TFR 29 – Agricultural Policy & Trade: Adjusting Domestic Programs in an International Framework

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This is the second Trilateral Commission report focused on agriculture and food. The first was the 1978 report on Reducing Malnutrition in Developing Countries: Increasing Rice Production in South and Southeast Asia. That study emphasized the significant potential that existed in the region, with its large and growing population, for increasing per capita food production and reducing the incidence of malnutrition. A number of important measures, including expansion and improvement of irrigation, increasing the availability of modern inputs such as fertilizer, pesticides and herbicides, and improvement of rural institutions, were outlined. Particular emphasis was given to estimating the capital cost of irrigation improvement and expansion and the means were suggested for meeting the capital costs from both international and domestic sources.

While it cannot be said that the specific measures suggested in the task force report have been adopted in full, what can be said is that considerable progress has been made in achieving the objective of doubling rice production in South and Southeast Asia between 1978 and 1993, a span of 15 years. The irrigated area in the region has increased at an annual rate of 1.4 million hectares since the mid-1970s. Rice production in the area was 182 million tons in 1983, an increase of 24 percent in the first third of the period. This is an annual growth rate of 4.4 percent, and very close to the 4.7 percent required for doubling in 15 years.

No claim is made that the Trilateral Commission report was responsible for these positive developments. What is important is that both international and domestic resources have been mobilized to achieve a significant expansion in production of rice and other food crops. Perhaps the most important point of the first Trilateral Commission report on agriculture was that food and nutrition problems have solutions and that, in fact, progress has been and is being made in finding and implementing the solutions.

This report is concerned with a very different set of agricultural issues adjusting the agricultural policies of the trilateral countries. From an international perspective, these policies leave much to be desired. While our countries have substantially liberalized trade in industrial products over the past four decades, little progress has been made in reducing the barriers to trade in farm products. In all too many cases particular farm programs in the European Community, the United States, Canada and Japan have been devised with little or no concern about their effects upon producers in other countries. Even though GATT rules provide significant exceptions for such products within general prohibitions against quantitative restrictions and export subsidies, most countries have made little or no effort to modify their domestic farm programs to make them consistent with GATT. Agricultural trade issues have been important sources of tension in recent years among trilateral countries and with other OECD countries (notably Australia and New Zealand) and developing countries as well.

Part of the impetus for our report is provided by the prospect of a new round of multilateral negotiations about agriculture under GATT auspices. The new GATT Round provides an opportunity for progress and in our final chapter we shall sketch a constructive course for the negotiations. The very essence of new GATT negotiations is to be found in defining the extent to which the pursuit of domestic agricultural policies should be permitted to affect trade by restricting or displacing imports or increasing exports.

It is politically naive to imagine as earlier GATT Rounds indicate, for instance that international undesirability in itself could bring about major agricultural policy changes. These policies have deep internal roots. A more reasonable hope is that as domestic policy regimes are adjusted, these adjustments will move in a direction that makes more international sense. What makes the current moment a relatively propitious one for our report and provides impetus for our work is that internal pressures are forcing more serious consideration of agricultural policy adjustments, adjustments which may move in a more market-oriented direction that makes more international sense as well. The most obvious and immediate source of pressure in all three of our regions is high government costs of existing arrangements in a tight budget climate.

The policies which concern us here and are of most concern internationally are those directly affecting the prices and output of farm products. Chapter I of the report sketches such policies in the United States, Canada, the European Community and Japan. Some of the important differences in the structure of farming in different trilateral regions will be noted, especially since these differences appear to have affected the nature of farm price and income support policies.

The aims of agricultural policies in the three regions are similar. They aim at stabilization of markets, income support, orientation of production and the modernization of farming. Differences among agricultural policies in the three regions are differences of degree rather than of kind. Moreover, domestic agricultural and food policies have always been dominated by national interests and views about the world market. As such they are not very susceptible to negotiation or coordination on a medium term basis. Consequently a more market-oriented stance on international trade has regularly yielded to these imperatives. By their very nature and complexity, agricultural policies with neutral effects on international trade today are non-existent; and there seems to be no accepted standard in the international community to balance the difference in (political) appreciation between "acceptable stabilization of markets" and "unacceptable (income) support." Myths and realities on this issue result in the recurring "diplomacy of the megaphone" or shouting matches across the Atlantic and the Pacific, because the stakes for governments and the farming community are high. The minimum requirement to orient domestic agricultural policies is therefore a trilateral view on the development of "domestic" production and international markets.

Price supports and liberal trade are not in conflict when support levels are set below the trend of international market prices and are adjustable as markets change. Such supports provide a measure of stability protecting producers against extraordinary temporary price drops while minimizing market distortion. But price supports are of course often set above international market levels, which then leads to interventions at the border to insulate the internal market whether through the variable levy typical of the European Community, import quotas used by the United States and Canada, a state-trading agency like that used by Japan for a number of commodities, or some other technique. High price supports have also led governments into the additional problem of dealing with excess supplies. This has happened in all trilateral countries. In the European Community and Japan traditional large importers among trilateral countries production of some major commodities, encouraged by high price supports, has grown over time beyond internal consumption. The United States has likewise had high price supports that have generated surpluses of grains and dairy products.1 One alternative, used at times by all, has been to dispose of excess supplies internationally at subsidized prices.

Another alternative is to directly limit internal production whether through incentives to farmers to take land out of production or, more typically, some form of production quotas, which can lead to remarkable economic distortions. Another alternative, of course, is to induce supply reductions with lower price supports.

Lower budgetary costs do not necessarily mean greater market orientation. Deficiency payment systems, for instance, are probably more market-oriented than price supports in the marketplace at the same target price level; but deficiency payments require much larger budgetary outlays. Price supports shift the costs from taxpayers to consumers.

Chapter II of the report examines the relevant provisions of GATT. It draws together available work on the trade effects of the programs laid out in Chapter I, including effects on developing countries. The OECD is now engaged in a remarkably comprehensive assessment along these lines, but that work was not available in time for use in this report we hope it will be available for the new GATT Round. Chapter II (and Section E of the Appendix) includes an examination of effects of agricultural policies on the level and stability of international priceswhich we do by presenting some of the existing research on what would happen to the level and stability of international prices if there were reduction in protection. Current policies tend to increase the instability of international prices. Greater international price variations are a necessary corollary of policies which eliminate internal price variations through varying imports in line with fluctuations in domestic production. As for the level of prices, some international markets are so distorted such as sugar and dairy products that it is virtually impossible to gauge the price effects of market-oriented domestic policies; but in both of these cases international price levels would probably rise considerably. In other major markets where analysis is more feasible, market-oriented policies would not have marked effects, Except for rice, the general effect would be to increase prices somewhat. Part of the analytical argument of our report is that if the trilateral countries acted in unison to reduce their market interventions, the presumed adverse effects of liberalization would be significantly reduced. International prices would become more stable, at roughly the same or higher levels for most major commodities.

There would of course be costs in moving to more market-oriented agricultural policies. Chapter III notes three kinds of transition costs: short run losses in farm income, the loss in value of assets and the costs of adjustment to alternative employment for those farmers who must leave agriculture as protection is removed or substantially reduced. These costs are real and if there is to be any realistic chance of liberalization, these costs must be recognized and compensatory measures taken. While there would be short run income losses in the move to more market-oriented policies, we believe that the long run effect of the removal of trade interventions and other protective measures upon the return to labor and capital employed in agriculture would be negligible provided that there are opportunities for farm workers to find attractive non-farm employment. This is true because the protective measures are ineffective in increasing over time the returns to any resource engaged in agriculture, other than farm land. There is ample evidence that income transfers in the United States quickly become capitalized into the value of assets in inelastic supply (e.g., land), enriching their first generation recipients but leaving their successors with higher entry barriers and a dangerously burdensome cost structure and increasing the cost of adjustment to more market-oriented policies.

As we shall emphasize with both vigor and conviction, the prospects for changing the current domestic agricultural programs to market-oriented policies will be greatly enhanced if the macroeconomic policies in the trilateral countries provide for employment conditions that make it relatively easy for farm men and women to find non-farm jobs when farm employment provides inadequate incomes. We cannot expect farm people to accept more market-oriented policies unless there are non-farm job opportunities of an attractive nature available.

It must also be recognized that there are substantial differences among geographic regions in the ease with which adjustments can be made. For example, in the farm communities in northern Europe the differences between the country and the city have diminished. In the past when conditions of reasonably full employment prevailed, farm people could more easily adjust to changing economic conditions affecting agriculture, including policy changes. But in southern Europe the differences between country and city remain quite large and farm people find it more costly and difficult to adjust to changing conditions. It is necessary to recognize that such differences do exist and that it is desirable to undertake special measures to promote adjustments.

The average income of farm families in each of our regions has risen significantly during the postwar era as a percentage of average family income in the overall economy. The improvement in income, however, has come in part from the increase in income from non-farm sources such income now constitutes more than half of the income of farm families in our countries. This is an indication of the integration of farm people over time into the general economy as a consequence of improved education, transportation, and communication. One result of increased integration and non-farm employment possibilities has been the increase in part-time farms as a percentage of all farms, and for these farms the effects of farm price policies on their incomes is much less than for full-time farms. The basic analytical point here is a simple one, but not generally understood: The average incomes of all farm families are determined more by the levels of income in the economy generally than by the level of farm prices or by changes in farm prices over an extended period of time.

The level of farm prices does determine to some degree how many people will be engaged in agriculture, which leads us to another basic analytical point reflected in the postwar economic history of all of our countries: The process of economic growth everywhere requires that the absolute level of employment in agriculture decline over time. Farm employment must decline given the combination of low income elasticity of demand for farm products (i.e., demand increases more slowly than income in our countries) with productivity change at least as rapid as in the rest of the economy. In fact increases in labor productivity in agriculture have generally been greater than in industrial employment. No country has been able to avoid the decline in farm employment, and attempts to do so become quite costly to taxpayers or consumers. We recognize the presence in each of our societies of disadvantaged, often older rural persons with a claim on society for assistance, but this assistance is better provided at less cost to the overall community through targeted programs rather than through high agricultural price supports that generally benefit other producers more.

Whatever its analytical merits, we recognize that general liberalization is not politically feasible in the near future. But progress can and should be made toward more market-oriented policies, toward lower levels of protection. In our final chapter Chapter IV we set out high priority adjustments for the United States, Canada, the European Community and Japan. While we are aware of the immediate policy debates in each of our regions, we have not let ourselves be completely bound by immediate political constraints. It is our purpose to look a little further down the road at those high priority adjustments which can and should be made over the medium term.

It is quite clear what is required if domestic farm policy regimes are to contribute to an improved international situation for all producers and consumers. We recommend that domestic programs should be made more market-oriented; that the trilateral countries should move together in achieving more market-oriented policies for agriculture; that it should be recognized that it is not possible to move to more market-oriented policies all at once; and that during the transition period there should be no additional trade barriers introduced nor should existing barriers be unilaterally broadened.

New GATT Round negotiations on agriculture provide an important framework for multilateral progress over the next several years, and in Chapter IV we also try to set out a constructive path for these negotiations. We have not approached this effort in the spirit of negotiators for our individual countries or regions. The spirit here, as throughout this report, has been that of a joint effort to help us all move forward. We all stand to gain from more market-oriented agricultural policies that make more international sense.

Our report is in two parts. The main body of the report is a relatively short statement of the main points and conclusions that we have reached concerning the reasons why domestic farm programs need to be changed and our views concerning how these policies could be gradually modified to create the conditions for smoother international relations among the trilateral countries and between the trilateral countries and the developing countries.

An Appendix provides background and support for the policy-oriented main body. The Appendix also includes a significant amount of descriptive material that we believe those who wish to become acquainted with the major agricultural policy and trade issues confronting the trilateral countries will find helpful. The main body is written to be self-contained, though it is our hope that some will find the material in it sufficiently interesting to induce turning to the Appendix as well.

Authors

D. Gale Johnson, Professor of Economics, University of Chicago
Kenzo Hemmi, former Dean of Faculty of Agriculture, University of Tokyo; Chairman of Board, International Rice Research Institute (IRRI)
Pierre Lardinois, Chairman of the Executive Board, Rabobank; former Member of Commission of European Communities; former Dutch Minister of Agriculture

T.K. Warley, Professor of Agricultural Economics, University of Guelph Ontario (Special Consultant)
P.A.J. Wijnmaalen, Agricultural Counsellor, Dutch Embassy, Paris (Special Consultant)

Table of Contents

Introduction
I. Domestic Farm Programs
A. United States Agricultural Policy
B. Canadian Agricultural Policy
C. Agricultural Policies of the European Community
D. Agricultural Policy in Japan
E. Consumer and Taxpayer Costs
II. Implications for International Trade
A. GATT Provisions for Agriculture
B. Effects of Farm Programs on Foreign Trade
C. Effects on Developing Country Exports
III. Moving to More Market-Oriented Policies
A. Transitional Adjustments
B. Market-Oriented Policies and Farm Incomes Over Time
C. Diminishing Agricultural Employment in Growing Economies
IV. Recommendations
A. Priority Adjustments
- The United States
- Canada
- The European Community
- Japan
B. Famine Conditions in Africa and Food Aid
C. New GATT Negotiations
Appendix
A. United States Agriculture and Policy
B. Canada's Agricultural and Food Trade Policies
C. The Common Agricultural Policy of the European Community
D. Agricultural Policy in Japan
E. Effects of Domestic Protection on International Prices
F. Relative Farm Prices and Rates of Decline of Farm Employment

  • Topics: Trade
  • Region:  North America, Europe, Middle East, Africa, Pacific Asia
  • Publisher:  Trilateral Commission (New York University Press)
  • Publication Date:  © 1985
  • ISBN:  0-8147-4168-1
  • Pages:  132
  • Complete Text: Click here to download
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