Clayton, Kenneth C.

English

Research Papers in Economics

SOUTHERN JOURNAL OF AGRICULTURAL ECONOMICS  JULY,  1988
UNITED STATES PERSPECTIVE:  SOUTHERN
AGRICULTURE  AND THE WORLD  ECONOMY:
THE MULTILATERAL  TRADE NEGOTIATIONS
Kenneth C.  Clayton
The  current  "Uruguay  Round"  of  trade  repair  needs  mounted,  the  old  gentleman
negotiations under the General Agreement on  always seemed to be out in his driveway bang-
Tariffs  and  Trade  (GATT)  began  with  the  ing  on  the  truck,  creating  something  of  a
Declaration  by trade  ministers  at Punta del  disturbance in the neighborhood.  The increas-
Este,  Uruguay,  in  September  1986.  To  con-  ing need for repairs  also began to affect  the
duct  the  negotiations,  an  agricultural  old  gentleman's  finances.  Repair  costs were
negotiating  group,  along with fourteen other  soaring.  Every  day  that  the  truck  sat  idle
such groups, has been established.  Negotiat-  because  of  a  breakdown  meant  lost  oppor-
ing proposals on agriculture have been offered  tunities for income.
by the Nordic Countries, the European  Com-  If the metaphor can be applied, what coun-
munity  (EC),  Canada,  the  Cairns  group,  tries around the world have today is an array
Japan, and the United States.  of "1953  pick-up  truck"  policies  for  agricul-
This paper  focuses on the proposal put for-  ture. These policies are offensive to the neigh-
ward  by  the  United  States  to  its  GATT  bors. They are not particularly reliable. They
negotiating partners on agriculture. To under-  are costly to maintain. Whether they actually
stand  why  this  particular  proposal  was  of-  promote  the  long-term  economic  welfare  of
fered, it is necessary first to be clear as to the  farmers is open to question,  as well.
nature of the agricultural trade problem. It is  Like  the  old  gentleman  in  my hometown,
also  important  to  recognize  the  historical  governments  face  some  difficult  choices.
shortcomings  of  the  GATT  with  respect  to  There  can  be  continued  tinkering  on  old
agricultural trade.  policies,  a  rather  intolerable  and  likely  un-
sustainable  option.  Alternatively,  existing
agricultural  policies  can  be  replaced,  or  at
A TRADE  FABLE: PICK-UP TRUCKS  least substantially rebuilt.
AND AGRICULTURAL POLICIES
In thinking about the agricultural trade prob-  DEFINING THE PROBLEM
lem, I am reminded of a situation in my home-  It is important that the real, underlying prob-
town when  I was growing up.  There  was an  lem of agricultural trade be distinguished from
old gentleman who came around every month  its more commonly recognized symptoms. This
or  so buying  up pieces  of machinery,  bits of  is the only basis upon which a lasting solution
metal, and other items for salvage. He had a  can be drawn.
1953 pick-up  truck that he used to haul away  The current situation takes  on a number of
his treasures.  Although  the truck was show-  dimensions.  It is  often  said  that there  is an
ing its age, the old gentleman was really fond  . excess  supply  of agricultural  goods,  particu-
of it.  He had purchased it new, and over the  larly as judged by unacceptably low  market-
years they had been through a lot together.  clearing price levels.  Government budget out-
The townfolk did not feel quite the same way,  lays  for farm programs  have  skyrocketed-in
however. For one thing, the truck burned a lot  the United States,  the EC and elsewhere.  In-
of oil-everywhere the old gentleman went, a  ternational  political  relations  are suffering  as
blue  cloud of smoke followed.  In addition, as  trade  frictions  multiply.  Debt-burdened
Kenneth  C. Clayton is Senior Economist,  Office of the U.S. Trade Representative,  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).
The views expressed  here are those of the author and not necessarily of the U.S. Government.
Copyright  1988,  Southern  Agricultural Economics  Association.
73developing countries  are in desperate need  of  other  shortcomings  of the  GATT  as regards
the foreign exchange earnings that agricultural  agriculture,  is the nature of agricultural  pro-
exports should be generating.  tection  itself.  Agricultural  protection  as
While each  of these is a problem in its own  already noted consists of a package of support,
right, the more pervasive, root problem is the  including  domestic programs.  Countries have
protection  or  support (and the nature  of that  been  unwilling  to  make  changes  in  import
support)  that  governments  are  providing  to  restrictions and export subsidies because they
their farm sectors. In search of an ill-defined in-  directly  or  indirectly  involve  domestic  pro-
come objective, the policy mix pursued by most  grams that are  considered  to be  a matter  of
countries  attempts  to  manipulate  the  prices  national decision-making  sovereignty.
and/or  costs  of production  that  their farmers
face.  In  so  doing  there  are several  repercus-  FRA  A S  T
sions:  production  is  too  often  stimulated;  de-AMIN  A  OLU
mand  is frequently  discouraged  or  distorted;  Having  defined  the  problem-excessive
import barriers become necessary to keep out  farm support that is distortive of production,
lower-priced  products;  and  subsidies  are  re-  consumption,  and trade-has put countries  in
quired to export excess production.  search of a solution. That is the purpose of the
It is particularly important to recognize  that  Uruguay  Round  of  multilateral  trade  ne-
it is the package of support that matters.  The  gotiations.
distinction  between  "trade"  and  "domestic"  Without  attempting  to  prejudge  the  out-
policies has become more illusionary than real.  come of the negotiations, the basic outline of a
Or, to put it another way, domestic policies are  solution  does  seem  rather  clear:  the  elimi-
an integral  part  of the trade  problem,  either  nation of those policies that are distorting pro-
directly or because  of the border measures  to  duction,  consumption,  and trade.  Preferably,
which they give rise.  existing  price  and  income  support  policies
would  be  replaced  with  need-based  income
transfer programs. If there are other rural  or
GATT AND AGRICULTURE  farm sector objectives  that countries wish to
The  General  Agreement  on  Tariffs  and  pursue  they  would  do  so  through  targeted
Trade (GATT)  was agreed to in  194748 as  Pa  programs that do not distort (or, at least, dis-
tort to a much lesser degree) the production,
part of the overall effort to get trade restarted  tort  to a much lesser  de  gree) the  productionural
after World War II. Its basic purpose was to  consumption,  and  trade  of  agricultural
establish  a system of rules whereby trade be-  products
tween countries could be nurtured and the re-
sulting benefits of economic growth promoted.
While agriculture has always been a part of  THE U.S. PROPOSAL
the  GATT,  the  rules  governing  agricultural  Given the  nature  of the  agricultural  trade
trade  have  been largely  ineffective.  Several  problem  and the  kind  of solution  that  is re-
factors seem to account for this failure. First,  quired,  the United  States tabled its proposal
a number of countries have received waivers  for agricultural reform in July  1987 (Office of
or exemptions  from  GATT  trade  disciplines  the U.S. Trade Representative).  The essential
when  it  comes  to  agriculture.  Among  these  features  of  the  U.S.  proposal  include  the
countries are the United States and the Euro-  following:
pean Community.  (1) the  phased  elimination  over a  ten-year
The  GATT  rules are rather loosely written  period of policies that distort the produc-
or  ill  defined  as  they  apply  to  agriculture.  tion, consumption,  and trade  of agricul-
These rules often lend themselves to conflict-  tural  products,  including  specific  pro-
ing interpretation,  vision for a freeze and phase-down of the
Even when evidence of a violation of GATT  quantities of commodities exported with
rules is established, the means to ensure com-  the aid of export subsidies, and required
pliance  have  been  ineffective.  Decisions  of  market-access  commitments  consistent
GATT  panels  established  to  review  a  com-  with the phased elimination  of support;
plaint can be blocked, with only the weight of  and
international opinion serving to force a change  (2)  harmonization  of food health and safety
in a country's trade practices.  regulations so that they do not serve  as
Finally,  and  having  much  to  do  with  the  disguised trade barriers.
74Two important exceptions are provided in the  tion and  Development,  World Bank).  That is,
proposal  with  respect  to  the  phasing-out  of  the  free-rider  benefits  of trade  liberalization
distortive policies.  First, direct payments that  appear  limited.  It  seems  only  logical,  there-
are decoupled from production and marketing  fore,  that  it is  in a  country's self-interest  to
would be  permitted  as a safety-net  for farm-  participate  in  agricultural  policy  reform  if
ers.  Second,  bona  fide  domestic  and foreign  other countries  are making similar reforms.
food aid could be continued.  The  evidence  is clear  that there  should be
The U.S. proposal has been characterized as  incentive for domestic farm policy reform. Ef-
bold  and  innovative  by  its  supporters.  Its  forts  to protect the  incomes  of less  efficient
detractors  term it unrealistic; they say that it  farmers  through  price  policy  have  not  been
goes too far. Questions have been raised such  particularly successful.  Such policies typically
as  whether  public  support  for  agricultural  have  led to a deterioration of the relative  in-
research  and  extension  education  could  or  come position of the less efficient,  as benefits
should be eliminated.  This debate, to some ex-  flow  predominantly  to the  larger,  more  effi-
tent,  misses  several  important  points  about  cient  producers.  Commodity  markets  have
the  U.S.  proposal.  Most importantly,  it sets  become distorted when governments have  in-
the standard  in identifying  what ought to be  tervened to influence or set prices.  The incen-
done.  The  U.S. proposal  addresses  the  need  tives  for production  and the  price signals  to
for fundamental agricultural  policy reform. It  consumers  inevitably  get  out  of  line  with
provides an approach  that allows countries to  market  realities.  This  ultimately  leads  to
adjust their policies over a reasonable  period  losses in economic  welfare  for taxpayers  and
of time. It appropriately recognizes  that it is  consumers  that  outweigh  any  gains  to
the package of support that governments pro-  producers.
vide to their farmers that must be considered.  A growing literature of general equilibrium
Issues such as policy  coverage will ultimately  analyses  suggests  that the  economy-wide  ef-
be a topic of the negotiation  so that particular  fects  of  farm  policies  are  quite  significant
programs (e.g., research and extension) can be  (Breckling et al.). By trying to hold resources
preserved  if  there  is  an  international  con-  in  agriculture,  these  policies  are  creating  a
sensus  to  do  so.  And  importantly,  the  U.S.  drag  on the general economy  causing  slower
proposal allows for reform of agricultural  poli-  economic  growth  and higher  unemployment.
cies without abandoning farmers.  Legitimate  It  is  ironic  that  many  of the  countries  that
income  needs  can  still  be  met  through  de-  argue the need for farm policy to keep their
coupled  (i.e.,  not  related  to  production  or  rural populations  out  of unemployment  lines
prices) payments.  in the  cities may actually  be contributing  to
the problem rather than resolving it.
The economic  difficulties being experienced
MOMENTUM  FOR  CHANGE  by many developing countries are not without
Previous GATT trade negotiations  have failed  consequence  for  the  industrialized  countries
to  deal  adequately  with  agriculture.  The  and should provide at least some impetus for
Uruguay  Round,  on  the  other  hand,  holds  policy  reform.  This  would  seem  particularly
promise for significant  progress.  There are a  true  with respect to those debt-burdened  de-
number of reasons for this noticeable  momen-  veloping countries that depend on agricultural
tum. A great  many countries  are  struggling  exports  to  generate  foreign  exchange  earn-
with the reform  of their domestic  farm  poli-  ings.  The financial  communities  in  many  in-
cies. However, the political constraints to sig-  dustrialized  countries  hold the debt  which  is
nificant reform  on  a  unilateral  basis are  ex-  t risk  in  these  developing  countries.  More-
ceedingly  difficult.  Multilateral  reform  can  ver,  the  future  growth  of  agricultural  ex-
ease this  process.  A number  of studies sug-  ports from industrialized  countries  is closely
gest,  moreover,  that the costs  of adjustment  tied  to  economic  growth  and  the  exchange
to any one country can be reduced if action is  earnings potential of developing countries.
undertaken  on a multilateral basis (Organiza-  On  a  broader  scale  than  just  agriculture,
tion for Economic  Cooperation  and Develop-  there is a strong vested interest in seeing the
ment, World Bank).  international trading system prosper. Several
Several  analyses  indicate  that  the  gains  of the countries which seem most resistant to
from agricultural trade liberalization accrue to  agricultural policy reform are greatly depend-
those  groups  of countries  that  reform  their  ent  on  trade  in  manufactures.  If  confronta-
policies  (Organization for Economic  Coopera-  tions  over agricultural  trade  are  allowed  to
75undermine  the overall trading  system,  it can  analytical effort  in an  international  forum  to
only work to their economic  disadvantage.  define the  problem of agricultural  protection
Finally,  there  is  an  international  political  and  examine  the  economic  implications  of
consensus as to the need for long-term reform  multilateral  reform  (OECD). And lastly,  the
of agricultural  policy.  This  consensus  is  un-  Punta del Este Declaration by trade ministers
precedented  and creates  a window  of oppor-  which  inaugurated  the  Uruguay  Round  was
tunity for  multilateral  actions  that  are  diffi-  an  important political  statement on the need
cult, at best,  on a unilateral  basis.  The need  for agricultural  policy  reform.
for agricultural  reform featured  prominently
at both the Tokyo and Venice  Economic Sum-  CONCLUSION
mits  attended  by  the  heads  of government  There can be no question but that the stage
from the major industrialized countries. In ad-  is set for significant progress in international
dition,  the  Organization  for Economic  Coop-  agricultural  policy  reform.  The  need  for
eration and Development  (OECD) recognized  reform  has  been  well  established.  Whether
the  need  for  reform  in  its  1987  Ministerial  countries  will  take  full  advantage  of  this
Communique.  This political  statement  at the  historic opportunity,  of course, remains to be
OECD was supported,  moreover, by the first  seen.
REFERENCES
Breckling,  J.,  S.  Thorpe,  and  A.  Stoeckel.  Effects  of EC Agricultural Policies:  A  General
Equilibrium Approach. Wiston  House  Conference  on  Economy-Wide  Effects  of Farm
Support Policies,  Steyning, West Sussex,  England,  May 8-10,  1987.
Organization  for  Economic  Cooperation  and  Development  (OECD).  National Policies and
Agricultural Trade. Paris:  OECD, 1987.
Office of the U.S. Trade Representative.  United States Proposal  for Negotiations on Agriculture.
Washington,  D.C., July 7,  1987.
World  Bank.  World Development Report 1986. New York:  Oxford  University Press, 1986.
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UNITED STATES PERSPECTIVE: SOUTHERN AGRICULTURE AND THE WORLD ECONOMY: THE MULTILATERAL TRADE NEGOTIATIONS

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