Trade in Agriculture — Trans-Pacific Partnership

The Trans-Pacific Partnership agreement concluded in Atlanta this past week is an historic deal. It is the first major multilateral trade deal to be concluded in more than 20 years. 

The Trade Minister, Andrew Robb, should be congratulated for bringing this deal to a conclusion and he is right to say it is the biggest trade deal since the Uruguay Round.  Indeed, Australia as a nation was a significant contributor to the delivery of the TPP – negotiations first began in Melbourne in March 2010.   

Still, we should not get carried away with the benefits of the Trans-Pacific Partnership. The last 20 years have been a drought for multilateral trade reform and we should not call one oasis in that desert a forest.  The Trans-Pacific Partnership is a missed opportunity to deliver genuine reform of agricultural markets.

As The Economist said this week of the Trans Pacific Partnership:

The sealing of a Pacific trade deal is welcome. But spare the cheers … Until this week, the world had not seen a big multilateral trade pact for over 20 years. The deal that has broken the drought…is welcome. But those who believe in free trade, and the benefits it brings, ought not to miss the bigger picture. The backdrop to this week’s deal is a bleak one.

That was a more deflated tone than The Economist struck when the TPP was being negotiated. In 2013 The Economist even said that with the TPP “Trade talks are threatening to become sexy again.”   Some commentators even viewed the TPP as some sort of sequel to the WTO multilateral trade negotiations that became stalled in the Doha round. A few years ago the Financial Times referred to the TTP as “Oceans Twelve”.

Unfortunately, the TPP, at least for some sectors like sugar, has not turned out as a “good” sequel to the Uruguay Round but more like a much-hyped but ultimately underwhelming one, like The Phantom Menace. The key problem with The Phantom Menace was that while other Star Wars episodes had princesses in distress, planet-destroying death stars, a battle between father and son and a lovable cast of eccentric robots and a 900 year old guru -- the plot of the Phantom Menace revolved around trade disputes, Senate negotiations and a very annoying Jar-Jar Binks.

I don’t share The Economist’s optimism. I don’t think trade disputes can ever be sexy! Senate negotiations perhaps even less so.

I want to propose tonight that Australia should not and cannot afford to give up on the greater gains of true multilateral trade reform of agricultural markets. It remains true that the greatest gains from trade liberalisation will come from the removal of trade barriers and subsidies in agricultural markets.

Before I do that I want to briefly give the TPP its due, outline its benefits but also its shortcomings in some areas.

The benefits of the TPP

The TPP is an agreement between 12 countries that between them have a population of 800 million people and a combined gross domestic product of about $28 trillion. These 12 countries represent around 11 per cent of world’s population and 40 per cent of the world’s GDP.

Overall the TPP will eliminate tariffs on more than $4.3 billion of Australia’s dutiable exports of agricultural goods to TPP countries upon entry into force of the Agreement.  An additional $2.1 billion of Australia’s exports will receive preferential access through new quotas and tariff reductions.

There have been reductions in tariffs and improved access for beef, sheep meat, wool, pork, cereal and grains, dairy, rice, cotton, wine, horticulture and seafood.

So there are some beneficial outcomes here.

However, there appears to be some substantial missed opportunities too. The US Department of Agriculture assessed the benefits of the elimination of tariffs and protections on agricultural products in TPP countries. It found that:

By commodity, the percentage increase in the value of intraregional trade due to the elimination of intraregional tariffs and TRQs will be largest for rice, sugar and “other meat” (which includes animal fats and oils and offals).

Sugar was estimated to deliver the second highest increase in trade of $569 million over 10 years to 2025 – delivering a whopping 48 per cent increase in the value of trade in sugar between TPP countries.

Unfortunately that outcome will not be delivered because tariffs and protections on sugar will be far from eliminated under the deal.

While the full text of the agreement has yet to have been released it would appear that the United States has not delivered a substantial increase on its sugar quota as agreed in the Uruguay Round 20 years ago.

This is a regrettable outcome. It is regrettable to the Australian sugar industry and to the broader world because the significant gains that would have otherwise flowed from increased world trade have been ignored and neglected.

I briefly wish to outline the details of the TPP in regards to sugar as has been publicly released so far.

Total Australian exports of sugar were valued at $1.5 billion in 2014, and around one third of these exports (valued at an estimated $510 million) went to TPP countries.

TPP market access gains for Australian sugar producers and exporters include:

  • An additional 65,000 tonnes of access to US.  US will also provide Australia with 23 per cent of future additional WTO quota allocations. Australia’s exports are likely to grow from around 100,000 tonnes a year to the US to 200,000 tonnes.
  • Elimination of Japan’s tariff and reduction in the levy on high polarity sugar exports on entry into force of the TPP.
  • Elimination of Canada’s tariffs on refined sugar (currently CA$30.86/tonne) within 5 years of entry into force of the TPP.  Australia already has duty free access for raw sugar into Canada;
  • In Mexico a guaranteed 7 per cent of any tariff rate quota for raw sugar in the years in which it is offered.  Australia is only the 6th country Mexico has offered such an outcome;
  • Elimination of in-quota tariffs on Vietnam’s WTO sugar quota on entry into force.
  • Malaysia to allow Australia access to wholesale distribution of refined sugar for the food/beverage industry

 

While these changes are welcome, they are far from the potential gains that could have been achieved. And they do little to amend the distorting impact of the US sugar program.

The United States has a long history of protecting its sugar industry. It introduced its first tax on the import of foreign sugar in 1789. Those taxes lasted more than 100 years before they were removed in 1890. What followed, however, was the introduction of subsidies just 4 years later and another almost 100 years of subsidies and reintroduced import taxes for the US sugar industry. In 1974 the US Sugar Act expired but President Ford played politics with the issue tripling the sugar tariff in an attempt to win the state of Louisiana in the US presidential election.

Over the past 30 years the US congress has made its sugar program even more complex and full of distortions.

The policy now consists of:

  • loans to maintain floor prices for sugar in domestic US markets;
  • the allocation of tariff rate quotas for overseas countries – a minimum 1,231,484 tonnes of raw sugar must be imported under the US’s commitments under the Uruguay Round;
  • a process to allocate upward adjustments to the US sugar quotas in the event that US production cannot meet demand; and
  • a sugar-to-ethanol program for the government to purchase excess production of sugar for the production of ethanol.

These changes have been made despite Presidential disapproval over the last few decades. Former President Ronald Reagan mentioned that the sugar program was one of three “objectionable features that must be changed” in the 1985 Farm Bill. President George W. Bush vetoed a Farm Bill in 2008 – only to have Congress override his veto.

The upshot of the US interventions in the sugar market means that the price of sugar in the US is higher than the rest of the world. In effect, the non-US sugar producers receive a lower price and US sugar producers receive a higher price thanks to the US sugar program.

Right now the US sugar price is around 9 cents per pound higher than the rest of the world. Using some very simplistic maths, the increase of 100,000 tonnes to the US under the TPP stands to deliver Australian sugar produces around $20 million additional export revenue before even assuming any increased Australian sugar production – although these calculations also assume no reduction in the US sugar price premium due to the increased US import of sugar.

These are benefits to the Australian sugar industry but they are not game-changing ones for a sector that exports more than $1.5 billion worth of raw sugar. As Yoda would say “Been missed, an opportunity has.”

The United States often pride themselves on their defence and promotion of free trade and open markets. For example, Jon Huntsman the former US ambassador to China once said that:

When America closes its doors, so does everybody else. We are the primary engine of growth in the world and we are the only beacon of free trade left,

But the US has not met its own lofty and worth principles when it comes to sugar.

I recognised that Australia’s negotiating team did all they could to get the best outcome for Australia. But in the overall scheme of things the gains, in agriculture in particular, were not nearly as large as we would have hoped.

Global trade in agriculture is the most distorted sector in world trade. And because of this, it is also the sector with the greatest potential gains to be had.

These distortions in world agriculture and food markets mean that Australian farmers as well as those in many developing countries, are unfairly disadvantaged.

Australia has reduced its own tariff levels and other trade distorting protections on agricultural and food products since the early 1970s. Australia’s simple average applied tariff on agriculture is 1.2 per cent of revenue. Australia is recognised internationally as one of the world’s most efficient agricultural producers.

According to the OECD Producer Support Estimate Australia’s support for agricultural producers was the third lowest among OECD countries.

Australia’s Producer Support Estimate as a percentage of gross farm receipts was 2.3% in 2014 (behind only NZ 1% and the Ukraine -8%), compared to an OECD average of 17.3%.

The Producer Support Estimates for other countries where much higher included: Norway 58%, Japan 49%, Indonesia 23%, China 20%, United States 10%, Canada 9%,

Trade and production distorting measures can increase price volatility, create disincentives for farmers to improve productivity. They can also encourage wasteful surplus production that in turn weakens commodity prices and lowers returns at the farm gate.

It is disappointing that the TPP has not made more progress in reducing agricultural barriers because it is these barriers that still represent the greatest distortion to world trade and offer the greatest potential benefits from multilateral trade reform.

That was clear in the work that was done to assess the potential benefits of the Doha Development Agenda – the original successor to the Uruguay Round. At least more than half of the potential benefits of this round were likely to come from the agricultural sector.

Economists Will Martin and Kym Anderson from the World Bank looked at the potential benefits of the Doha round. They found that the full liberalisation of global merchandise trade could increase world income by $287 billion. A full 62 per cent (or $182 billion) of these gains were from increased trade of agriculture and food.

This was similar to other research by Hertel and Keeney which put agriculture and food’s share of the total gains from trade liberalisation at around two thirds. Will Martin and Kym Anderson went on to say that:

This is consistent with the high tariffs in agriculture and food (17 percent global average) versus other sectors, but is nonetheless remarkable given the low shares of agriculture in global GDP (4 percent) and global merchandise trade (9 percent). Three-quarters of those gains are accounted for by the farm policies of high-income countries. Notice too that as much of that gain from farm reform is due to South-South agricultural liberalization as would come from developing countries’ unrestricted access to high-income country markets.

A new DOHA

Unfortunately these figures are moot because Doha is probably about as dead as disco.

Doha was a big idea. As Fredrick Erixon has pointed out the Doha round rested on the big idea of an all inclusive grand bargain. Developing countries would get better access to rich-country markets for agricultural and semi-industrial products; developed countries would get better access to other rich-country markets and to developing country markets for services and advanced industrial and consumer goods.

This approach didn’t work. The reach of Doha probably was beyond the grasp of international trade politics.

I would like to suggest a different approach. I believe that we should return to a renewed focus on achieving progress in discreet areas of trade reform not shooting for the stars or the grand bargain. This concentrate minds on the specific gains in particular areas.

We should start in agriculture because that is where the largest potential gains lie and that is where developed countries have the most to gain.

Some may call this approach too simplistic and naïve but I would argue that it would return the WTO to a successful model that delivered results previously in telecommunications, intellectual property and biosecurity. Indeed, it could be argued that the big post-second world war trade agreements like Kennedy and Uruguay were actually focused agreements largely tackling the issue of high trade barriers in manufactures.

However, the real template for this approach is the Agreement on Textiles and Clothing.

For many decades, trade in textiles was marked by distortionary quantitative restrictions used to protect the domestic textile industries of the US, EU, Canada, and Norway.  Quantitative restrictions, or quotas, tend to be much worse than tariffs in distorting markets and increasing efficiency costs and losses to consumers.

Reform seemed impossible. Textiles and clothing industries were highly labour intensive and concentrated in a few industrial areas, making them politically powerful. Even in Australia the removal of tariffs and subsidies on the textiles and clothing sector were some of the last to be removed.  

But during the Uruguay Round, WTO Members signed the Agreement on Textiles and Clothing. The agreement established multilateral rules and subjected the textiles trade to the basic WTO principles of non-discrimination and national treatment.

The upshot was a staged removal of quantitative restrictions over time. At the end of the agreement trade in textile and clothing products is no longer subject to quotas under a special regime outside normal WTO/GATT rules but is now governed by the general rules and disciplines embodied in the multilateral trading system.

This focused approach has worked in the past. Why can’t we make it work for something like sugar.

I do congratulate the Australian negotiators on bringing the TPP negotiations to a conclusion. But while the sun sets on these negotiations we should already be looking for a new dawn. And we should face towards the protections and distortions in agricultural trade markets for those new opportunities. 

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