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Doha Isn’t Dead

A Canadian trade expert said it is likely the WTO will reach a new trade agreement in 2010


October 26, 2009
By Jim Knisley


Topics

There is increased likelihood of a trade deal at the WTO, Canada’s
former agricultural trade negotiator and an expert in international
trade told poultry producers in Smithville, Ont., in August.

There is increased likelihood of a trade deal at the WTO, Canada’s former agricultural trade negotiator and an expert in international trade told poultry producers in Smithville, Ont., in August.

p36_gifford  
Worst Case Scenario
Former agricultural trade negotiator Mike Gifford told Ontario poultry producers to hope for the best but prepare for the worst if Doha is completed with the current modalities in place.


 

Speaking during a Farm Credit Corporation lecture tour on international trade negotiations Mike Gifford said that with the exception of Canada members of the WTO have agreed on the modalities for an agriculture deal. Agreements on services and industrial goods have lagged, but it is likely negotiators will find agreement on those two sectors this fall or early next year.

The sticking point is that the U.S. will have to show leadership if services and industrial agreements are to be reached. Throughout the spring and summer Washington has been focused on dealing with macroeconomic policies, the recession and health care. If international trade makes it onto Washington’s agenda a WTO agreement could come quickly.

While Canadian supply-managed groups and the Canadian government are firmly opposed to provisions in the agriculture package as it now stands, they are alone in the world.

Other nations have accepted the combination of lower tariffs and increased access. “But nobody in their wildest dreams is talking about free trade in agriculture,” he said.

With a deal likely, it is in Canada’s interest and in the interests of producers in the supply-managed sector to come up with a Plan B. Plan A, Gifford said, was to oppose any weakening of the protections provided to supply-managed industries. If there is an agreement Canada will be unable to stand alone and it will need to negotiate the best deal it can.

Once the modalities are set each country puts together and initial offer “then there is a lot of to and fro.”

No Plan B
But Canada doesn’t have anything to offer because it doesn’t have a Plan B, which puts it in a terrible negotiating provision if a deal goes through.

Part of Plan B could be safeguard mechanisms that would protect producers from the worst of the very volatile U.S. markets. “The rest of the world would understand that,” he said.

They have seen the violent swings in production and prices in the U.S. – with the current example being milk – and understand that Canada’s geographic proximity means it needs measures to safeguard its industries.

“If you stand alone to the last minute you don’t have the capacity to influence,” he said. Gifford also said that the provisions in the current WTO package allow for significant tariff protection. Canadian producers would have to adjust and adapt but there would be a phase-in period to allow for that. They might also have to prepare for more price volatility than in the past because currency fluctuations could weaken the tariff walls.

What a new, lower tariff will do is put a cap on the Canadian domestic price.

The worst case scenario sees a 23 per cent cut in over quota tariffs and increased access.

But the prospective deal doesn’t mean the end of supply management, he said.
“While it won’t be as perfect as today, you will still have substantial tariff protection,” he said.

“There is no compelling reason why the system cannot survive and prosper in the post Doha round.”

However there will be pressure on high cost producers to exit, he said.

The main change the industry would face would likely be the replacement of the present pricing system in dairy and eggs with a system of negotiated prices between producers and processors (paralleling the existing situation for chickens and turkeys), which still would reflect the substantial protection of the remaining over-quota tariffs. The main adjustment would be that Canadian producer prices would start to more closely track world prices, which should be less volatile and higher as a result of the phase-out of export subsidies and the creation of new market access opportunities.

The impact on production quota values is hard to judge and would depend heavily on the adjustment policies adopted by the Canadian federal and provincial governments to allow for a “soft” rather than a “hard” landing for producers, he said.

Given the political influence of the supply-managed industries at the federal and provincial levels, it’s likely there would be a soft landing and most of the main elements of supply management would continue.

Differing Impacts
Doha would also have differing impacts on supply-managed industries.

The greatest impacts would be expected for dairy, turkey, and egg producers, while the impacts on producers of chicken and broiler hatching eggs and chicks should be considerably less, reflecting the fact that for these latter products Canada’s NAFTA market access obligations already provide considerably more low in-quota tariff access than Canada’s existing WTO commitments.

For example, Gifford says, Canada is obliged, under NAFTA, to provide low duty access for chicken equivalent to 7.5 per cent of the previous year’s production. This compares to Canada’s existing WTO commitment to provide low duty access for an amount equivalent to five per cent of consumption in the 1986-88 period. Given that Canadian broiler production has grown considerably since then, this means that the NAFTA rather than Canada’s WTO commitment is the binding import access obligation. In the case of broiler hatching eggs there would be no new market access under a Doha Round Agreement since Canada’s existing NAFTA access obligation (21.1 per cent of the anticipated current year’s production) already greatly exceeds its current and prospective WTO obligations, he said.

The situation for dairy, turkey, and eggs would be different because much of the increase in WTO quota volumes would represent new access. However, even for these products, the actual import increase will be moderated because the supplementary import permit system already allows in more imports than the current WTO commitment levels.

The result is that a Doha Round deal similar to the current draft modalities would imply that Canada will need to increase the volume of WTO in-quota imports by five to eight per cent of domestic consumption in exchange for having to reduce its 200-300 per cent over-quota tariffs by less than one-quarter (instead of around 70 per cent if there was a full application of the tiered tariff reduction formula).

“The remaining over-quota tariffs still should be high enough to allow a slightly modified supply-management system to survive,” he says.

However, Canadian supply-managed prices would have to increasingly reflect duty paid cost of imports. This would mean less price stability than under the current system.

A Doha Round result would also contain caps on trade distorting domestic support and any remaining administered prices would be subject to a cap and roll-back to the average prevailing in the 1995-2000 period – which, in effect, means a move to negotiated pricing, he said.

As to quota values, they could fall more than necessary unless the adjustment plan is known early, producers are given time to adjust, and government assistance is provided.

Government’s Role
There are valid reasons why governments need to consider adjustment assistance, he says.

Most current supply-managed producers purchased their production quota and made other long-term investments in the context of an ongoing supply-management system. These investments were made on the basis of long-standing policies supported at the federal and provincial levels.

“If the rules of the game are to be changed as a result of a multilateral trade agreement, it is only fair that governments provide appropriate financial adjustment assistance.”

This means that government and producers will have to sit down and work out a process to ensure a soft landing and to avoid panic.

Gifford said the supply-managed industries have done “a first rate job” convincing politicians. “I haven’t heard anyone, aside from a few academics, suggest we should get rid of supply management.”

He said supply managed industries represent 20 per cent of total agriculture production in Canada but carry 80 per cent of the political clout. Other farm interests that have 80 per cent of agriculture production have, maybe, 20 per cent of the political impact.

That political influence could be put to good use to ensure a sound, solid adjustment package and a reasonable timetable, he said.

Given the likelihood of a Doha deal Gifford said the industry should “assume the worst and hope for the best. But prepare for the worst.”

About Mike Gifford
During his 35-year career in agricultural trade policy Mike Gifford served as Canada’s chief agricultural trade negotiator (including the Canada/U.S. Free Trade Agreement, NAFTA and the Uruguay Round), and most recently, has been involved in agricultural trade policy projects in Egypt, China, Africa and Russia. He also served as consultant to the WTO and as a member of a WTO dispute settlement panel. He is now a member of the International Food and Agricultural Trade Policy Council and is a Senior Fellow of the Canadian Agricultural Trade Policy Research Network, and the Centre for Trade Policy and Law at Carleton University.

Modalities – the details
A Doha agreement along lines currently proposed would call for significant reductions in agricultural tariffs, which would average more than 54 per cent for developed countries. A tariff formula would ensure that the higher the tariff the higher the reduction, with the highest tariffs (over 75 per cent) being reduced by about 70 per cent, and tariffs 50-75 per cent, 20-50 per cent and 0-20 per cent being reduced by 64 per cent, 57 per cent and 50 per cent respectively.

However, so-called “sensitive” tariffs would only be reduced by around 23 per cent. Most of these sensitive tariffs are protected by “tariff quotas,” which enables a certain import volume to enter at zero or relatively low tariffs.

Once this within-quota amount is filled, a much higher over-quota tariff applies. In order to minimize the erosion effect on the tariff formula, the number of tariff lines, which can be designated as sensitive would normally be limited to four per cent of the total number of tariff lines. In addition, sensitive tariffs would have to allow additional import volumes to enter at low tariffs. Countries that need a higher number of sensitive tariffs or that want to keep tariffs above 100 per cent would have to pay by further increasing the volume which can enter at low or zero tariffs.

The base increase in tariff quota volumes would be four per cent of the average 2003-5 consumption but this could increase to six per cent, or even slightly higher, if countries wish to take advantage of the maximum flexibilities.

This would appear to be the case for Canada, which has indicated that it needs to have at least six per cent of tariff lines designated as sensitive and freedom to maintain over quota tariffs in excess of 100 per cent.

It should also be recalled there is a trade-off between minimizing over quota tariff reductions and tariff quota expansion – the smaller the over quota tariff reduction, the greater the requirement to expand the size of the new tariff quota and the greater the need to reduce domestic production quotas.

It must be stressed that this is probably the worst case scenario and that Canada should be able to moderate these Doha Round consequences by an appropriate choice of adjustment measures. The main challenge is to avoid panic decisions.

(Edited extract from a paper prepared by Mike Gifford for the Centre for Trade Policy and Law at Carleton University.)


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