FAPRI Analyzes Global Effects of Recent U.S. Proposal for WTO Agriculture Negotiations

Chad Hart, Food and Agricultural Policy Research Institute, (515) 294-9911; chart@iastate.edu
Sandra Clarke, Center for Agricultural and Rural Development, (515) 294-6257; sclarke@iastate.edu

December 15, 2005

Ames, Iowa -- In October, the U.S. Trade Representative released a proposal for agricultural trade reform in the ongoing World Trade Organization negotiations. The Food and Agricultural Policy Research Institute today released its analysis of the impacts of this proposal on U.S. and world agriculture.

The U.S. proposal includes radical changes in export competition, market access, and domestic support. It reduces the permitted current U.S. aggregate measures of support to $7.64 billion and limits so-called blue box support to $4.77 billion. The proposal lowers EU domestic support to €11.4 billion, implying large reductions in actual domestic support in sugar, dairy, cereals, fruits, and vegetables.

The proposal also includes significant tariff reductions or tariff rate quota (TRQ) expansions, which would open protected rice, sugar, and dairy markets. Products declared "sensitive" would face smaller tariff cuts but would also face a definite increase in TRQs. All export subsidies would be eliminated, mostly affecting EU production and trade of sugar, rice, meat, and dairy products.

Highlights of the projected outcomes for major commodities are detailed below.

  • Reforms moderately increase world prices for most commodities, with larger increases for sugar, rice, and dairy. Dairy and livestock sectors are directly impacted, which in turn affects feed sectors. U.S. export expansion is large for pork, beef, and rice and moderate for corn and wheat. U.S. cotton exports decline under the proposal.

  • In many cases, the removal of coupled domestic support in the European Union and the United States is not fully compensated by world price increases and gains in world markets. Decoupled payments could be put in place to balance the loss of farm income from coupled payments and would not have to be as large since distortions would be removed and world prices would be higher.

  • U.S. corn exports and feed consumption both increase, contributing to a modest increase in U.S. corn prices, driven by larger net imports by the European Union and South Korea. World wheat prices increase by almost 3 percent because of higher export demand from Japan and China and reduced export supplies of Canada, Russia, and Ukraine. Higher prices result in a slight increase in wheat production, limited by the increase in returns for feed grains.

  • World prices for rice increase by 8 to 25 percent, depending on the variety, driven by greater market access in Japan and South Korea. China, the United States, Australia, and Egypt gain market shares in medium-grain rice trade, and long-grain rice exports increase for all major producers. Decreased livestock production in Japan and the European Union causes a reduction in U.S. soybean meal exports. This is offset by an increase in domestic soybean meal consumption driven by expanding U.S. livestock production. The world price of soybean oil increases by 4 percent by 2014. World consumption of all protein meal declines in tandem with animal production.

  • World prices of pork and beef products increase significantly while poultry price changes are moderate. World trade of pork increases the most, followed by beef and then poultry (7, 6, and 3 percent). Japanese imports of U.S. meat expand under lower import duties. The elimination of export subsidies and increased market access result in an increase in EU meat imports. In many importing countries, lower domestic prices resulting from tariff reduction are more than offset by the higher world meat prices. Brazil, Argentina, Australia, Canada, and the United States expand their meat exports.

  • Major dairy changes occur in the European Union, Canada, and Japan. Without an export subsidy and with reduced intervention prices, EU dairy production and exports decrease substantially. Domestic EU consumption increases because of lower domestic prices. The European Union becomes a marginal player in world markets for nonfat dry milk and butter. Australia, New Zealand, Argentina, Ukraine, and India partially make up for the decline in EU exports, which leads to higher world prices for butter, cheese, nonfat dry milk, and whole milk powder. Canada becomes a net importer of nonfat dry milk as export subsidies disappear and tariffs are lowered.

  • The EU would declare sugar as sensitive, creating a larger TRQ and reduced tariffs. The world sugar price increases by an average of 24 percent. The European Union becomes a net importer of sugar. Net exporting countries, such as Brazil, Australia, Colombia, Argentina, and Cuba, respond to the higher world price with increased sugar production, lower sugar consumption, and increased exports.

  • World cotton prices increase by 2 percent. Given other countries' modest policy adjustments, the primary impact in the sector comes through a reduction in domestic supports, which lowers U.S. production and exports. Larger exports out of Africa, Brazil, and Central Asia partially offset the lower volume of U.S. cotton exports.

For more details, see "U.S. Proposal for WTO Agriculture Negotiations: Its Impact on U.S. and World Agriculture," a working paper available at http://www.fapri.iastate.edu/. Companion analyses by the FAPRI consortium providing detailed looks at the effects of the U.S. proposal on U.S. agriculture are available from the FAPRI University of Missouri site at http://www.fapri.missouri.edu/.