prevailing judgment is that the SPS Agreement has inadvertently furthered politicized decisionmaking within the international standards-setting institutions. This result was inevitable in view of the fact that the

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agreement increased the international legal standing of their standards, guidelines, and recommendations. Three specific instances have brought the most attention to the politicization of the standards-setting organizations: the debate over the Codex Statement of Principles; the 1995 vote on Codex hormone standards; and the 1997 vote on Codex mineral water standards. In the first case, compromise language was enunciated, whereas in the latter cases the standards for hormone-treated beef (favoring producers in North America, Japan, Australia, New Zealand, Korea, and others) and mineral water (favoring European producers) were approved by slim majorities—not consensus—with accusations of energetic arm-twisting to ensure the outcomes. In the debate over the Statement of Principles, the United States and European Union sought to propagate decision criteria that implicitly favored their domestic agricultural policy regimes.27 The United States and its allies argued that food safety standards should rest solely on scientific evidence with respect to risks, whereas Europe and its allies sought to introduce a “need” criterion into the statement that productivity-enhancing food technologies that posed uncertain health risks also threatened the livelihoods of economically marginal farmers and were not “needed” in the face of excess global production capacity. The compromise language resulted in a statement that Codex food standards “shall be based on the principle of sound scientific analysis and evidence”; but where appropriate, Codex will consider “other legitimate factors” relevant for consumer health protection and the promotion of fair practices in food trade. Debate over the interpretation of this phrase has continued. In 2000, it included various proposals to include the precautionary principle as a basis for permanent regulatory standards-setting. As long as harmonization remains a mechanism for achieving the goals of the SPS Agreement, and the standards-setting institutions remain central to harmonization decisions, then a high level of political pressure on these institutions remains inevitable, despite recent, well-intentioned statements by which these institutions have sought to reestablish neutral credentials by renewing efforts to rely as much as possible on consensus decisions.28

DISPUTE SETTLEMENT AND THE SPS AGREEMENT

Dispute settlement procedures are available to WTO members whenever bilateral and multilateral technical exchanges and related negotiations have reached an impasse. The WTO Understanding on Rules and Procedures Governing the Settlement of Disputes (known as the Dispute Settlement Understanding, or DSU) provides the legal infrastructure for enforcing provisions under all the agreements negotiated during the Uruguay Round,

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301

including the SPS Agreement. The DSU rules stipulate that if formal consultations do not result in a mutually agreeable solution between the parties to a conflict, then a member can request that a dispute panel (and subsequently the WTO Appellate Body, if necessary) rule on the issue. Formal complaints related to thirteen distinct SPS issues were made over the first five years of the SPS Agreement (see Table 15.2). In contrast, during the forty-seven years of the General Agreement on Tariffs and Trade (GATT) there were virtually no trade disputes over SPS measures that advanced to formal dispute settlement.29 Three of the thirteen complaints only tangentially involved SPS issues. Of the remaining ten disputes, consultations are pending in five cases, two were settled by negotiation, and three others have advanced to WTO panels and thence to the Appellate Body: the EU-U.S./Canada hormones dispute, the Australia-Canada salmon dispute, and the Japan-U.S. varietal testing dispute. The increased adjudicatory decisionmaking activity suggests that the prospects for disciplining the use of questionable SPS measures have improved in the post–Uruguay Round legal environment. The Hormones Case The long-running disagreement between the European Union and the United States (and later Canada) over the safety of hormonal growth stimulants in beef cattle production has been viewed in some quarters as the bellwether test of the new disciplines in the SPS Agreement.30 The European Union claimed that the level of human health protection provided by the international standards for the hormones at issue (which are based on the split Codex vote noted above) did not meet its exigent public health goals. The European Union also defended its ban on imports of hormone-treated beef as a precautionary approach to managing risks that were not fully understood. The challenge of the EU ban raised substantive legal questions about the extent to which the new multilateral trade rules could limit an importer’s ability to adopt measures that exceeded international standards, or to utilize the precautionary principle in policy decisions. The Appellate Body upheld the original panel’s decision that the ban was not in compliance with the disciplines in the SPS Agreement (see Table 15.3). The judges concurred that the ban was not based on a risk assessment, as there appeared to be no “rational relationship” between the European Union’s measures and the health risks from consuming hormonetreated beef that were reported in the scientific evaluations. The Appellate Body also ruled that even though international standards were not mandatory,31 the European Union had not produced scientific evidence to support the claim that its ban achieved a higher level of health protection. The Appellate Body decision noted that even though the European Union had

Settled Panel and Appellate Body ruled against EC Panel and Appellate Body ruled against Japan Pending (minor SPS issue)

Canada United States and Canada United States EC

Korea—bottled water

EC—ban on use of hormones

Japan—varietal testing requirements

India—quantitative restrictions

United States—poultry requirements

Slovakia—BSE restrictions

EC—restrictions on rice

France—asbestos restrictions

EC—measures on pine wood nematodes

United States—state restrictions on Canadian trucks

DS 20

DS 26/49

DS 76

DS 96

DS 100

DS 133

DS 134

DS 135

DS 137

DS 144

Source: WTO .

Panel and Appellate Body ruled against Australia

Canada

Australia—ban on salmon imports

DS 18/21

Canada

Canada

Canada

India

Switzerland

Pending

Pending

Referred to panel (minor SPS issue)

Pending (minor SPS issue)

Pending

Pending

Settled

United States

Korea—shelf-life requirements

DS 5

EC

Pending

United States

Korea—produce inspection

DS 3/41

Complainant(s) Status

Issue

Disputes Under the SPS Agreement, 1995–1999

Case Number(s)

Table 15.2

302

SANITARY AND PHYTOSANITARY MEASURES

Table 15.3

303

Jurisprudence in SPS Appellate Body Rulings, 1995–1999 Complainant Party

Cocomplainants

EC Measures Concerning Meat and Meat Products (Hormones)

United States Canada

Australia New Zealand Norway

EC measure was not based on a risk assessment (Article 5.1)

Australia Measures Affecting the Importation of Salmon (Salmon)

Canada

EC India Norway United States

Australian measures were not based on a risk assessment (Article 5.1)

Dispute

Japan United States Measures Affecting Agricultural Products (Varietal Testing)

Ruling (Provision Violated)

The ban on salmon imports provided a level of protection that was higher than other measures used by Australia to protect fish stocks, and this variation was a disguised restriction on trade (Article 5.5) Brazil EC Hungary

Japan’s varietal testing requirements were maintained without sufficient scientific evidence (Article 2.2) and were not based on a risk assessment (Article 5.1) The testing requirement was not published (Article 7 and Annex B) Japan did not fulfill its obligation to obtain information for a scientific risk assessment by requiring exporters to submit data (Article 5.7)

Source: WTO .

broadly argued that its regulatory decision had been guided by the precautionary principle, it had been unwilling to specifically defend its measure under Article 5.7, which allows members to adopt temporary measures while collecting scientific evidence to complete a risk assessment. The

304

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European Union did not invoke Article 5.7, as it considered its measure to be final, not provisional. The Appellate Body ruled that the EU measure must therefore be brought into compliance with the obligations specified in the other articles of the agreement. The Salmon and Varietal Testing Cases Formal consultations also failed to produce negotiated solutions in the Australian-Canadian salmon dispute and in the Japan-U.S. varietal testing dispute. These two disputes centered on measures that were justified on the basis of protecting, respectively, recreational and commercial fish stocks from several diseases, and orchards from codling moths. In the salmon dispute, the Appellate Body concurred with Canada that Australia’s 1975 ban on imports of fresh, chilled, or frozen (eviscerated) salmon from the Northern Hemisphere was inconsistent with the legal obligations set forth in the SPS Agreement. As in the hormones case, the Appellate Body ruled that the measures at issue were not based on a risk assessment. The judges concluded that the scientific report Australia relied on to inform its policy decision did not constitute a risk assessment because it neither evaluated the likelihood of entry, establishment, and spread of diseases nor evaluated the potential consequences of those diseases.32 The Appellate Body also concurred with Canada that the salmon import ban provided a level of environmental protection that was arbitrarily higher than that provided by other Australian SPS measures, because Australia allows imports of other fish that are potentially vectors for the same, or even more virulent, diseases. At issue in the varietal testing dispute were Japanese requirements to test whether methyl bromide treatments effectively exterminated codling moths on each new variety of fruit and walnuts. The United States argued that such requirements were unscientific, as Japan could produce no evidence to support the claim that variety is a causal factor of variation in extermination efficacy. Such requirements restricted U.S. exports of fruits and walnuts, the United States claimed, since the large cost of the required trials discouraged exporters from marketing new hybrids in Japan. The Appellate Body concurred with a panel ruling that Japan’s phytosanitary measures were not transparent, as they had never been published, and were not based on “sufficient scientific evidence.” The judges ruled further that the varietal testing measures were not based on a risk assessment and that the testing requirements could not be justified under the terms of Article 5.7. In making the latter assessment, the judges decided that Japan’s claim that its measures were provisional was belied by the fact that they had been in effect for forty-eight years. Moreover, in the view of the Appellate Body judges, a government’s obligation to seek additional information to com-

SANITARY AND PHYTOSANITARY MEASURES

305

plete a risk assessment is not fulfilled by requiring exporters to submit data from costly experiments. Implications of the Dispute Settlement Process The decisions in the hormones, salmon, and varietal testing cases provide important indications of how WTO tribunals will interpret some of the general disciplines of the SPS Agreement. In all three cases, panels and Appellate Body judges emphatically ratified the substantive obligation to base sanitary and phytosanitary measures on an objective assessment of risks. The decisions, which found that the disputed measures in these cases were not “based on a risk assessment” or that they were “maintained without sufficient scientific evidence,” recognized that science is descriptive, not prescriptive, but held that there must be a “rational relationship” between the policy choices made by governments and objective scientific assessments that go beyond hypothesis or hazard identification. The judiciary’s rational relationship test also suggests that tribunals will be willing to discipline measures that are based on popular misconceptions of risks (even if the requirements apply equally to domestic and foreign producers), as well as more overtly discriminatory measures. In taking the three Appellate Body rulings into balanced assessment, the determinations on the SPS Agreement’s provisions related to international standards and regulatory decisions based on the precautionary principle should dispel some of the concerns that WTO tribunals will view their mandate as the vigorous promotion of globalization at the expense of national sovereignty on health and environmental issues. The WTO Appellate Body explicitly ruled in the hormones case that international standards are not obligatory under the terms of the SPS Agreement. This should allay anxieties that the agreement must promote “downward harmonization” of national standards in order to facilitate trade. The panel and Appellate Body rulings did not support the specific EU arguments that its regulatory measure could be interpreted as precautionary, but the rulings did highlight the provision made in the SPS Agreement for the adoption of measures to mitigate unfamiliar risks on a temporary basis. Several measures adopted under these provisions over the years have not been formally challenged by exporters, most prominently in the BSE crisis but also in the wake of the karnal bunt outbreak in the United States and the recent Belgian dioxin scare. The outcomes of formal disputes that reach WTO panels, especially the highly visible hormones dispute, figure prominently in any judgment about the effectiveness of the SPS Agreement (and jurisprudence that interprets the agreement) in contributing to the reform of welfare-reducing trade restrictions and increased integration of the world trading system. The SPS

306

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Agreement, together with strengthened dispute settlement procedures, has restored the rule of law in the cases of several long-standing disagreements. It is interesting to note that the three SPS disputes to advance to the Appellate Body have been won by the complainants. This outcome mirrors the historical pattern of other GATT/WTO disputes, but it is notable in the context of SPS regulations because it indicates that countries with sophisticated scientific establishments are not immune to successful challenge of their measures.33 Unfortunately, not all legally sanctioned results of SPS dispute settlement cases give equally desirable trade outcomes. The European Union announced that it would not change its hormones measure by May 1999. It defied a ruling of the WTO Arbitrator and asserted that it needed to complete additional risk assessments. 34 The United States, Canada, and European Union could not reach agreement on resolution of the hormones dispute based on product labeling; neither could the parties agree on a compensation deal that would leave the EU ban in place but offer trade concessions on other products. The WTO General Council has therefore authorized retaliation by the complainants against $128.1 million of European products. This historic case has thus (for the moment at least) resulted in less rather than more international trade. Trade sanctions are by far the least preferable of the possible outcomes of the WTO dispute settlement process. But the granting of authorized retaliation under rules of law is superior to undisciplined unilateral tit-for-tat measures, such as those that occurred between the United States and European Union in the 1980s, which have been described as the equivalent of “vigilante justice” in trade.35

CHALLENGES CONFRONTING THE SPS AGREEMENT

The SPS Agreement achieved some success in the first five-year phase of implementation. In particular, its strengthened transparency provisions have had the intended effect of improving the availability of information and providing a forum for informal airing of disputes. Similarly, progress can be reported for fulfillment of the obligation to base regulatory measures on a science-based risk assessment. Strengthened WTO dispute settlement procedures have provided a new institutional setting in which to test compliance with this obligation, and its substance has been sustained in the formal decisions of WTO panels and the Appellate Body. These accomplishments indicate that staying the course set by the Uruguay Round will continue to yield benefits. The notification system can be strengthened and extended to more countries, and formal dispute settlement rulings can continue to provide a nuanced interpretation of the SPS Agreement’s basic language. Over time, the beneficial impact of each of these innovations will

SANITARY AND PHYTOSANITARY MEASURES

307

accumulate and thus narrow the scope for misuse of SPS barriers. Continuing progress under these mechanisms provides an appropriate approach to furthering the aims of the SPS Agreement. It is more difficult to discern how progress can be achieved in the areas of equivalence and harmonization, where fulfillment of international objectives is difficult, the language of the agreement is less binding, and pressures on the agreement will intensify. On substantive grounds, the pressures will come from the dynamics of science, evolving production technologies, and changing consumer preferences for food safety. The more insidious political-economy effects arise from capture of regulatory processes by organized special interests with a vested concern in the outcomes. The politically organized groups can represent traditional producer interests, which have long achieved high levels of support and protection from agricultural policy, particularly in developed countries; or they can be organizations of consumers, imposing another set of specific preferences on the regulatory process that reduces broad societal welfare. In either case, the WTO provides only limited institutional innovation to alter the regulatory decisions that are reached domestically, particularly under the equivalence and harmonization mechanisms. Even the risk assessment–based decision criterion of the SPS Agreement is not immune from new challenges. Within developed countries, politicians and lobby groups concerned with health and environmental issues often suggest that in order to expedite trade in a global market regulators are being obliged to compromise the protection of human, animal, and/or plant health. Although there is little evidence that increased international trade in agricultural goods and foodstuffs has had any deleterious impact, a public perception has been created within developed countries that international rules are imposing lower standards through the insistence on science-based risk assessment. This perception has, according to observers, fueled recent demands for a more prominent role for the precautionary principle in regulatory decisionmaking, demands that are evident in the Convention on Biological Diversity as well as the debate over the Codex Statement of Principles.36 Should such pressures result in amending the SPS Agreement to significantly relax the requirement to seek additional information to perform a risk assessment while provisionally adopting measures to mitigate new risks (i.e., the limited precautionary principle embodied in Article 5.7), governments may increasingly revert to stonewalling strategies that were used to great effect prior to the Uruguay Round. Future disputes over genetically modified agricultural products may turn on the question of the credibility of importers’ efforts to collect scientific information to test hypotheses that such products harm the environment or are unsafe for human consumption. The emphasis of the SPS Agreement on risk assessment embodies a

308

NONTRADE CONCERNS

broader normative issue, however. From an economic perspective, the riskassessment paradigm encourages a somewhat myopic focus on the direct risk-related costs associated with trade.37 By failing to systematically recognize the economic benefits derived from imports, this risk-assessment paradigm biases risk-management decisions toward trade-restrictive measures.38 This implicit endorsement of a normative foundation based on riskrelated costs rather than benefit-cost analysis in the SPS Agreement may have stemmed from philosophical objections to the introduction of economic benefits into SPS policies, or from pragmatic concerns related to articulating disciplines without unduly complicating subsequent judgment about the compliance of measures with the agreement’s obligations.39 The omission of explicit disciplines regarding consideration of trade benefits in the SPS Agreement can perhaps be defended on the grounds that it is an international trade treaty, not a regulatory blueprint. The purpose of the legal obligations in the agreement is to limit the use of putative scientific claims for political purposes, not to establish templates for risk-management decisions. In short, the trade disciplines were not intended to be good practice standards. But if countries come to regard the provisions of the SPS Agreement as a regulatory model, rather than as establishing minimal benchmarks for SPS measures, then the unfortunate outcome could be to divert attention on SPS policy formulation from good regulatory practices to the merely legally defensible. Injection of a discussion of the costs and benefits of policy regimes into the current mix of legal, political, and scientific perspectives on risk management may complicate progress toward international consensus on an appropriate framework for SPS regulatory decisions. Yet eventually it could help countries direct scarce resources toward risk-reducing activities that not only are congruent with their international obligations but also yield the highest pay-offs.

309

SANITARY AND PHYTOSANITARY MEASURES

Appendix:

Trade Patterns in Agricultural, Forestry, and Fishery Products, 1997a Developed Country

Developing Country

Exporter

Value (U.S.$ billion)

Growth Rate (1990– 1997)

Value (U.S.$ billion)

Growth Rate (1990– 1997)

Developed Countries Total Bulk Commodities Processed Intermediates Produce & Horticultural Products High-Value Processed Products Related Agricultural Products

211.6 13.2 35.4 22.7 90.1 50.2

16 13 15 16 17 16

92.0 10.4 18.3 3.7 33.1 26.5

21 14 23 27 20 24

Developing Countries Total 159.3 Bulk Commodities 37.1 Processed Intermediates 27.1 Produce & Horticultural Products 15.7 High-Value Processed Products 25.8 Related Agricultural Products 53.5

19 17 17 17 22 19

128.0 36.4 29.1 12.1 25.5 25.1

26 22 28 25 33 27

Source: USDA, Economic Research Service, International Bilateral Agricultural Trade (IBAT) database, developed from UNCTAD bilateral trade data. Note: a. Bulk commodities include primarily grains and oilseeds; processed intermediates include oilseed meals, vegetable oils, animal feed, pet food, live animals, wool, and hides and skins; horticultural products include fresh fruits and vegetables; high-value processed products include roasted coffee, cocoa products, beverages, dairy products, eggs, meats, and processed fruits and vegetables; related agricultural products include seafood, distilled spirits, fish, wood, yarn, thread, and leather.

NOTES The support of the World Bank’s Agriculture and the WTO 2000 Project for this study is acknowledged. This chapter draws and abstracts from “WTO Disciplines on Sanitary and Phytosanitary Barriers to Trade: Progress, Prospects, and Implications for Developing Countries,” by Donna Roberts, David Orden, and Timothy Josling, presented at the World Bank–World Trade Organization Conference on Agriculture and the New Trade Agenda from a Development Perspective, October 1–2, 1999, Geneva, Switzerland. The views expressed in this chapter are not to be attributed to the U.S. Department of Agriculture (USDA) or the U.S. Trade Representative. 1. Stanton, “Implications of the WTO Agreement,” p. 77. 2. OECD, “Recommendations on Improving the Quality of Government Regulation.” 3. Least-developed countries were exempted from many of the agreement’s disciplines, including the notification requirement, until 2000.

310

NONTRADE CONCERNS

4. GATT, “International Trade, 1990–1991,” vol. 1, p. 32. 5. World agricultural trade totaled $590.9 billion in 1997 based on UNCTAD data (see table in the Appendix in this chapter). Developed countries’ exports were $303.6 billion, accounting for 51 percent of total world exports of these products. 6. The EU has noted, for example, that as of July 1999 it had responses to only two of eight follow-up queries it submitted to trading partners about their notifications over the previous two years. WTO, “Trade Concerns,” Submission by the European Union. 7. A member’s appropriate level of sanitary or phytosanitary protection is tautologically defined in the agreement as the level of protection deemed appropriate by the member. An explanatory note states that many members otherwise refer to this concept as the “acceptable level of risk.” 8. The agreement did stop short of explicitly allowing measures to be based on “consumer concerns” (i.e., subjectively assessed risks), as advocated by some countries. 9. Before its final ruling, USDA received more than 2,000 comments, mostly opposing the proposed rule to allow imports of Mexican avocados. This was a greater number of comments than the agency had ever before received on a phytosanitary regulation. The domestic avocado industry also placed provocative fullpage advertisements in several national newspapers to register its opposition. One, for example, asserted (against the backdrop of a hangman’s noose) that “the USDA is about to sign the death warrant for a billion dollar American industry.” Roberts and Orden, “U.S. Phytosanitary Restrictions on Mexican Avocados.” 10. See WTO, “Summary of the SPS Meeting,” various dates. 11. See MacDonald and Crutchfield, “Modeling the Costs of Food Safety Regulation,” p. 1289. It has also been argued that process standards can serve as a form of technology transfer for developing countries. See Sykes, Product Standards, p. 137. 12. Antle, Food Safety Policy. 13. WTO, “Review of the SPS Agreement.” 14. For example, the chair of the Codex Committee on Food Import and Export Certification and Inspection Systems (CCFICS) reports that “the concept of equivalence has not been widely applied.” Gascoine, “Harmonisation, Mutual Recognition, and Equivalence,” p. 7. 15. “U.S. Poultry Exports to EU Hit as Negotiators Fail to Agree on Equivalence,” WFCN, April 2, 1997, p. 8. 16. “Canada Signs Veterinary Equivalency Agreement with European Union,” WFCN, January 6, 1998, p. 6. 17. In the United States, the regulatory approach of the Food and Drug Administration to genetically modified commodities is straightforward. The question asked is whether the modified product is materially different from the nonmodified product in terms of the health risks it might pose to consumers. If the modified product is considered similar to that of the original product, as is often the case, then no separate authorization is needed. Labeling of these products is not mandatory. Voluntary labeling is permitted as long as it is not misleading. 18. Zarilli, “WTO Agreement on SPS Measures: Issues for Developing Countries.” 19. “Major Exporting Countries Seek Help to Comply with U.S. Seafood HACCP Rule,” WFCN, July, 11 1997, p. 11. 20. See, for example, WTO, “SPS Agreement and Developing Countries,” Statement by Egypt.

SANITARY AND PHYTOSANITARY MEASURES

311

21. One study of the international variation in maximum residue levels (MRLs) for fruit illustrates the problem. Although the MRL for malathion on apples is 8.0 parts per billion (ppb) in the United States, it is 0.5 ppb in Germany, France, the Netherlands, and the United Kingdom. The MRL for permethryn on apples is 0.05 ppb in the United States,1.0 ppb in Europe. An apple exporter must therefore target either the U.S. or European market or else meet the highest standard of any of the possible foreign destinations in order to have flexibility to respond to changing market conditions. See Fischer, “Regulation as a Trade Issue from Chilean Perspective,” p. 38. 22. The study reports that of a possible 22,494 acceptances (163 standards times 138 countries) developing countries had notified 2,157 acceptances to the Codex Commission, whereas developed countries reported 559. Victor, “Risk Management and the World Trading System,” p. 24. 23. Gascoine, “Harmonisation, Mutual Recognition, and Equivalence.” 24. Victor, “Risk Management and the World Trading System.” 25. Developing-country critics point to the allocation of standards-setting resources to income-sensitive commodities (such as the recent proposal to set standards for sports drinks) and to the design of the standards based on capital-intensive solutions to mitigating risks as indicative of their interests being marginalized. See WTO, “Proposals Regarding the Agreement on Sanitary and Phytosanitary Measures,” India. 26. As of the end of 1999, nine proposals had been submitted to the committee to be forwarded to the relevant scientific organization. Developing countries (Thailand, the Philippines) identified two priorities; the remaining seven were identified by the United States, the European Union, and Canada. Several developing countries supported the proposals made by the developed countries; as evident in the cross-notification data, the trade interests of developed and developing countries are not always mutually exclusive. WTO, “Procedure to Monitor the Process of International Harmonization.” 27. Powell, “Science in Sanitary and Phytosanitary Dispute Resolution,” p. 15. 28. Codex, “Improvement of Procedures for the Adoption of Codex Standards and Measures to Facilitate Consensus.” 29. Stanton, “Implications of the WTO Agreement,” p. 77. 30. For discussion of the hormones case, see Roberts, “Preliminary Assessment of the Effects of the WTO Agreement,” pp. 385–396. 31. The Appellate Body held that the statement in the SPS Agreement that a measure shall be based on an international standard where one exists (except as otherwise provided for in the agreement) does not imply that measures need to conform to international standards. If this were so, contended the judges, the SPS Agreement would vest international standards (which are recommendations under the terms of the Codex Commission) with obligatory force and effect. To sustain such an assumption, the Appellate Body argued, language far more specific and compelling than that found in Article 3 of the SPS Agreement would be necessary. WTO, “EC Measures,” Report of the Appellate Body, para. 165. 32. The Appellate Body agreed with the earlier panel finding that the report contained “general and vague statements of mere possibility of adverse effects occurring; statements which constitute neither a quantitative nor a qualitative assessment of probability.” WTO, “Australia Measures,” Report of the Appellate Body, para. 19. 33. It should also be noted that the measures that Australia adopted to comply

312

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with the 1998 WTO decision in the salmon case (which lifted the twenty-five-yearold ban on fresh salmon imports but imposed onerous rules for such trade, including the requirement that all imports be limited to consumer-ready portions) have once again been found to violate the SPS Agreement. In February 2000, a WTO panel found that Australia’s new measures were not based on a risk assessment (in violation of Articles 2.2 and 5.1) and were not the least-trade-restrictive means of achieving its appropriate level of protection (in violation of Article 5.6). The panel also ruled that a unilateral ban placed on all salmon imports by one Australian state (Tasmania) violated the SPS Agreement. WTO, “Recourse to Article 21.5 by Canada,” para. 8.1 34. The arbitrator noted that “it would not be in keeping with the requirement of prompt compliance to include in the reasonable period of time, time to conduct studies or to consult experts to demonstrate the consistency of a measure already judged to be inconsistent.” WTO, “EU Measures,” Arbitration under the DSU, p. 15. 35. Orden and Romano, “The Avocado Dispute,” p. 36. 36. “Precautionary Principle Viewed as Rejection of Risk Assessment, Says Scientist,” WFCN, March 1, 2000, p. 14. 37. Roberts, “Sanitary and Phytosanitary Risk Management in the Post– Uruguay Round Era: An Economic Perspective.” 38. The potential benefits of different regulatory options appear to be at best intermittently, and at worst opportunistically, factored into decisions that regulators view as “unarbitrary and justifiable distinctions” in the appropriate level of protection. For example, it is not uncommon for regulators to accept imports of live breeding stock (which are inputs that contribute to productivity of a domestic industry) because of industry “need” while rejecting arguably less-risky meat imports. 39. It is clear that many WTO members hold the view that consumer or processor gains from trade fall in the same category as producer losses that result from decreases in domestic prices brought about by imports—as commercial considerations that might be appropriately factored into a country’s choice of its single “appropriate level of protection,” but which should not be used as decision criteria for individual risk-mitigation measures

BIBLIOGRAPHY Antle, John. 1995. Choice and Efficiency in Food Safety Policy. Washington, D.C.: American Enterprise Institute. Codex Alimentarius Commission. March 1999. “Improvement of Procedures for the Adoption of Codex Standards and Measures to Facilitate Consensus.” Codex Committee on General Principles. CX/GP/99/5. Fischer, R. 1998. “Regulation as a Trade Issue from a Chilean Perspective.” In Regulatory Reform in the Global Economy: Asian and Latin American Perspectives. Proceedings of the Conference on Trade Policies and Trade Regulations and International Openness. Paris: Organization for Economic Cooperation and Development. Gascoine, Digby. October 1999. “Harmonisation, Mutual Recognition, and Equivalence—How and What Is Attainable.” Paper presented at the Conference on International Food Trade Beyond 2000: Science-Based Decisions, Harmonization, Equivalence, and Mutual Recognition. Melbourne, Australia.

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General Agreement on Tariffs and Trade (GATT). “International Trade, 1990–1991,” vol. 1. Geneva: GATT. MacDonald, James, and Stephen Crutchfield. 1996. “Modeling the Costs of Food Safety Regulation.” American Journal of Agricultural Economics 78, no. 5: 1285–1290. Orden, David, and Eduardo Romano. November 1996. “The Avocado Dispute and Other Technical Barriers to Agricultural Trade Under NAFTA.” Paper presented at the Conference on NAFTA and Agriculture: Is the Experiment Working? San Antonio, Texas. Organization for Economic Cooperation and Development (OECD). March 9, 1995. “Recommendations of the Council of the OECD on Improving the Quality of Government Regulation.” OECD/GD(95)95. OECD Public Management Service. Powell, Mark. 1997. “Science in Sanitary and Phytosanitary Dispute Resolution.” Discussion Paper 97–50. Washington, D.C.: Resources for the Future. Roberts, Donna. 2000. “Sanitary and Phytosanitary Risk Management in the Post–Uruguay Round Era: An Economic Perspective.” In Current Institutions for Managing SPS Issues in International Trade (Proceedings of the Conference on Incorporating Science, Economics, Sociology, and Politics in Sanitary and Phytosanitary Standards in International Trade). Washington, D.C.: National Research Council, National Academy of Sciences. ———. “Preliminary Assessment of the Effects of the WTO Agreement on Sanitary and Phytosanitary Trade Regulations.” Journal of International Economic Law 1, no. 3: 377–405. Roberts, Donna, and David Orden. January 1997. “Determinants of Technical Barriers to Trade: The Case of U.S. Phytosanitary Restrictions on Mexican Avocados, 1972–1995.” In David Orden and Donna Roberts, eds., Understanding Technical Barriers to Agricultural Trade (Proceedings of a Conference of the International Agricultural Trade Research Consortium). St. Paul, Minn. Stanton, Gretchen. January 1997. “Implications of the WTO Agreement on Sanitary and Phytosanitary Measures.” In David Orden and Donna Roberts, eds., Understanding Technical Barriers to Agricultural Trade (Proceedings of a Conference of the International Agricultural Trade Research Consortium). St. Paul, Minn. Sykes, Alan. 1995. Product Standards for Internationally Integrated Goods Markets. Washington, D.C.: Brookings Institution. Victor, David. January 25–27, 1999. “Risk Management and the World Trading System: Regulating International Trade Distortions Caused by National Sanitary and Phytosanitary Policies.” Paper presented at the Conference on Incorporating Science, Economics, Sociology, and Politics in Sanitary and Phytosanitary Standards in International Trade. National Research Council. Irvine, Calif. World Food Chemical News. March 1, 2000. “Precautionary Principle Viewed as Rejection of Risk Assessment, Says Scientist.” World Food Chemical News, p. 14. ———. January 6, 1998. “Canada Signs Veterinary Equivalency Agreement with European Union,” World Food Chemical News, p. 6. ———. July 11, 1997. “Major Exporting Countries Seek Help to Comply with U.S. Seafood HACCP Rule,” World Food Chemical News, p. 11. ———. April 2, 1997. “U.S. Poultry Exports to EU Hit as Negotiators Fail to Agree on Equivalence,” World Food Chemical News, p. 8.

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World Trade Organization (WTO). 2000 (February 18). “Australia—Measures Affecting Importation of Salmon: Recourse to Article 21.5 by Canada.” WTO/DS/18/RW. ———. 1995–1999. “Summary of the Meeting of the Committee on Sanitary and Phytosanitary Measures.” G/SPS/R/1-17. ———. 1999a. “Proposals Regarding the Agreement on Sanitary and Phytosanitary Measures in Terms of Paragraph 9(a)(i) of the Geneva Ministerial Declaration.” Communication from India. ———. 1999b (July). “Procedure to Monitor the Process of International Harmonization.” Committee on Sanitary and Phytosanitary Measures. WTO/G/SPS/13. ———. 1999c. “Implementation of the SPS Agreement—Trade Concerns.” Submission by the European Communities at the Meeting of July 7–8. WTO/G/SPS/GEN/132. ———. 1999d. “SPS Agreement and Developing Countries,” Statement by Egypt at the Meeting of July 7–8. G/SPS/GEN/128. ———. 1999e (March). “Review of the Operation and Implementation of the Agreement on the Application of Sanitary and Phytosanitary Measures.” Committee on Sanitary and Phytosanitary Measures. G/SPS/12. ———. 1998a (January 16). “EC Measures Concerning Meat and Meat Products (Hormones).” WT/DS26/AB/R and WT/DS48/AB/R. ———. 1998b (May 27). “EU Measures Concerning Meat and Meat Products (Hormones).” Arbitration under Article 21.3(c) of the Dispute Settlement Understanding. WT/DS26/15 and WT/DS48/13. ———. 1998c (October 29). “Australia—Measures Affecting Importation of Salmon.” WT/DS18/AB/R. Zarilli, Simonetta. July 1999. “WTO Agreement on Sanitary and Phytosanitary Measures: Issues for Developing Countries,” Working Paper, South Centre. Geneva.

16 Conclusion: The Future of Agricultural Trade HANS J. MICHELMANN, JAMES RUDE, JACK STABLER, AND GARY STOREY

The theme of this volume is “emerging issues in agricultural trade policy.” For the most part these issues to date have not received a great deal of critical research attention or rigorous analysis. The objective of this volume is to bring them to the fore. The broad scope of our theme suggests, however, that it is difficult to draw sharply focused conclusions about the impact of these emerging issues on agricultural trade. Given the broad nature of the topics covered, we will only attempt to address one concluding question: Are the emerging issues stumbling blocks or stepping-stones to agrifood trade reform? In other words, do the emerging issues presented in Parts 1–4 of this volume improve or weaken the prognosis for a new Agreement on Agriculture and progress in other areas of the World Trade Organization (WTO), such as the Agreement on Sanitary and Phytosanitary Measures (SPS), that are relevant to agriculture? We address this question first with a set of general observations, and then we ask the question again as it relates to each of the book’s parts. A final section addresses another question: Where do we go from here?

GENERAL CONSIDERATIONS1

A successful round of trade negotiations usually requires that a broad set of issues be discussed so that trade-offs can be made and consensus reached. Mike Gifford has suggested that the menu of issues facing negotiators in the agriculture sector has become too broad and that it is this primary reason that the Seattle ministerial meetings were not a success.2 Issues includ-

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ed the prescheduled negotiations for agriculture and services as well as a broad assortment of others, including new rules for less-developed countries, antidumping rules, disciplines for state trading enterprises (STEs), the environment, investment/competition policy, and labor standards. Gifford concluded that more groundwork must be done before all these issues can be included in the negotiations. Issues of importance to developing countries will be central to the question of whether a new round of comprehensive negotiations is possible and whether the new round would be successful. However, developing countries do not negotiate as a block. In general, they are interested in agricultural liberalization, textiles and clothing, and antidumping. These are issues that are in Canada’s interest to negotiate. In addition, regions, such as the European Union (EU), that historically have pursued the interests of protecting import-competing firms, will begin to have an interest in pursuing outward-looking exporter interests. This implies that the European Union might take a leadership role in promoting trade liberalization. Nonetheless, whether the European Union will fill the WTO leadership void, which has been at least temporarily left by the absence of U.S. leadership, is very much in doubt. The process of implementing the Uruguay Round Agreements has itself been a roadblock to further reform. In the Agreement on Agriculture, implementation issues have posed problems. The modalities that were originally put forward in the Dunkel proposal for implementation of market access were given a very loose interpretation in the implementation of the final Agreement on Agriculture. As countries tabled their positions, a vicious cycle of declining levels of access to markets developed. Gifford speculated whether the modalities have to be formally included in the rules for agriculture to prevent a repetition of this type of backsliding on basic principles of the agreement.3 Gifford also saw problems on the horizon for implementation of the export subsidy provisions of the Agreement on Agriculture. Currently under the WTO, export subsidies can only be a result of government actions such as government funding or reduced taxation. Dumping is considered a private action. Gifford mentioned that the WTO panel on Canadian dairy exports falls into a gray area. He raised the question, When does a two-price system constitute an export subsidy? This issue will have to be addressed. Implementation issues have taken center stage for developing countries. The less-developed countries are asking whether they have given up too much for what little they have received. Their concessions include the Agreement on Trade Related Aspects of Intellectual Property (TRIPS), trade-related investment issues and the added costs of implementing the

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Agreement on the Application of Sanitary and Phytosanitary Measures (SPS Agreement), and the Agreement on Technical Barriers to Trade (TBT Agreement). Potential benefits for lesser-developed countries include improved access for clothing and textiles, as well as agriculture products. An imbalance is also considered to exist between importing and exporting country interests. Although export subsidies are prohibited for industrial products, and are disciplined for agriculture, export taxes are not regulated by the WTO. This asymmetry between export taxes and subsidies worries importers, such as Japan, which seek stable sources of imports. The prognosis for a new round covering new issues is not good if existing implementation issues cannot be properly addressed. Grace Skogstad discussed barriers external to the formal WTO process resulting in a changed international political landscape for the negotiations.4 She argued that a number of features do not augur well for expeditious negotiations. First, she sees the WTO as an emerging new tier of government that not only increasingly imposes restraints on national governments but also, because of its increased efficacy, has become the focus for the activities of interest groups. Such groups include those with the traditional focus on environmental concerns in addition to such emerging themes as public health and food safety issues. These groups, aided by the new information technology, are insisting on making the WTO system, previously dominated by technocratic elites, more open and accountable. A second goal of these groups is to create a better balance between trade and economic goals, on the one hand, and environmental and ethical goals on the other. Involvement of these groups will, needless to say, complicate the WTO negotiating environment and probably engender delay. Skogstad further suggested that making the negotiating process more widely accountable to consumers and citizens, even though a laudable objective, will lead to greater divergence on national positions and thus greater difficulty in achieving a negotiating consensus. In the absence of movement toward a more market-oriented international trade system for agricultural products, farmers in countries such as Canada—whose government has based agricultural policies on the premise of liberalized agricultural trade and thus has drastically reduced support measures—are suffering from the absence of government support, whereas their counterparts in Europe and the United States enjoy substantial state subsidies. Skogstad suggested that such a market-oriented agricultural policy should be revisited because of the hardship it imposes on affected producers. It is not likely that such a return to state aid for agriculture in those countries that have tried to live up to their international commitments on agricultural trade would expedite the WTO process. Given this context for the current prospects for a successful agriculture

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trade agreement, do the emerging issues present stumbling blocks or stepping-stones to further agrifood trade reform?

ENVIRONMENTAL ISSUES

Concerns regarding the impact of environmental issues on trade are really about side effects: trade affects the environment and environmental regulation affects trade. These concerns were addressed in Part 1 of this volume. Increasing concerns with food quality, health, safety, and environmental quality in the richer countries of the world are likely to heighten the importance of food safety regulation, environmental regulation, and other technical barriers to trade in coming years. The danger is that these protective measures can become captive to protectionist interests. Keeping these issues off the negotiating agenda will not solve this problem. Linking other international environmental agreements to the WTO, however, opens trade remedy instruments to abuse by interest groups. C. Ford Runge (Chapter 1) showed the conditions under which trade and environmental policies can be compatible. However, the process of defining these conditions is information-intensive and complex. Nothing in this accommodation process will speed up the negotiations, but Runge’s framework may facilitate implementation of new environmental and trade policies. Richard Gray (Chapter 2) suggested the Kyoto Accord will not have an immediate impact on trade mostly because it has not been ratified. However, he predicts pressures will increase for a binding international climate-change agreement that is tied to international trade agreements. This agreement may eventually have to become part of the WTO in order to have an effective remedy mechanism. Any move to integrate environmental agreements with trade agreements could very well create a stumbling block in the road to further trade liberalization. William Kerr (Chapter 3) explored how different interest groups may attempt to capture the WTO agenda. These groups are encouraged because of the inclusion of the TRIPS Agreement in the WTO. The regulation of intellectual property is not fundamentally a trade issue, although it has international aspects, so the inclusion of this agreement creates a precedent for the inclusion of other nontrade issues in the WTO. The potential for capture by outside interest groups greatly reduces the potential for a successful agreement. Peter Phillips and Don Buckingham (Chapter 4) prescribed a slow, gradual, caseby-case process to incorporate genetically modified organism (GMO) regulation into international agreements. Given the pressures to include GMOs under the auspices of the WTO, a go-slow process can only be considered as a stumbling block to trade liberalization. Certainly, GMO regulation is a very thorny issue, which will be difficult to resolve.

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STATE TRADING ENTERPRISES

State trading enterprises were discussed in Part 2. The United States has made negotiation of further disciplines on STEs a priority of the next WTO round. Given the use of STEs by a wide range of nations over many commodities, it is unlikely that their outright banning will be achieved. State trading enterprises are not just an agricultural issue but apply to the WTO writ large. One proposed avenue to address many of the issues presented by state traders is competition policy. Competition policy is a useful avenue because many of the same criticisms that apply to the noncompetitive behavior of STEs also apply to private traders. However, due to the complexity of the issues involved in competition policy and the divergent starting positions of WTO members, progress on competition policy may take many years. Expanding STE regulation to address broader issues related to competition policy will probably create a stumbling block for a speedy conclusion to an agriculture agreement. W. M. Miner (Chapter 5) did not provide specific proposals for disciplining STEs. Rather, he offered two extreme approaches: elimination or minor adjustments to Article XVII. He suggested that neither of these approaches is likely to be adopted. Given that STEs are a broader issue than just the Uruguay Round Agreement on Agriculture, meaningful trade rules for STEs will require completion of a comprehensive round. Price discrimination is an issue that is central to both exporting and importing STEs. Troy Schmitz and Andrew Schmitz (Chapter 6) suggested that little empirical evidence about the effects of price discrimination on specific commodities is available. They concluded that if the negotiators determine that price discrimination is a problem, then it is not one that will likely be rectified soon, hence there is a stumbling block. Philip Abbott and Linda Young (Chapter 7) examined how STEs have evolved with reform. They claim that STEs will continue to exist as long as they are used as an instrument for domestic policy. There are two difficulties in evaluating potential benefits of disciplining state trading enterprises. First, investigations of both importing and exporting STEs have been hampered by the lack of data required for conclusive empirical analysis. A clear consensus does not exist on the size of the economic impact that state trading has on world markets. Murray Fulton, Bruno Larue, and Michele Veeman (Chapter 8) demonstrated that analyzing the impact of STEs is a complex issue with no clear-cut answer. The issue requires a case-by-case analysis. The appropriate question to ask is, What is the impact on trade with and without the STE in place? This analysis will be information-intensive and has only just begun. The second difficulty in assessing further disciplines on STEs is ambiguity over what is being proposed. To date, U.S. government position statements submitted to

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the WTO have not included any specific proposals on how further discipline on STEs would be achieved.

REGIONAL TRADE AGREEMENTS

The question of the role of regional trade agreements in promoting multilateral liberalization is more of a question of what will happen if tangible progress on multilateral liberalization is not achieved. Issues related to this question were addressed in Part 3. Regional trade agreements are not a new phenomenon, but their recent proliferation challenges the trade agenda. Although such agreements can be beneficial to members of a pact, do they make other members of the international community worse off? Some argue that regional trade agreements are inherently discriminatory because they give preferences to members and are therefore inconsistent with the global community’s commitment to multilateral reform. Others argue that this type of trade liberalization has dynamic effects that are likely to lead to global liberalization. Tim Josling (Chapter 9) stated that regional bodies may resume their roles as engines of international integration if there is no WTO progress. However, agriculture has been excluded from many of the regional agreements (e.g., Canada’s supply managed sector is excluded from the North American Free Trade Agreement), so more regional trade agreements could put agriculture at a disadvantage relative to industrial product trade liberalization. Although agriculture has not been entirely excluded from the process under the General Agreement on Tariffs and Trade (GATT) since 1947, until the Uruguay Round it had been affected by a large number of exemptions and in effect was largely excluded from the disciplines of the GATT. The Uruguay Round Agreement on Agriculture began to reverse the exemptions; however, trade liberalization of the agricultural sector lags behind industrial products. A proliferation of regional agreements that exclude agriculture would put agriculture even farther behind in the liberalization process and delay the point of convergence when agriculture has the same level of protection as the rest of the economy. Europe’s protectionist and interventionist policies would be extended with eastward expansion of the European Union. Alan Swinbank and Carolyn Tanner (Chapter 10) stated that this expansion would cause problems for both Europe’s adherence to its WTO commitments and the welfare of third countries. The prospects for further global agricultural trade liberalization are weakened by EU enlargement to include Central and Eastern European countries. John Gilbert, Robert Scollay, and Thomas Wahl (Chapter 11) deter-

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mined that the issues in the agriculture policy debate within the AsiaPacific Economic Cooperation (APEC) process are the same issues as in the WTO negotiations. APEC has an objective of complying with the WTO and promoting expedited WTO reform. APEC’s vision of “open regionalism” extends the benefits of liberalization for the region to the rest of the world. The authors demonstrate that capacity-building reduces the negative impacts of integration for constituents of APEC and that unconditional APEC liberalization can have positive welfare effects across member and nonmember countries. This is one measure that could be considered a stepping-stone toward more widespread liberalization. Regionalism can promote multilateral liberalization, but apart from the APEC effect there is not much evidence of it. Regionalism, as a whole, appears to be a stumbling block.

NONTRADE CONCERNS

Nontrade concerns are examined in Part 4. At the heart of all nontrade concerns is the state’s sovereign right to pursue domestic policies without the constraint of international agreements. This has been an issue since the very first attempts at multilateral trade liberalization. The term nontrade concerns, as it appears in the Agreement on Agriculture, presents a possible way to circumvent that agreement’s domestic support commitments. Although there are legitimate reasons for governments to intervene to protect the public interest, the resulting policies can also be used to protect domestic interests from international competition. The challenge is to strike a proper balance between protecting the public interest and disallowing protectionism. This is what the SPS Agreement is all about. Traditionally, protectionism has been directed at the interests of producers. However, new calls for protectionism are coming from consumerinterest groups faced with imperfect information about product attributes. This is at the heart of the issues in the EU beef hormone case and in much of the controversy over GMOs. The idea that consumers should be protected from nontangible threats, which may or may not develop into a serious problem, is at the heart of many recent calls for protectionism based on precautionary motives. James Rude’s discussion of multifunctionality (Chapter 12) shows how some interest groups wish to roll back the Agreement on Agriculture’s provisions on domestic support in order to achieve certain domestic objectives. Rude sees these objectives largely as disguised protectionism. His proposed remedies to the problems raised by multifunctionality are case-specific and require large amounts of information. He argues that it would be difficult to come up with a general set of rules for exceptions to the disciplines on

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domestic support that would appropriately address the problem while not simultaneously distorting trade. Kenneth Thomson (Chapter 13) stated that rural development is an evolutionary process, one that has largely not been affected by trade liberalization. Where rural development can become an issue is in the context of multifunctionality. One can respond that although multifunctionality may be a code word for protectionism, there are nevertheless legitimate issues at stake as well.5 Addressing multifunctionality will slow the negotiations process whether or not multifunctionality includes legitimate policy measures. Jill Hobbs (Chapter 14) examined the role of labeling in this controversy. She explained that although more labeling is desirable because it provides more information, it also increases the transaction costs of foreign competitors. There are complex issues yet to be resolved. How will labeling and other methods for establishing product quality be used? Will these procedures be judged consistent with WTO agreements? These complex issues cannot be quickly resolved. Trade liberalization means that countries are less able to use conventional trade barriers—tariffs and quotas—to restrict trade. Regulations justified by supposed health and environmental concerns may therefore become more attractive to countries wanting to restrict imports from other countries. Donna Roberts (Chapter 15) examined the evolution of the SPS Agreement since its inception 1995. She showed that for the most part it has worked. However, there are very real pressures to reopen the agreement in order to consider factors not subject to scientific assessment. The pressures to reform something that is working can only be considered a stumbling block to liberalization.

WHERE DO WE GO FROM HERE?

It is unlikely that agricultural trade negotiations will really get going until at least 2002. At that time, many factors converge. The peace clause 6 expires at the end of 2003. A new U.S. farm bill will be drafted in 2002. The U.S. administration requires fast-track negotiating authority that will not be in place until at least 2001 and probably later. It is unlikely that the schedule of negotiations for agriculture will diverge too much from the overall WTO negotiations because a number of issues are shared among the sectors. State trading enterprises are primarily an agricultural concern, but other sectors have such enterprises as well. Genetic engineering is an issue of concern for the agrifood sector as well as the pharmaceutical industry. Competition policy cannot be applied to just one sector and not the rest of the economy. Even rural development is a broader issue than just agricul-

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ture. The pace of the agricultural negotiations has linkages with broader negotiations, so the agricultural negotiations cannot precede or lag behind a comprehensive negotiating package by any great degree. There is a common apprehension that this round of negotiations will take a long time to complete.7 One common attitude—“if we can just hang on until there is a level playing field”—has to be adjusted to the reality that any negotiations will be protracted. Thus, multilateral negotiations might not provide a quick solution to the current low commodity prices. The role that the emerging issues discussed above will play in slowing the negotiations is not clear. We can get a sense of how long the delay will be only when the negotiations begin in earnest. The emerging issues will influence the eventual success or failure of the negotiations. In the meantime, it is up to the research community to fill the knowledge gaps relating to these emerging issues.

NOTES 1. This section is based on the remarks made by four speakers at the concluding session of the conference from which this volume developed. These concluding remarks were not provided in formal papers, and the discussion in this chapter provides a summary of these remarks. Two of our concluding speakers specifically addressed the prognosis for a successful round of agricultural negotiations. Mike Gifford (former chief Canadian agriculture trade negotiator) discussed obstacles within the WTO negotiating environment that will either hinder or help the negotiating process. Grace Skogstad (professor of political science at the University of Toronto) discussed external pressures outside the formal agriculture negotiating process. Tom Johnson (professor of agricultural economics at the University of Missouri–Columbia) and Harvey Brooks (formerly with the Saskatchewan Wheat Pool) commented on the prospects for a successful round in their discussion of future key issues for the Canadian agricultural sector. 2. This derives from nonpublished concluding remarks by Mike Gifford. 3. Ibid. 4. This derives from nonpublished concluding remarks by Grace Skogstad. 5. This derives from nonpublished concluding remarks by Tom Johnson. 6. Article 13 (the due restraint clause) of the Agreement on Agriculture protects countries using subsidies that comply with the agreement from being challenged under other WTO agreements. 7. Derived from nonpublished concluding remarks by Harvey Brooks.

Acronyms

ABAC ACP AFS AIA AMS APEC APTA ASC BFTA BSE BSP Bt BULOG CACM CAP CARIBCAN CBD CBI CBM CCC CEECs CEFTA CER CES CET CH4 CO2 Codex

APEC Business Advisory Council African, Caribbean, and Pacific countries APEC Food System advanced informed agreement Aggregate Measure of Support Asia-Pacific Economic Cooperation Andean Pact Trade Agreement Australian Sugar Corporation Baltic Free Trade Area bovine spongiform encephalopathy BioSafety Protocol insect resistance Badan Urusan Logistik Central American Common Market Common Agricultural Policy Caribbean countries Convention on BioDiversity Caribbean Basin Initiative Continental Barley Market Commodity Credit Corporation Central and Eastern European countries Central European Free Trade Area Closer Economic Relations Agreement constant elasticity of substitution common external tariff methane carbon dioxide Codex Alimentarius Commission

325

326 COFCO CTE CWB CWRS DHC DNS DSB DSM EC Ecotech ECTI EEA EEC EEP EFTA EU EVSL FTAA FTN GATS GATT GIs GM GMOs GTAP GURTs HRW IPCC IPPC ISPMs ITO JFA kg/ha LAFTA MAC MEAs MFA MFN MMPA mmt MNEs MOU

ACRONYMS

China National Cereals, Oils, and Foodstuffs Import and Export Corporation Committee on Trade and Environment Canadian Wheat Board Canadian Western Red Spring domestic human consumption Dark Northern Spring Dispute Settlement Body dispute settlement mechanism European Communities economic and technical cooperation European Union–Canada Trade Initiative European Economic Area European Economic Community Export Enhancement Program European Free Trade Association European Union Early Voluntary Sectoral Liberalization Free Trade Area for the Americas free trade network General Agreement on Trade in Services General Agreement on Tariffs and Trade geographical indications genetically modified genetically modified organisms Global Trade Analysis Project genetic use restriction technologies Hard Red Winter Intergovernmental Panel on Climate Change International Plant Protection Convention International Standards for Phytosanitary Measures International Trade Organization Japanese Food Agency kilograms per hectare Latin American Free Trade Area minimum access commitment multilateral environment agreements Multi-Fibre Agreement most-favored-nation Marine Mammal Protection Act million metric tonnes multinational enterprises memorandum of understanding

ACRONYMS

MRA MSG N2O NAFTA NEG NGOs NZDB OECD OFA OIE PPMs QSC rDNA RIs ROW RTAs SPS SPS Agreement STEs TBT TEP TILF TRIPS Agreement TRQ TT UNEP UNFCC URA URAA USITC VERs WIPO WTO WTO/GATT

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mutual recognition agreement Meyers Strategy Group nitrous oxide North American Free Trade Agreement new economic geography nongovernmental organizations New Zealand Dairy Board Organization for Economic Cooperation and Development off-farm activities International Office of Epizootics production and processing methods Queensland Sugar Corporation recombinant DNA regional initiatives rest of the world regional trade agreements sanitary and phytosanitary Agreement on the Application of Sanitary and Phytosanitary Measures state trading enterprises Agreement on Technical Barriers to Trade Transatlantic Economic Partnership trade and investment liberalization and facilitation Agreement on Trade Related Aspects of Intellectual Property tariff rate quota technology transfer United Nations Environment Program United Nations Framework Convention on Climate Change Uruguay Round Agreement Uruguay Round Agreement on Agriculture U.S. International Trade Commission voluntary export restraints World Intellectual Property Organization World Trade Organization World Trade Organization/General Agreement on Tariffs and Trade

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The Contributors

Philip Abbott is professor in the Department of Agricultural Economics at Purdue University. He spent the 1988–1989 academic year at the Mediterranean Economic Institute in Montpelier, France, and the 1998 calendar year at Al Akhawayn University in Ifrane, Morocco. Professor Abbott has consulted for several domestic and foreign government agencies, the United Nations Food and Agriculture Organization, commissions on food policy issues, and private agencies. Don Buckingham is a lawyer academic who researches and teaches in the fields of international trade law, food and agricultural law, human rights, and environmental law. He is an associate professor at the University of Ottawa, Section de Common Law programme francais, and a research fellow at CSALE in Saskatoon, Saskatchewan, Canada. Murray Fulton is head of the Department of Agricultural Economics and a fellow of the Center for the Study of Cooperatives at the University of Saskatchewan. His research and teaching interests are focused in several areas, including industrial organization, agricultural industry analysis, cooperative theory, and agricultural policy. John Gilbert is with the International Marketing Program for Agricultural Commodities and Trade at Washington State University. His specializations include international agricultural trade with an emphasis on Asia-Pacific relations. Richard Gray is associate professor, Department of Agricultural Economics, and director of the Center for Studies in Agriculture Law and Environment at the University of Saskatchewan. He serves as a university member on the National Agriculture and Agri-Food Table for Climate Change. 335

336

THE CONTRIBUTORS

Jill Hobbs joined the Department of Agricultural Economics at the University of Saskatchewan in July 1999. Her research interests include international agrifood marketing, supply chain management, the economics of food safety, and quality assurance and transition of the agrifood sector in Central and Eastern Europe. Tim Josling is professor at the Food Research Institute, Stanford University, Stanford, California. In 1997 he moved to the Institute for International Studies, Stanford University, where he is a senior fellow and convenor of the European Forum. His research interests include industrial country agricultural and food policies, international trade in agricultural commodities, the process of economic integration, and the development of the global trade system. William Kerr is Van Vliet Professor, Department of Agricultural Economics, University of Saskatchewan. His research centers on international commercial policy. He is a member of the Canadian Agri-Food Trade Research Network and is the editor of The Estey Centre Journal of International Law and Trade Policy. Bruno Larue is a professor of agricultural economics at Laval University and a member of the Centre for Research in the Economics of Agri-Food (CREA). His current research spans international trade, industrial organization, and consumer economics. He is also an editor for the Canadian Journal of Agricultural Economics. Hans J. Michelmann is professor of political studies and associate dean (Social Sciences) at the University of Saskatchewan. His research and teaching interests are in comparative government and politics, with emphasis on Western Europe, public policy, and public bureaucracy. He has written and edited books and articles on these topics. W. M. Miner is a private trade consultant and a research associate of the Center for Trade Policy and Law. He is also a founding director and member of the International Policy Council on Agriculture, Food, and Trade, and is a member of the International Agricultural Trade Research Consortium. Peter Phillips is professor of agricultural economics in a five-year NSERC/SSHRC Chair in Managing Knowledge-Based Agri-Food Development at the University of Saskatchewan. His current research program concentrates on issues related to biotechnology and agriculture. He has research under way on intellectual property rights, trade issues, and

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consumer acceptance for genetically modified foods. He is a member of the Canadian Biotechnology Advisory Committee, director of the Canadian Agri-Food Trade Research Consortia, and founding member of the International Consortia on Ag-Bio Research based in Rome. Donna Roberts is an economist with the U.S. Department of Agriculture, Economic Research Service. Her research has focused on technical trade barriers, including sanitary and phytosanitary measures. She served on the U.S. Trade Representative’s Trade Policy Subcommittee on Sanitary and Phytosanitary Measures before moving to the U.S. Permanent Mission to the World Trade Organization in Switzerland in 1996. In her current position, Roberts continues her research on a variety of topics related to technical barriers, also serving as a U.S. delegate to the WTO’s Committee on Sanitary and Phytosanitary Measures. James Rude is a research scientist with the Department of Agricultural Economics, University of Saskatchewan, and a member of the Canadian Agri-Food Trade Research Network. His primary areas of research are trade policy and trade analysis. C. Ford Runge currently holds several joint positions at the University of Minnesota. He is Distinguished McKnight Professor in the Department of Applied Economics, professor of applied economics and law in the Center for International Food and Agricultural Policy, and professor at the University of Minnesota School of Law. He also holds adjunct professorships at the Hubert H. Humphrey Institute of Public Affairs and the Department of Forest Resources. His areas of research interest are agricultural policy analysis and land use and environmental policy. Andrew Schmitz holds the Ben Hill Griffin Jr. Chair in the Department of Food and Resource Economics, University of Florida, and is a research professor at the University of California–Berkeley. He is a fellow of the AAEA. His research interests include international trade, welfare economics, and agricultural policy. He has served as a consultant to governments in Canada and the United States, and is a popular speaker on policy issues. Troy Schmitz is assistant professor, Morrision School of Agribusiness and Resource Management, at Arizona State University. His research includes international agricultural policy, measuring the effects of advertising on the demand for food, E-commerce issues in agribusiness, and computer applications for agribusiness industries.

338

THE CONTRIBUTORS

Robert Scollay is director of the APEC Study Centre and a member of the Economics Department at the University of Auckland, New Zealand. He has published in the areas of international trade and macroeconomics. His current research is focused on trade policy issues, with particular emphasis on regional trade agreements and trade in the Asia-Pacific region. Jack Stabler is professor and head, Department of Agricultural Economics, at the University of Saskatchewan. He is the author or editor of numerous books and articles concerning rural, urban, and regional economic development. He has also written extensively on the transitions in Canadian and U.S. rural communities. Gary Storey is professor of agricultural economics at the University of Saskatchewan. His areas of specialization include marketing, trade, and policy. He has completed studies on the Canadian rye industry, the coordination and vertical integration of the domestic and international pork industries, and barley malting under the Canadian Wheat Board. Alan Swinbank is professor of agricultural economics at the University of Reading, U.K. His research focuses on the food and farm policies of the European Union, their trade ramifications, and the process of food and farm trade liberalization in the GATT/WTO. He has written extensively on these topics and was coauthor (with Carolyn Tanner) of Farm Policy and Trade Conflict: The Uruguay Round and CAP Reform. Recent consultancies have involved work for Britain’s Department for International Development on the Agreement on Sanitary and Phytosanitary Measures, and the future of the Lomé Convention for the Commonwealth Secretariat. Carolyn Tanner is a senior lecturer in agricultural economics at the University of Sydney. Her recent publications cover agriculture in the multilateral trade negotiations, regional trade agreements, and quarantine policy. She is a former editor of the Australian Journal of Agricultural Economics, and in 1995 she became the first female president of the Australian Agricultural and Resource Economics Society. Kenneth Thomson is professor in the Department of Agriculture, University of Aberdeen, Scotland. His main research interests are in European agricultural policy; especially the European Union’s Common Agricultural Policy (CAP); and various other central European countries such as Poland and Romania. He also has interests in econometric modeling, rural regional economics, and forestry policy in Scotland and elsewhere. He has been a frequent writer and conference speaker on CAP

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developments and on international agricultural trade; he has acted as a consultant to the European Commission, various U.K. government agencies, and the FAO. Michele Veeman chairs the Department of Rural Economy at the University of Alberta. Her specializations include agricultural marketing and trade. Thomas Wahl is an associate professor in the Department of Agricultural Economics, Washington State University. His research interests include international marketing and trade as well as food demand analysis. Dr. Wahl works closely with the IMPACT Center at Washington State and has been involved in projects focusing on trade policy, food demand in the Pacific Rim, and world wheat trade. He is also the director of the APEC Study Center for Food Systems at Washington State, which focuses on food trade–related issues in the Asia-Pacific Economic Cooperation process. Linda Young is currently undertaking research, at Montana State University, on more productive processes to resolve international agricultural trade conflicts. Her research is focused on trade disputes between the Canadian and U.S. cattle industries as well as WTO negotiation issues. She recently completed five years as Agricultural Policy Coordinator with the Trade Research Center, and she has worked at the Australian Bureau of Agricultural Economics and at Purdue University.

Index

Accepted retaliation, 54 ACP. See African, Caribbean, and Pacific countries Acquis communautaire, 204 Advanced informed agreement (AIA), 86 African, Caribbean, and Pacific countries (ACP), 175, 181, 183–187 AFS. See APEC Food System Agenda 2000, 207–209, 212(n8), 261 Aggregate Measure of Support, 14, 242 Agreement for Scientific and Technological Cooperation, 81 Agreement on Agriculture. See Uruguay Round Agreement on Agriculture Agriculture and Agri-Food Climate Change Table, 3, 44–48 AIA. See Advanced informed agreement Algeria: wheat trading, 114 Allergens, labeling of, 278 Amber box, 242–243, 242(fig.) Amsterdam Treaty, 211(n1) Andean Pact Trade Agreement, 176, 186, 188 Animal welfare, 78–79; labeling, of goods, 271 Antidumping legislation, 107, 124, 141, 153 Antitrust violations and legislation, 142, 152, 158 APEC. See Asia-Pacific Economic Cooperation APEC Food System (AFS), 216–233; AFS proposal, 217–218; modeling

techniques for liberalization, 218–223; open regionalism, 222–223; and TILF, 223; welfare effects of agricultural reform with capacity-building, 228(fig.) Appellation labels, 273–274 Applied general equilibrium, 216–217 Arbitrage, 174–175 Argentina, 70, 71(table), 178 ASEAN. See Association of Southeast Asian Nations Asia-Pacific Economic Cooperation (APEC), 7, 171, 191, 215–233, 321; agricultural/industrial wages, 230(fig.), 232(fig.); effect on trade policy, 180–181; excluding agriculture from liberalization programs, 215–216; inclusion of agriculture in trade agreements, 177; labor growth, 234(table); member states, 234(n1); welfare effects of agricultural reform, 224(fig.), 229(fig.). See also APEC Food System Asia-Pacific region, 193(n14), 215–233 Association of Southeast Asian Nations (ASEAN), 177–180, 188, 191, 193(n13) Australia: amber box programs, 242(fig.); Australian-Canadian salmon dispute, 304–305, 311(n33); domestic support, 2; food labeling, 277; GM products, 71(table), 76–77; inclusion of agriculture in trade agreements, 178; labor growth,

341

342

INDEX

234(table); liberalization, 222–223; price discrimination legislation, 158; regional trade agreements, 212(n4); SPS dispute settlement, 302(table), 303(table); state trading enterprises, 100; trade diversion and erosion, 200; welfare effects of agricultural reform with capacity-building, 229(fig.); welfare effects of capacity-building, 225(fig.). See also AsiaPacific Economic Cooperation Australian Sugar Corporation. See Queensland Sugar Corporation Australian Wheat Board (AWB), 5; annual export value, 112; classification of, 101, 113, 162; STEs in international agricultural markets, 134(table); Uruguay Round Agreement terms, 104; wheat and barley trading, 113–114 Badan Urusan Logistik (BULOG): as importer, 133; STE classification, 101, 164; STEs in international agricultural markets, 134(table); Uruguay Round Agreement terms, 112; wheat and barley trading, 114. See also Indonesia Baltic Free Trade Area (BFTA), 177, 203 Banana trading, 185 Barley trading, 113–118; CWB and EEP, 119–120; CWB premiums, 125–126; impact of CWB on Canadian production, world price, and trade, 126(table); mean difference test of CWB barley prices, 116(table); STE classification, 162–164. See also Grain production and trade Beef-feeding industry, 30(n3) Beef hormone case, 301–304, 306, 321 Beef industry: evaluating trade-environment interactions, 21–22; market power control by STE, 138; methane emissions, 43–44 Belgian dioxin scandal, 283 Benefits, of environmental measures, 19(fig.), 20, 32(n12) Berlin Summit, 210 BioSafety Protocol (BSP), 77, 85–88;

food labeling, 275, 279–280; inadequacy of, 93–94; international GM product regulation, 77–78, 78(table) Biotechnology, 68–69; application of the precautionary principle, 62–63; competing regulatory approaches for agricultural biotechnology, 76(table); diffusion of, 69–73; domestic regulation of, 73–77; enforcing biotechnology regulations, 90–91; national and international undertakings on genetic resources, 75(table); negotiations for standards and regulations, 88–93. See also Genetically modified products Bird species protection, 28–29, 32(n17) Blue box, 252(n3) Brazil: Canadian wheat exports, 114(fig.); inclusion of agriculture in trade agreements, 178; preferential agreements, 186; SPS dispute settlement, 302(table), 303(table) British Commonwealth, 175–176 Bruntland Commission, 39 BSP. See BioSafety Protocol BULOG. See Badan Urusan Logistik Burdens, of environmental measures, 19(fig.), 20–22 Bush, George W., 181 Cairns Group, 194(n18), 239, 242, 252(n2) CAM. See Central American Common Market Canada, 178; Australian-Canadian salmon dispute, 304–305, 311(n33); biotechnology negotiations, 81–82; carbon dioxide/carbon exchange, 43(fig.); change in carbon content in agricultural soils, 44(fig.); domestic regulation of GM products, 76–77; EU beef hormones case, 306; exports of living seed, 73(table); food labeling, 276–277; future negotiation issues, 316–317; GM products, 71(table), 279–280; greenhouse gas emissions, 39, 41–48, 42(table); import and export of GM crops, 70–71; labor growth, 234(table); postwar regionalism, 175–176; regional trade agreements,

INDEX

172–173, 192; relevant markets, of competition, 155; rural farm communities, 246–247; SPS dispute settlement, 302(table), 303(table); state trading enterprises, 100; welfare effects of agricultural reform with capacity-building, 229(fig.); welfare effects of capacity-building, 225(fig.); wheat-dumping case, 124; wheat export markets average, 114(fig.); wheat trading, 114. See also Asia-Pacific Economic Cooperation; Canadian Wheat Board Canada–United States Free Trade Agreement, 1, 153, 166(n4) Canadian Climate Change Model, 39 Canadian Wheat Board (CWB), 5; annual export value, 112; Canadian bulk durum exports, 121(table); classification of, 101, 113, 162; daily export sales, 118(table); Export Enhancement Program and, 119–120; government policy and, 120–123; grain import licensing, 166(n4); impact of CWB on Canadian production, world price, and trade, 126(table); mean difference test of CWB barley prices, 116(table); premium on wheat export sales, 117(table); price discrimination, 114–118, 123–126, 129–130; as state trading enterprise, 126–127, 162–163; STEs in international agricultural markets, 134(table); Uruguay Round Agreement terms, 104; wheat and barley trading, 113–114 Canola production: Canadian export of living seed for, 73(table); countries allowing GM production, 71(table); distribution of production and trade of GM crops, 72(table); GM labeling, 273, 281; segregating GM and non-GM products, 88 CAP. See Common Agricultural Policy Capacity-building measures, 215–233; agricultural/industrial wages, 232(fig.); rural policy, 226–233; welfare effects of agricultural reform, 225(fig.), 228(fig.), 229(fig.) Capper Volstead Act, 152

343

Carbon dioxide/carbon cycle, 41–42, 43(fig.); change in carbon content in agricultural soils, 44(fig.) Caribbean Basin Initiative (CBI), 184–185 Caribbean Basin Recovery Act, 186 CARIBCAN Agreement, 175–176, 185 CARICOM, 176, 185–186, 188 Cartagena Protocol, 85, 87, 279 CBD. See Convention on BioDiversity CBI. See Caribbean Basin Initiative CCC. See Commodity Credit Corporation CEEC. See Central and Eastern European Countries CEFTA. See Central European Free Trade Area Central America, 186 Central American Common Market (CAM), 176 Central and Eastern European Countries (CEEC), 6–7, 197–211; basic data on EU applicants, 203(table); EU enlargement, 202–210, 203(table); EU preferential trade agreements, 202–210; incorporating agriculture into trade policy, 176–177; STE coexistence with private firms, 143–144; tariff rate quota and, 144 Central European Free Trade Area (CEFTA), 177, 202–203, 212(n7) Chicken war, 199 Chile, 172, 185–186, 294. See also Asia-Pacific Economic Cooperation China: agricultural/industrial wages with agricultural reform, 230(fig.), 232(fig.); Canadian wheat exports, 114(fig.); GM crops, 70, 71(table); labor growth, 234(table); regionalism, 181; state trading enterprises, 138, 143–146, 164; U.S. wheat exports, 115(fig.); welfare effects of agricultural reform with capacitybuilding, 229(fig.). See also AsiaPacific Economic Cooperation China National Cereals, Oils, and Foodstuffs Import and Export Corporation (COFCO), 133; annual export value, 112; classification of, 113; CWB and agricultural policy, 122–123; government policy, 121;

344

INDEX

STE coexistence with private firms, 145–146; STEs in international agricultural markets, 134(table); tariff rate quota, 144; wheat price discrimination, 129–130; wheat trading, 114 Climate change, 3, 37–49. See also Greenhouse gas emissions Clinton, Bill, 60 Closer Economic Relations Agreement (CER), 177–178, 193(n13) Clothing. See Textiles Club goods, 249 Code of Good Process, 31(n7) Codex Alimentarius Commission (Codex), 78–79, 92–93, 275, 278–279, 288, 298–300 Codex Committee on Labeling, 271–273 Codex Statements of Principle Concerning the Role of Science in the Codex Decision-making Process, 289, 300 Coercive interests, 57–59 COFCO. See China National Cereals, Oils, and Foodstuffs Import and Export Corporation Colombia, 114(fig.), 186 Committee on Food Labeling, 278 Committee on Trade and the Environment (CTE), 61–64 Commodity Credit Corporation (CCC), 104, 112–114, 127 Common Agricultural Policy (CAP), 6–7, 197–198; Agenda 2000, 207–210; EU enlargement and, 203–204; inclusion of agriculture in trade agreements, 177; rural economic policy, 260–261; trade diversion, 198–200 Common External Tariff (CET), 193(n12) Competition, 2; climate change and trade policy, 48–49; enhancement through price discrimination, 157–158; foreign competition and protectionism, 59–60; state trading enterprises, 5–6, 102–105, 137, 151–153; WTO regulation for competition policy, 141 Competition Bureau (Canada), 155–156 Competition policy, 107, 147

Competitor discounts, 116 Comprehensiveness, of APEC liberalization, 215 CONASUPO, 133, 134(table) Conditional liberalization, 223, 224(fig.) Conference on Environment and Development, 62 Conflict resolution, 83–84 Consensus documents, 80–81 Conservation Reserve Program, 29 Consultative Group for International Agricultural Research, 90–91 Consumer-focused labeling, 8–9, 269–273 Consumer-interest groups, 321 Consumer issues, 8–9, 269–274; food labeling, 269–284 Contestability, of competition, 142–143, 153–156, 158–164, 160(table), 165(n1) Continental Barley Market, 116 Convention on BioDiversity (CBD), 62, 86, 289 Convention on Climate Change, 62 Convention on the Illicit Trade in Endangered Species, 89 Corn production. See Maize production Cotonu Agreement. See Lomé Convention Cotton production, 71(table) Country-of-origin labeling, 274, 282–283 Credence attributes, of goods, 270–271, 280 Crops: GM products, 69–73; IPPC, 79–80; OECD regulation of GM products, 80–81; SPS disputes, 83–84 Cross-notification process, 291–293, 292(table) Crow Benefit, 121 CTE. See Committee on Trade and the Environment Customs unions, 197 CWB. See Canadian Wheat Board Dairy industry, 133–135; equivalence agreements, 297; milk quotas, 193(n14), 209–210, 212(n9); trade diversion, 174

INDEX

Deepening, 187–189 Deterritorialization, 255 Developing countries: disputes over biotechnology regulations, 91; equivalence agreements, 297; GM products, 74–75; intellectual property rights, 55–56; Kyoto Accord, 39–41; negotiation issues, 316–317; preferential trade agreements, 183–187; SPS cross-notification process, 291–293, 292(table); state trading enterprises, 100; trade patterns in agricultural, forestry, and fishery products, 309(table); trade sanctions, 57–59 Development: AFS proposal, 224–225; rural economic policy, 261 Dioxin scandal, 283 Discrimination, trade. See Mostfavored-nation status; Price discrimination Disease control, 9. See also Biotechnology; Sanitary and Phytosanitary Measures Agreement Dispute settlement: AustralianCanadian salmon dispute, 311(n33); beef hormones case, 301–304; biotechnology regulations, 91; green-box policies, 263; salmon and varietal testing disputes, 304–305; SPS Agreement, 300–306, 302(table), 303(table), 305–306; SPS cross-notification process, 291–293, 292(table); WTO system, 83–84 Dispute Settlement Body (DSB), 83 Dispute Settlement Understanding, 300 Dolphin dispute. See Tuna-dolphin dispute Domestic market support, 2 Domestic trade policy: market power control, 138; multifunctionality, 240; STE effect on, 137; trade deflection, 174–175 Drug trade, 185–186 DSB. See Dispute Settlement Body DSU. See Dispute Settlement Understanding Dumping, export, 107, 124, 128–130, 141, 153

345

Ecolabeling, 272 Economic and technical cooperation (Ecotech), 218, 223, 226–228, 231 Economic integration, 176 Economic jointness, 244 Economic sanctions, 57–59 Economies of scale, 165(n3) Ecuador, 186 EEC. See European Economic Community EEP. See Export Enhancement Program EFTA. See European Free Trade Association Egypt: low-quality subsidies, 140–141; U.S. wheat exports, 115(fig.); wheat trading, 114 Emissions. See Greenhouse gas emissions Enlargement, of the European Union, 6, 191, 202–210, 203(table), 320 Environmental damage: agricultural subsidies, 27; genetically modified organisms, 27–29; institutional response to, 14–16; linking damage to trade, 19, 19(fig.) Environmental measures, 30(n1) Environmental policy, 29–30, 30(n3), 248–249; agricultural trade and, 2–4; Committee on Trade and the Environment, 61–64; ecolabeling, 272; effects on trade, 16–19; environmental and regulatory implication of trade measures, 15(fig.), 21–22, 25(fig.), 26(fig.); evaluating trade-environment interactions, 13–19, 17(fig.), 20–22, 24(fig.), 25(fig.), 26(fig.); greenhouse gases and climate change, 37–49; impact on future negotiations, 318; influencing WTO policy, 57–61, 64–65; Millennium Round negotiations, 264–266; NGO access to WTO negotiations, 56–57; product transformation curve, 24(fig.); rural economic policy and, 259–264; targets and instruments principle, 23; WTO and, 53–65. See also Biotechnology; Genetically modified products; Sanitary and Phytosanitary Measures Agreement

346

INDEX

Environmental Protection Agency (EPA), 28 Equivalency, of measures, 295–298, 311(n21) Ethical issues. See Biotechnology; Genetically modified (GM) products; Labeling Euro-Med Agreements, 181 Europe Agreements, 181, 198 European Communities (EC), 197, 199(table) European Economic Area (EEA), 177, 201–202 European Economic Community (EEC), 176 European Free Trade Association (EFTA), 176, 197, 200–202 European Union (EU), 1–2; Agenda 2000, 207–209, 212(n8), 261; amber box programs, 242(fig.); beef hormones case, 301–304, 306, 321; BioSafety Protocol stance, 87; centralized foreign trade policy, 181; competing regulatory approaches for agricultural biotechnology, 76(table); CWB and Export Enhancement Program, 119–120; domestic regulation of GM products, 76–77; Eastern Europe, 191, 197–211, 203(table); European Council, 212(n12); EU–U.S. veterinary agreement, 296; food labeling, 276–277; future negotiation issues, 316–317; GM products, 81, 297; impact of enlargement on global trade, 6, 191; Kyoto Accord, 40–41; labor growth, 234(table); market power control by STEs, 138; Millennium Round negotiations, 264–265; multifunctionality, 242; postwar regionalism, 175–176; preferential trade agreements, 183–187, 201–202; rural economic policy, 260–261; SPS dispute settlement, 302(table); state trading, 104–107, 138; targets and instruments principle applied to subsidies, 23; U.S. tuna embargo, 58; welfare effects of agricultural reform, 229(fig.); welfare effects of capacity-building, 225(fig.); wheat and barley trading,

113; widening and deepening of integration, 187–188. See also Common Agricultural Policy Experience attributes, of goods, 270 Export dumping, 107, 124, 128–130, 141, 153 Export Enhancement Program (EEP), 119–120, 119(fig.), 138 Export tax, 140–142 Externalities, 8, 240–241, 251–252; corrective policy instruments, 243–244; environmental, 248–249; food security as, 246; rural areas, 247 FAO. See Food and Agriculture Organization Farm income support, 24(fig.), 25(fig.) Fishing industry, 31(n11); AustralianCanadian salmon dispute, 304–305, 311(n33); dispute settlement, 83–84, 302(table), 303(table); evaluating trade-environment interactions, 22; Marine Mammal Protection Act, 58; salmon and varietal testing cases, 304–305; shrimp-turtle dispute, 18, 31(n4); trade patterns in agricultural, forestry, and fishery products, 309(table); tuna-dolphin dispute, 16, 31(n4), 58, 276 Fixed-proportions technical jointness, 244 Flaxseed production, 71(table), 72(table), 73(table) Flexibility principle, 215 Food and Agriculture Organization (FAO), 74, 252(n4), 299 Food labeling. See Labeling Food safety, 78–79, 279–280 Food security, 216, 245–246, 250, 252(n4), 264 Foreign policy, 139 Foundation Paper (National Climate Change Secretariat), 41 France: GM crops, 71(table); SPS dispute settlement, 302(table) Free Trade Area for the Americas (FTAA), 177–178, 181, 191, 193(n9) Free trade network (FTN) arrangements, 177

INDEX

Fruit production, 71(table), 72(table) FTAA. See Free Trade Area for the Americas General Agreement on Tariffs and Trade (GATT), 1–2, 5, 320; balancing environmental benefits and damage to trade, 17–19; customs unions, 197; environmental issues, 53–54; exclusion of agriculture from free trade, 200–201; food labeling, 275; international regulation of GM products, 82–85; Lomé Convention, 183; national sovereignty, 239–240; regional trade agreements, 172, 190–191, 192(n4); retaliation through trade measures, 55; tunadolphin dispute, 31(n4). See also Uruguay Round Agreement on Agriculture General Agreement on Trade in Services (GATS), 55–56, 192(n4) General Algebraic Modeling System, 219 General System of Preferences (GSP), 138 Genetically engineered products, 281 Genetically modified (GM) products, 4, 67–68, 318, 321; Canadian export of living seed, 73(table); countries allowing production of GM crops, 71(table); diffusion of biotechnology, 69–73; distribution of production and trade in, 72(table); domestic regulation of, 73–77; environmental impact of, 27–29; equivalency agreements, 297; food labeling, 272–273, 276–281; international regulation of, 77–88, 78(table), 93–94; national and international undertakings on genetic resources, 75(table); negotiations for standards and regulations, 88–93; regional initiatives, 78(table), 81–82; species preservation, 32(n17); technological aspects of, 68–69; U.S. regulation of, 310(n17) Geographical indications, in labeling, 274–276 Germany: CAP reform, 209 Gifford, Mike, 315–316 Global liberalization, 224(fig.),

347

255–256; agricultural/industrial wages with agricultural reform, 230, 230(fig.); impact on small farms, 262–264; management of, 172, 192(n3) GM/GMOs. See Genetically modified products Goals and policies relationship, 22– 27 Grain import licensing, 166(n4) Grain production and trade: Agenda 2000, 207–208; antidumping regulation, 124; Canadian export of living seed, 73(table); countries allowing GM production, 71(table); distribution of production and trade of GM crops, 72(table); grain import licensing, 166(n4); segregating GM and non-GM products, 88; STE classification, 113, 162–164; STE coexistence with private firms, 143–144; STEs as importers, 133–135; STEs in international agricultural markets, 134(table); tariff rate quota, 145; trade diversion, 174 Green-box policies, 13–14, 252(n3); AMS inclusion, 30(n2); disputes procedures, 263; Millennium Round negotiations, 265 Greenhouse effect, 38 Greenhouse gas emissions (GHG), 3, 37–49; Canadian agriculture, 41–44, 42(table); as externality, 248; GHGreduction policy options, 44–48; global warming, 38–39; Kyoto Accord, 39–41; trade policy and climate change, 48–49 GSP. See General System of Preferences Habitat protection, 29 Harmonization, of SPS measures, 298–300 Havana Charter, 102, 152–153 Hazard Analysis and Critical Control Point protocols (HACCP), 92, 296 Health issues. See Sanitary and Phytosanitary Measures Agreement Hormones, in meat, 83–84, 300–304, 306, 321

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Import and export issues. See Grain production and trade; State trading enterprises Import licensing, 166(n4) Import quotas, 128 Income redistribution, 138–142, 144, 228–233 India, 138, 179, 193(n15), 302(table), 303(table) Indonesia: agricultural/industrial wages, 230(fig.), 232(fig.); Canadian wheat exports, 114(fig.); labor growth, 234(table); welfare effects of agricultural reform with capacitybuilding, 229(fig.); welfare effects of capacity-building, 225(fig.). See also Asia-Pacific Economic Cooperation; Badan Urusan Logistik Industry-regulated model, of biotechnology, 92 Insect preservation, 68–69 Intellectual property rights, 55–56 Interest groups, 317, 322 Intergovernmental Panel on Climate Change (IPCC), 38 International Food Policy Research Institute, 90 International Framework Convention on Climate Change, 39–41 Internationalization, 8 International Office of Epizootics (OIE), 78–79, 92–93, 288, 298– 299 International Plant Genetics Resources Institute, 90 International Plant Protection Convention (IPPC), 74, 77–78, 78(table), 79–80, 88–89, 288, 298–299 International Service for National Agricultural Research, 90 International Standards for Phytosanitary Measures (ISPMs), 79–80 International Trade Commission, 163 International Trade Organization (ITO), 54 International Whaling Commission, 56 Internet, 263 Interperiod model, of liberalization, 219–221

Intraperiod model, of liberalization, 218–219 IPCC. See Intergovernmental Panel on Climate Change IPPC. See International Plant Protection Convention Iran, 114, 114(fig.) ISPMs. See International Standards for Phytosanitary Measures Issues-based negotiations approach, to biotechnology regulation, 93 ITO. See International Trade Organization Japan, 2; agricultural/industrial wages, 230(fig.); amber box programs, 242(fig.); Canadian wheat exports, 114(fig.); food labeling, 277; labor growth, 234(table); liberalization, 222–223; multifunctionality, 242; regionalism, 179–180; SPS compliance, 294; SPS dispute settlement, 302(table), 303(table); STEs and market power, 138; U.S. wheat exports, 115(fig.); welfare effects of agricultural reform with capacitybuilding, 229(fig.); welfare effects of capacity-building, 225(fig.). See also Asia-Pacific Economic Cooperation Japan Food Agency (JFA): annual export value, 112; classification of, 101, 113, 164; CWG and agricultural policy, 122–123; as importer, 133; STEs in international agricultural markets, 134(table); wheat and barley trading, 114 Joint Canada-EU Action Plan, 81 Joint products, 22–27, 240–241, 244–245 Kenya Agricultural Research Institute, 74 Korea: agricultural/industrial wages, 230(fig.), 232(fig.); amber box programs, 242(fig.); Canadian wheat exports, 114(fig.); labor growth, 234(table); multifunctionality, 242; regionalism, 179–180; SPS dispute settlement, 302(table); U.S. wheat exports, 115(fig.); welfare effects of agricultural reform with capacity-

INDEX

building, 229(fig.); welfare effects of capacity-building, 225(fig.). See also Asia-Pacific Economic Cooperation Korean Livestock Products Marketing Board, 133, 134(table), 138 Kyoto Accord, 37–49, 318 Labeling, of products, 8–9, 269–284, 321; challenges to trade negotiation, 283–284; economic impact of, 280–283; as environmental protection, 60; international institutions and regulations, 275–280; role and types of food labeling, 269–274; TBT and SPS agreements, 276–277 Labor: agricultural/industrial, 229–233; agricultural/industrial wages, 230(fig.), 232(fig.); effects on liberalization, 218–221; growth of, 222, 234(table); migration of, 234(nn2, 3), 235(n5); mobility of, 218–219; off-farm activities, 226–227; rural development, 246–248 LAFTA. See Latin American Free Trade Area Landscape preservation, 24–26, 24(fig.), 25(fig.), 26(fig.), 248–249 Latin American Free Trade Area (LAFTA), 176, 193(n13) Latin American Integration Association (ALADI), 193(n13) Liberalization, 62, 255; under APEC, 215–233; APEC scenarios, 222–223; impact of Uruguay Round, 262–264; modeling techniques for, 218–223 Licensing arrangements, 145, 166(n4) Lomé Convention, 138, 175, 181, 183–184, 194(nn21, 24), 198 MacSharry, Ray, 207; reforms, 208–209, 211 Maize production, 71(table), 72(table), 73(table). See also Grain production and trade Malaysia, 225(fig.), 229(fig.)–230(fig.), 232(fig.), 234(table). See also AsiaPacific Economic Cooperation Marine Mammal Protection Act (MMPA), 58 Market access, 2 Market conduct, 154

349

Market-failure interests, 57, 59 Market performance, 154 Market power control, 137–143, 147 Market restrictions, 116 Market structure, 154 Mathematical Programming System for General Equilibrium Analysis, 219 Maximum residue levels, of pesticides, 311(n21) MEAs. See Multilateral environment agreements MERCOSUR: commodities, 193(n12); effect on trade policy, 181; expansion of, 191; inclusion of agriculture in trade agreements, 176–178; market access, 194(n22); preferential agreements, 186, 202; widening and deepening, 187–188 Mergers, 155–156 Methane gas, 43–44, 248. See also Greenhouse gas emissions Mexico, 178; agricultural/industrial wages, 230(fig.), 232(fig.); Canadian wheat exports, 114(fig.); EU’s preferential trade agreements, 202; GM product regulation, 71(table), 76–77; grain import licensing, 166(n4); labor growth, 234(table); SPS compliance, 294; tuna-dolphin dispute, 16, 31(n4), 58, 276; welfare effects of agricultural reform with capacitybuilding, 229(fig.); welfare effects of capacity-building, 225(fig.). See also Asia-Pacific Economic Cooperation Meyers Strategy Group, 116 Miami Group, 87 Migration. See under Labor Milk quotas, 193(n4), 209–210, 212(n9) Millennium Round negotiations, 264–266 MMPA. See Marine Mammal Protection Act Modeling techniques, for liberalization, 218–223 Monopoly exporting, 106 Montreal Protocol, 89 Morocco: low-quality subsidies, 140–141 Most-favored-nation (MFN) status: food labeling, 275; liberalization, 222–223, 231; regional trade agree-

350

INDEX

ments and, 182; STE restrictions under WTO, 136–137, 142; welfare effects of agricultural reform, 225–226 Multifunctionality, 3, 7–8, 239–252, 322; APEC liberalization, 216; current negotiations and, 241–243; economic importance of, 243–245; environmental impact of subsidies, 27; food security, rural areas, and environmental protection, 245–249; policy instruments, 249–251; of subsidies, 23–24; targets and instruments, and joint products, 22–27 Multilateral environment agreements (MEAs), 56–58, 61–62, 64–65 Multilateral integration, 171–172 Multilingual labeling, 9 Mundell, Robert, 128 Mutual recognition process, 295– 296 NAFTA. See North American Free Trade Agreement Narcotics trade, 185–186 National Climate Change Secretariat, 41, 44–48 National sovereignty, 239–240, 251, 289 New economic geography (NEG), 257, 259 New environmentalist-protectionist interests, 57, 60–61 New Transatlantic Agenda, 191 New Zealand: amber box programs, 242(fig.); domestic regulation of GM products, 76–77; domestic support, 2; food labeling, 277; inclusion of agriculture in trade agreements, 178; labor growth, 234(table); liberalization, 222–223; SPS dispute settlement, 302(table), 303(table); welfare effects of agricultural reform with capacity-building, 229(fig.); welfare effects of capacity-building, 225(fig.). See also Asia-Pacific Economic Cooperation New Zealand Dairy Board, 5; annual export value, 112; STE classification, 101, 113, 162–163; STEs in international agricultural markets,

134(table); Uruguay Round Agreement terms, 104 NGOs. See Nongovernmental organizations Niche markets, for small farms, 263–264 Nitrous oxide, 42–43 Nondiscrimination, 54–55 Nonexcludability, of goods, 241 Nonfood items, 240–241 Nongovernmental organizations (NGOs), 56–59 Nonreciprocal agreements. See Preferential trade agreements Nonrival nature of goods, 240– 241 Nontrade concerns, 7–9, 321–322 North American Free Trade Agreement (NAFTA), 1, 171; Asian trade integration, 193(n13); effects of trade on the environment, 30(n3); grain import licensing, 166(n4); inclusion of agriculture in trade agreements, 176–177; management of globalization, 188; market access, 194(n22); regional trade agreements, 193(n9); state trading, 105; trade deflection, 174–175; traditional producerprotection interests, 60 Norway: amber box programs, 242(fig.); multifunctionality, 241; SPS dispute settlement, 302(table), 303(table) Nutrition labeling, 270–271 OECD. See Organization for Economic Cooperation and Development Off-farm activities, 226–227, 228(fig.), 231. See also Capacity-building measures OIE. See International Office of Epizootics Open regionalism, 222 Options Reports (National Climate Change Secretariat), 41 Organic labeling, 272 Organization for Economic Cooperation and Development (OECD), 80–81; biotechnology regulation, 92–93; environmental measures and trade, 15; GM product regulation, 77–78,

INDEX

78(table); regional trade agreements, 172; rural areas, 257 Origin, rules of, 174 Our Common Future (Bruntland Commission), 37 Packaging, of products, 60 Pakistan, 115(fig.), 138 Pecuniary economies, 252(n6) Peru, 186 Pest control, 79–80. See also Biotechnology; Sanitary and Phytosanitary Measures Agreement Pesticide use, 27–29, 68–70, 80–81, 311(n21) Philippines: agricultural/industrial wages, 230(fig.), 232(fig.); labor growth, 234(table); U.S. wheat exports, 115(fig.); welfare effects of agricultural reform with capacitybuilding, 229(fig.); welfare effects of capacity-building, 225(fig.). See also Asia-Pacific Economic Cooperation Phytosanitary measures. See Sanitary and Phytosanitary Measures Agreement Portugal: GM crops, 71(table) Postcolonialism, as regionalism, 175 Potato production, 71(table), 72(table), 73(table) Poultry trading, 174, 199, 297 Precautionary principle, 62–63, 87, 289 Preferential liberalization, 223, 224(fig.), 225–226 Preferential trade agreements, 183–187, 192(n1), 193(n5), 198, 201–202 Price discrimination, 5, 116, 142; Canadian Wheat Board, 114–118, 120–126, 129–130; COFCO, 129–130; by destination, 146; enhancement of competition through, 157–158; impact of STEs on price, 164–165; Queensland Sugar Corporation, 128; STEs, price discrimination, and transparency, 156–158; types of, 165(n2); wheat and barley trading, 115–118 Price stabilization, 139 Private firms, 143–144, 146–147 Privatization, 144 Process labeling, of foods, 271

351

Producer-based protection, 63–64 Producer-focused labeling, 8–9, 269, 273–274 Producer support, 139–141 Product transformation curve, 24(fig.) Protectionism, 320–321; ecolabeling as potential source of, 272; environmental interests, 59–60; geographical indications in labeling, 275–276; new environmentalist-protectionist interests, 57, 60–61; producer-based, 63–64; producer-focused labeling, 273–274; SPS Agreement, 287–289, 293–294; tariff protection, 207–208; traditional producer-protectionist interests, 57, 59–60 Quality assurance labeling, 271, 282–283 Queensland Sugar Corporation (QSC), 5; annual export value, 112; classification of, 113; price discrimination, 128; STEs in international agricultural markets, 134(table) Quotas, 259. See also Tariff rate quota Rate of product transformation (RPT), 32(n15) Reciprocal agreements. See Regional trade agreements Reform, agricultural, 223–226; AFS and TILF, 223–233; agricultural/industrial wages, 230(fig.), 232(fig.); welfare effects of, 224(fig.); welfare effects of agricultural reform with capacity-building, 228(fig.), 229(fig.); within-economy income distribution, 228–233. See also Common Agricultural Policy Reformulated gasoline claim, 18 Regional initiatives, for GM regulation, 77, 78(table), 81–82 Regional integration, 171–172 Regionalism, 171–173, 175–180, 222 Regional trade agreements (RTAs), 6–7, 171–173, 192(n1), 320–321; affecting trade policy, 180–182; EU enlargement and, 202–210; EU’s preferential trade agreements, 201–202; exclusion of agriculture from free trade, 200–201; expansion

352

INDEX

of, 191–192; as multilateral agreements, 182; multilateral trade institutions, 189–191; post–Seattle Round development of, 179–180; postwar regionalism, 175–179; preferential agreements, 183–184, 201–202; trade creation, trade diversion, and trade deflection, 173–175; widening and deepening membership and functions, 187–189 Regulations: animal welfare, 271–272; biotechnology, 88–94; competing regulatory approaches for agricultural biotechnology, 76(table); domestic regulation of GM crops, 73–77; enforcing biotechnology regulations, 90–91; environmental and regulatory implication of trade measures, 15(fig.); GM products, 67–68, 77–88; international institutions and, 275–280; national and international undertakings on genetic resources, 75(table); self-regulation of biotechnology, 92; transparency of the SPS process, 290–293. See also Environmental policy; Labeling; Sanitary and Phytosanitary Measures Agreement Relevant markets, of state trading enterprises, 153–156, 158–164 Resistance, to pesticides, 28 Retaliation, 54–55 Rice production, 71(table), 72(table), 73(table), 143–144, 248. See also Grain production and trade Risk assessment, 83–84, 86–87, 288, 293–295, 306–308 Risk management, 293–295. See also Precautionary principle Robinson-Patman Act, 157–158 Romania: GM crops, 71(table) RTAs. See Regional trade agreements Rural areas, 8; capacity-building policy, 226–228; correcting externalities, 246–248, 250–251; development, 322; labor migration, 234(nn2, 3); policy approaches, 256–258 Rural Development Regulation, 261 Rural employment, 247–248 Rural policy, 260–264; diverse approaches, 258–260; globalization,

255–266; lost farmland, 266(n6); Millennium Round negotiations, 264–266 Rural unskilled labor, 220–222 Rural viability, 252(n5) Russia: state trading enterprises, 164 Safe-harbor standards, 288 Salmon and varietal testing cases, 304–305 Sanctions, trade, 57–59 Sanitary and Phytosanitary Measures Agreement (SPS Agreement), 9, 18, 287–308, 322; challenges to, 306–308; dispute settlement, 300–306, 302(table), 303(table); environmental protection interests, 63–64; food labeling, 275–277; harmonization of SPS measures, 298–300; implementation issues, 317; international regulation of GM products, 83–84; regulation by product versus process, 89; risk management and risk assessment, 293–295; transparency of the regulation process, 290–293, 291(fig.). See also International Standards for Phytosanitary Measures Scientific review and consensus approach, to biotechnology regulation, 92 Search attributes, of goods, 270 Seattle negotiations, 1, 56 Security issues, 186 Shrimp-turtle dispute, 18, 31(n4) Singapore: liberalization, 222–223 Single European Act, 211(n1) Single Market Program, 176 Skilled labor, 220–222 Skill formation, 227, 228(fig.), 231. See also Capacity-building measures Social activism labeling, 273 Social/cultural-oriented labeling, 8–9, 269, 274 South Africa, 71(table), 202 South Asia Regional Cooperation Council (SAARC), 193(n15) South Korea. See Korea Sovereignty, national, 239–240, 251, 289

INDEX

Soybean production, 71(table), 72(table), 73(table), 164 Spain, 71(table), 200, 209 Specialization, 8 Species preservation, 28–29, 32(n17), 68–69 Spillover benefits. See Externalities SPS Agreement. See Sanitary and Phytosanitary Measures Agreement Squash production, 71(table), 72(table) Statement of Principles, 289, 300 State trading enterprises (STEs), 4–6, 319–320; analysis of relevant markets, 158–164; bypassing trade agreements, 151–152; classification of, 111–113, 160(table), 161(table), 162–164; coexistence with private firms, 143–144; competition policy, 141–143; conflict among importing STEs, 139–141; contestability and relevant markets, 153–156; as importers, 133–136; importing under WTO/GATT, 136–137; institutional innovations, 146–148; international agricultural markets, 134(table); links to competition, 152–153; market power control by, 137–139; price discrimination, 128–130; as private firms, 146; tariff rate quota and, 144; wheat and barley trading, 113–114; WTO negotiations, 99–108. See also Australian Wheat Board; Badan Urusan Logistik; Canadian Wheat Board; New Zealand Dairy Board STEs. See State trading enterprises Structural adjustment, 135, 262–263 Subsidies, 1–2, 316; Agenda 2000, 207–209; agricultural subsidy effects, 25(fig.); price discrimination, 128–130; production, 245–246; regional trade agreements, 193(n9); species preservation and GMOs, 27–29; spillover benefits, 8; state trading, 106–107; STE import versus export subsidies, 139–141; targets and instruments, and joint products, 23, 26–27; trade deflection, 175; wheat trading, 125 Sugar production, 71(table), 72(table), 128, 133–135, 164

353

Supply control, 175 Switzerland, 241, 242(fig.), 302(table) Targets and instruments, 22–27, 24(fig.) Tariff rate quota (TRQ), 135–136, 139, 143–147, 163–164, 166(n4) Tariffs, 55; Common External Tariff, 193(n12); preferential trade agreements, 184; STE conflict and, 140; STE operation under WTO/GATT, 136–137; tariff bindings, 205–206, 212(n10); tariff concessions, 141; tariff protection, 207–208; trade diversion, 174; transboundary externalities, 59 Technical Barriers to Trade Agreement (TBT), 63–64, 276–277, 317 Technical jointness, 244 Technology: GHG emissions reductions, 44–48; impact on rural areas, 263–264; technology transfer, 226–228, 228(fig.), 229(fig.), 232(fig.). See also Capacity-building measures TEP. See Transatlantic Economic Partnership Territorialization, 255 Textiles, 262, 317 Thailand: agricultural/industrial wages, 230(fig.), 232(fig.); labor growth, 234(table); SPS compliance, 294; welfare effects of agricultural reform with capacity-building, 229(fig.); welfare effects of capacity-building, 225(fig.). See also Asia-Pacific Economic Cooperation TILF. See Trade and investment liberalization and facilitation Tobacco production, 71(table), 72(table), 73(table) Tomato production, 71(table), 72(table), 73(table) Tradable externality permits, 250 Trade agreements. See Preferential trade agreements; Regional trade agreements; and individual agreements Trade and investment liberalization and facilitation (TILF), 218, 223–233 Trade barriers, 85, 155, 217 Trade blocs, 187–188, 194(n31) Trade creation, 173–175, 198–200, 209

354

INDEX

Trade diversion, 173–175, 194(n30), 209 Trade measures, 29–30; climate change agreements, 48–49; linking environmental damage to trade, 14–19, 15(fig.), 19(fig.), 21–22, 30(n3); RTA impact on, 180–182; targets and instruments principle, 23 Trade Practices Act (Australia), 158 Trade Related Aspects of Intellectual Property (TRIPS) Agreement, 55–56, 275–276, 316–317 Trade reversal, 199 Trade wars, 119–120 Traditional producer-protectionist interests, 57, 59–60 Transatlantic Economic Partnership (TEP), 81 Transparency, 54–55, 136–137, 156–160, 164–165, 290–293, 291(fig.) Treaty of Rome, 181, 198, 211(n1) TRIPS. See Trade Related Aspects of Intellectual Property TRQ. See Tariff rate quota Tuna-dolphin dispute, 16, 31(n4), 58, 276 Turkey, 178 Two-price system, 249–250 Ukraine: GM crops, 71(table) Unconditional liberalization, 223, 224(fig.), 228(fig.), 229(fig.), 230, 230(fig.), 232(fig.) Understanding on Rules and Procedures Governing the Settlement of Disputes, 300 Understanding on the Interpretation of Article XXIV, 201, 205 United Kingdom: CAP reform, 209; exclusion of agriculture from free trade, 200–201; regional trade agreements, 193(n5); trade diversion and erosion under CAP, 199–200; wheat agreement, 122 United Nations Environment Program (UNEP), 86 United States, 1–2; amber box programs, 242(fig.); barley trade wars,

119–120; beef hormones case, 301–304, 306; biotechnology negotiations, 81–82; BSP stance, 87; Canadian wheat exports, 114(fig.), 121(table); Caribbean trade, 184–185; Central American security, 186; EU–U.S. veterinary agreement, 296; evaluating trade-environment interactions, 22; food labeling, 277; GM products, 70, 71(table), 76–77, 81, 279–280, 297, 310(n17); illegal agricultural trade, 185; Kyoto Accord, 40–41; labor growth, 234(table); market power control by STEs, 138; Millennium Round negotiations, 264–265; multifunctionality, 242; price discrimination measures, 128, 157; regional trade groups, 180; Spain’s potential trade diversion, 200; SPS compliance, 294; SPS dispute settlement, 302(table), 303(table); state trading enterprises, 4–5, 99–100, 107, 137, 145–146; trade deflection, 175; trade discrimination, 18; tuna-dolphin dispute, 16, 31(n4), 58; welfare effects of agricultural reform with capacitybuilding, 229(fig.); welfare effects of capacity-building, 225(fig.); wheat deficiency payments and loan marketing gains, 129(fig.); wheat-dumping case, 124; wheat export markets, 115(fig.). See also Asia-Pacific Economic Cooperation Urban unskilled labor, 220–222 Uruguay Round Agreement on Agriculture, 1–2; economic gains of liberalization, 262–264; EU enlargement, 206–207; exclusion of agriculture from free trade, 201; globalization, 255–256; green-box policies, 13–14, 30(n2); implementation process and trade reform, 316; multifunctionality, 240, 242; national sovereignty, 239–240; nontrade concerns, 7; SPS Agreement, 18, 287–289; state trading enterprises, 99–100, 103–104, 136; tariff bindings, 205–206; tariff rate quota, 135–136, 147; TRIPS Agreement, 55–56

INDEX

Venezuela, 186 Wheat trading, 113–114, 164; price discrimination, 129–130; state trading and, 116–118; STE classification, 162–164; STE coexistence with private firms, 143–144; U.S. wheat deficiency payments and loan marketing gains, 129(fig.); U.S. wheat exports, 115(fig.); wheat pool deficits, 122(fig.); world wheat export market share, 119(fig.). See also Canadian Wheat Board; Grain production and trade Widening, 187–189 Wildlife refuges, 29 Wines and spirits, 274 World Bank, 53–54 World Health Organization, 299 World Intellectual Property Organization (WIPO), 56 World Trade Organization (WTO), 1; Committee on Trade and the

355 Environment, 61–64; CWB and price discrimination, 123–126; ecolabeling, 272; EU’s preferential trade agreements, 201–202; food labeling, 272, 275–278, 280; GM product regulation, 77–78, 78(table), 82–85; IPPC and SPS, 79–80; linking environmental damage to trade, 3–4, 17–19, 53–65; market power control, 141–143, 147; Millennium Round negotiations, 264–266; national sovereignty, 239–240, 251; nontrade concerns, 7–9; regional trade agreements, 172, 190–191, 193(n5), 194(n25); regulating biotechnology, 88–89; shrimp-turtle dispute, 31(n4); SPS Agreement, 9, 287–308; state trading enterprises, 4–6, 99–108, 111–113, 135–137, 152–153; tunadolphin dispute, 58; widening and deepening, 188–189. See also Uruguay Round Agreement on Agriculture

About the Book

At the outset of a new round of World Trade Organization talks, agricultural issues remain bitterly contested. In this volume, international experts provide fresh insights on topics that agribusiness, producer organizations, governments, and scholars must respond to as negotiations progress. The authors cogently discuss rapidly evolving environmental policies; state trading enterprises and their impact on international prices and competitiveness; regional trade agreements; and the influence of the WTO on rural development policy, consumer protection regulation, and the structuring of health measures worldwide. The result is a thoughtful assessment of how new global policies are affecting—and will affect—both states and markets. Hans J. Michelmann is professor of political studies and associate dean (Social Sciences) at the University of Saskatchewan. He is coeditor of the Journal of European Integration. James Rude is a research scientist with the Department of Agricultural Economics, University of Saskatchewan. Jack Stabler is professor of agricultural economics at the University of Saskatchewan. He has written extensively on economic development transitions in rural Canada and the United States. Gary Storey is professor of agricultural economics at the University of Saskatchewan; his research focuses on trade and policy.

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