Shires, David

English

Research Papers in Economics

SOUTHERN JOURNAL OF AGRICULTURAL ECONOMICS  JULY,  1988
AUSTRALIAN/CAIRNS  GROUP PERSPECTIVE: SOUTHERN
AGRICULTURE  AND  THE WORLD  ECONOMY:
THE MULTILATERAL  TRADE  NEGOTIATIONS
David Shires
Last week was Australia's  200th birthday.  ers, and highly ranked in beef and veal, lamb,
When  the  rebels in  America won  what they  wheat,  and sugar.  We  sell  80 percent  of our
called their war of independence,  Britain lost  food  and fiber  overseas.  This  has  made  our
her penal colonies in the Carolinas and looked  farmers and our government acutely aware of
around  for  replacements.  The  first  colonial  world  market  conditions  and of the  interre-
fleet arrived in Australia on January 26, 1788,  lationship  of domestic  and international agri-
and  included,  along  with  700  convicts,  44  cultural policies. An inescapable  fact has been
sheep and 6 cattle. If Britain had defeated her  that  sometimes  world  prices  are  high  and
American  colonists,  then the  history of both  other times they are  low.  As  well,  the long-
Australia  and  Louisiana  would  likely  have  term  real  prices  for  agricultural  products
been very different. The French flag might be  often appear to be in decline.
flying  today  over  both  Sydney  and  New  Our farmers,  like  yours,  have thus  had  to
Orleans.  face  the twin  evils of price variability and in-
We have  our own flag  now,  of course.  We  come decline.  For some time in the European
also have around 170 million sheep and 23 mil-  Community  (EC) and Japan,  and  now  in the
lion cattle and have really been more success-  U.S.,  farmers  have  faced these  problems  by
ful  at  growing  animals  than  people.  Our  relying  on  funds  from  taxpayers  and  con-
human population of 16 million is spread over  sumers.  In  general,  however,  Australian
a land area about the same as the continental  farmers  have  abandoned  this approach.  One
U.S.  (i.e.,  about  3  million  square  miles).  The  reason is  simply that our treasury  is not big
main reason  is a lack of water.  Over  70 per-  enough  to finance large direct subsidies.
cent  of Australia  is  arid,  in  the  sense  that  But  there  are  other reasons.  Our farmers
there  is  not  enough  rainfall  to  support  the  have  become  much more  aware  of macroeco-
farming  of either  crops  or pasture.  The  sole  nomic factors. They realize that the exchange
agricultural use of that land is extensive graz-  rate and the inflation rate can affect their real
ing, where the animals range over large areas  net returns more than the nominal price. They
of sparse native vegetation.  These properties  have also been at the forefront of demands for
can  be thousands of square miles in size, and  cutting  our budget  deficit,  a stance  which  is
yet  the  land  itself  has  almost  no  economic  hardly  compatible  with  increased  subsidiza-
value  other  than  that  of  the  animals  them-  tion.  Incidentally,  partly as  a result of these
selves.  One result  is that Australia is a very  pressures,  Australia  this  year  will  have  a
low-cost producer of the products of extensive  small budget surplus.
grazing. Our aridity is in stark contrast to the  We  also watched  some  of our protected  in-
U.S.  I have heard that the flow of the nearby  dustries,  such  as  dairy,  suffer  a  merciless
Mississippi over five  days equals  all the flow  decline  when times grew hard.  Many  of our
in all the rivers in Australia over a year.  farmers  drew the  conclusion  that the protec-
We  also  have  a  strip  of  land-called  the  tion had merely encouraged a high cost of pro-
"wheat/sheep  belt"-which is usually produc-  duction,  which  made  the  eventual  fall  even
tive and is where  we grow most  of our wool  harder.  Incidentally,  I have  heard  Secretary
and crops. Although not major producers, we  Lyng  make  similar  comments  about  the
are major agricultural  exporters:  the world's  dangers of U.S. farm programs setting in ce-
leading  wool,  mutton,  and live sheep export-  ment  a high cost structure  in  U.  S. grain in-
dustries.
David Shires is Commercial  Counselor, Australian  Embassy,  Washington,  D.C.
Invited paper  presented  at the  annual  meeting  of the  Southern  Agricultural  Economics  Association,  New Orleans,  Louisiana,
February  1-3, 1988. Invited papers are routinely published in the July SJAE without editorial council review but with review of the copy
editor (as per Executive  Committee action June 25, 1982).
Copyright  1988, Southern  Agricultural  Economics Association.
69Exposure to the market can hurt, however,  Australia,  that  it would  not  have  to  sell  so
as  our grain  farmers  have  learned  over the  much feed grain if it did not buy so much corn
past  few  years,  faced  with  declining  world  gluten from the U.S. So a policy introduced to
prices,  a  significant  cause  of which  was  the  benefit  U.S.  sugar  producers  adversely  af-
1985 Farm  Bill. We  have a Guaranteed  Mini-  fects not only Australian sugar producers, but
mum Price (GMP)  scheme  in place for wheat  also  Australian  feed  grain  producers.  It  is
which  will require  a government  payout this  highly  questionable  whether the policy  even
season for the first time ever  (of about  U.S.  benefits U.S. sugar producers, given their loss
$150 million). But this has not encouraged ex-  of market share in recent years.
cess production. On the contrary, because the  Of course the  direct  losers out of the  U.S.
GMP is calculated from world market prices,  sugar policy have been those developing coun-
plantings have dropped dramatically, by over  tries  which  rely  heavily  on  sugar  exports,
20 percent last year, and  so has production.  such  as  the  Philippines  and  the  Dominican
But the outlook for Australian agriculture is  Republic.  Developing  countries  have  also
by no means one of unrelieved gloom. The net  been hurt by aggressive  U.S. export subsidies
value  of our rural production  this year is pre-  in  other areas,  such  as Thailand for rice  and
dieted to increase by around 30 percent, mainly  Argentina for wheat.
because of good growth in wool, livestock, and  This helps to  explain why  some of these de-
crops other than wheat and barley. Our farm-  veloping  countries  agreed  to join  the  Cairns
ers have had no artificial incentive  to remain  group  when  the  proposal  was  made  by
in wheat production, and some have  switched  Australia in Cairns in 1986. The idea behind the
to more profitable  alternatives.  group  was  to join  with  other  countries  who
These comments have been intended to give  relied  on agricultural  export  income  but who
you some understanding of Australian agricul-  were not sufficiently large in their own right to
ture in order that you can more readily appre-  significantly  influence  the  outcome  of  the
ciate  our attitude towards the current  Multi-  MTN.  These  countries  therefore  decided  to
lateral  Trade  Negotiations  (MTN)  and  the  combine  forces  and present  a united front  in
Cairns group. We believe that a free market is  the MTN process. These countries are: Argen-
the most profitable goal.  We also believe that  tina, Australia,  Brazil,  Canada,  Chile,  Colom-
in  the  long  run  it is  futile  to  fight  market  bia,  Fiji,  Hungary,  Indonesia,  Malaysia,  New
forces.  The  cost  of doing  so  is  now  greater  Zealand, Philippines,  Thailand,  and Uruguay.
than  it  has  ever  been.  The  World  Bank  The Cairns group proposals were presented
estimates that currently around $250 billion is  by  our  Prime  Minister  in  Geneva  late  last
spent  worldwide  on  agricultural  subsidies,  year. Their basic objective is similar to that of
taking into account both direct taxpayer sub-  the  U.S. proposals,  namely the elimination of
sidies  and  artificially  high  consumer  prices.  agricultural  subsidization.  You  will  also  be
There  has  to be  a better  way  to  spend  this  aware  that  the  EC  has tabled  its proposals
money.  and  has  committed  itself  to  negotiating  to-
Economic  forces  are  inextricably  linked.  wards  a substantial  reduction  of agricultural
Once  distortions  are  introduced  into  one  subsidies.  However,  it has not proposed  the
market,  they inevitably  affect  others even in  elimination of all subsidies and seems inclined
unpredictable  ways. To give just one example,  to favor  some form of market organization-
the  U.S.  sugar  policy  is  intended  to benefit  either of production or prices or both-by the
U.S. sugar producers.  The results have been  exporting  countries.
far-reaching.  Production  of  corn  sweetener  The Cairns group sees its proposals as lying
has  become  economic  in  the  U.S. because  of  in between  those of the U.S.  and the EC.  In
the  artificially  high support  prices for sugar.  the  following important respects,  they differ
Moreover,  the  U.S.  has  become  an  efficient  from the U.S. proposals  in that they seek:
producer  of  corn  gluten,  one  of  the  by-  * an immediate  end to any escalation of sub-
products  of corn  sweetener  production.  The  sidization,
U.S. ships vast quantities of this gluten to the  * short-term  measures  (consistent  with  the
EC which  then feeds it to its  dairy cattle. If  long-term goal of subsidy elimination) to be
those  EC dairy products  were  sold at world  put in place at once to provide  early relief
market  prices,  they would  sell  for less  than  from the agricultural  subsidy war,
the EC pays for its corn gluten.  * priority in phasing out subsidies to be given
The  EC also  dumps feed  grains  on  world  to those which most affect  trade, and
markets, telling alternative suppliers, such as  * some form of special and differential treat-
70ment for developing countries,  ensure an even higher degree of subsidization
As to timing,  our aim is to have a mid-term  than exists  now.  The Europeans  themselves
review  of the  MTN  by  the  end  of  1988,  at  say that the EEP has not been a major cost
which  time  countries  would  agree  to  a pro-  burden for them. The decline in the dollar has
gram for reform to follow.  This will be by no  been  more  significant,  and  its  major  cost
means easy to achieve. The Japanese, who are  burdens lie in the dairy and livestock sectors
major  offenders  in  distorting  world  agricul-  rather  than  in  grains.  If the  U.S.  were  to
tural  markets,  still appear to be reluctant to  agree this year to a cease fire and short-term
admit that the problems have been caused by  alleviating  measures,  I  believe  there  is  a
anybody other than exporters. Nevertheless,  distinct  possibility  that  a  preliminary
the rhetorical  support for reform has reached  agricultural MTN agreement could be reached
unprecendented  and unpredicted  high levels.  before the end of 1988.
This  may  be  the  best  chance  to  achieve  Too much  attention is generally focused  on
progress  for  the  remainder  of this  century.  the possible losers from reduced subsidization
We certainly intend to give it our best shot.  in  the  farming  sector  in  the  U.S.  Farmers
We  see  the  U.S.  role  this  year  as  being  everywhere,  including the U.S. and Australia,
pivotal.  It probably  does not help that this is  stand to gain greatly from a genuine liberali-
the last year of the  current  U.S. administra-  zation  of world  trade.  The  developing  coun-
tion and  is,  therefore,  an  election  year.  Cer-  tries  remain  vast  untapped  markets.  These
tainly it is in the hands of the U.S. to make or  countries will not be able to pay all their debts
break the MTN  this year.  One aspect of cur-  and achieve real income growth without more
rent U.S.  policies which is troubling is the ap-  access to developed  countries' markets. But if
parent  intention  to  not  only  maintain,  but  that growth occurs,  then the potential is im-
actually increase, grain subsidization.  The Ex-  mense. A common change in diet when income
port  Enhancement  Program  (EEP)  is  being  grows is away from rice and into wheat prod-
used  at  a  faster  rate  than  ever.  Deficiency  ucts, which would  of course benefit  both our
payments for grain will be down slightly this  grain  farmers.  Meat  consumption  also  of
year,  which  is  a  step  in  the right  direction.  course  increases  greatly.  I  understand  the
However,  a  reduction  in  acreage  controls  average  consumption  of  meat  in  developed
could  mitigate  the effects  of that  fall. These  countries is around 40 lbs. per head per year,
moves are politically  popular in the U.S.  The  but only 14 lbs. in developing countries. An in-
justification  given  for them  is  that they  are  crease  in  consumption  of only  a few  pounds
directed  primarily  against  the  EC  and it  is  per  head  would  be  of considerable  economic
necessary to keep the heat on the EC to main-  significance.
tain momentum in the MTN.  No  one  doubts  the  technical  efficiency  of
This is a view that we do not  share.  For a  U.S. farmers.  Economic  efficiency  is another
start, the EC is not the only other exporter of  factor which we believe only comes from com-
grains  in  the  world,  and  U.S.  policies  ad-  petition.  A  single  Australian  sheep  farmer
versely  affect  countries  like  Australia,  now runs up to 8,000 sheep,  and 5,000 is com-
Canada,  and  Argentina just  as  much  as  the  mon.  Cattlemen  are  starting  to  run  600  or
EC.  Furthermore  from  our perspective,  the  even  1,000 cows, and sugar farmers up to 200
EC is already  at the negotiating table. There  acres. Our wheat farmers' last season received
is a danger that if the U.S. turns up the heat,  something like U.S.  $1.70 per bushel on farm,
this  will  only encourage  the  EC to lock into  and yet many were profitable.
place and include budget measures which will
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AUSTRALIAN/CAIRNS GROUP PERSPECTIVE: SOUTHERN AGRICULTURE AND THE WORLD ECONOMY: THE MULTILATERAL TRADE NEGOTIATIONS

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