Free trade agreements shape domestic agricultural policy

Agricultural policy has achieved political prominence again, as the drafting of a new Farm Bill begins in earnest. Trade policy is also high on the administration’s agenda with the Doha Round reaching (another) critical juncture and President Bush facing a June 30 deadline to forge an agreement with the Democratic Congress on approval of four new bilateral free trade agreements (FTAs) with South Korea, Colombia, Peru and Panama. Yet while there has been plenty of media speculation as to how a potential Doha agreement would impact the Farm Bill, and vice versa, there has been little comment on the significant interactions between FTAs and U.S. domestic agricultural policy.

FTAs and farm policy

The dramatic change in U.S. trade policy over the past 25 years — from being cool toward FTAs until the mid-1980s to being one of the most active players in the contest for preferential access — initially affected agriculture less than some other sectors (such as services and knowledge goods). However, this is changing as their cumulative impact is finally being felt. About one-half of all agricultural trade to and from the United States is covered by FTAs, though often some restrictions still apply. While negotiators are skillful in devising safeguards for the most sensitive agricultural sectors, such as sugar and dairy production, the pattern of U.S. agricultural and food trade has shifted away from such staples and included more high-value products. These products are usually subject to the full competitive rigors of bilateral free trade.

NAFTA agriculture fallout

FTAs can have major domestic policy and political implications, especially on sensitive agricultural issues. The EU Common Agricultural Policy (CAP) began as a device to allow freer trade in farm products within the European Economic Community (EEC). Washington has favored less complete regional agreements, such as the North American Free Trade Agreement (NAFTA) and bilateral FTAs with Chile and Australia, which avoid the complications of a “common policy.” However, Mexico changed its agricultural policy radically to enter NAFTA, and is still feeling the social effects of that change. The United States and Canada opened up their borders to each other’s cereal production under the Canada-U.S. FTA, exacerbating a long-running conflict between U.S. and Canadian wheat farmers.

U.S.-Mexican agricultural trade

The impact of bilateral trade agreements on the U.S. domestic market is usually delayed by schedules of tariff reductions and quota-controlled transition periods. However, as U.S.-Mexican agricultural trade indicates, such agreements can shake markets:

•In 2008, the elimination of tariffs on U.S. staple commodities, such as corn and beans, will have a major impact on Mexican producers.

•Likewise, freeing Mexican sugar imports next year will be a challenge for the highly protected U.S. sector. Even if this does not undermine U.S. sugar policy, significant changes are expected.

•The “domestic” agricultural market for many products now extends across the United States and Mexico (Canada opted out of the free agricultural market for sugar, as well as for dairy products and poultry).

•While Mexico will feel the impact of free trade more than the much larger U.S. market, the ability of the U.S. authorities to control their part of the market will be reduced as a result of the open border.

Increased political attention

One reason why public attention has not focused on how much U.S. agricultural policy has been shaped by FTAs is that the World Trade Organization (WTO) has dominated the issue over the past decade. However, this situation could change fairly quickly:

•Growth of FTAs. A further hiatus in the WTO Doha Round would almost certainly lead to more FTAs. The apparent difficulty in gaining better market access through a multilateral agreement will translate into pressure for market access through bilateral (and regional) trade pacts. WTO Director-General Pascal Lamy has predicted that 400 such agreements could be in place in a few years’ time.

•Industry preferences. The short-term rewards of FTAs are potentially greater for the exporter, as tariffs are eliminated rather than just cut, and the degree of trade preference relative to competitors allows for greater profit margins. The import-competing sector may also prefer to compete with selected partners rather than with the lowest cost supplier in the world.

Therefore, the political attraction of FTAs to agricultural producers is clear — even if economists rightly warn of the perils of abandoning the difficult march toward a multilateral open trade system for the appealing fruits of a series of preferential deals.

Opaque FTA effects

The impact of FTAs on domestic agricultural policy has been obscured by three key factors:
•Advantaged ‘program crops.’ The dominance of the major “program crops” (corn, wheat, soybeans, cotton and rice) in farm policy debates is understandable, given that they absorb 80 percent of the U.S. budget allocated to agricultural support. These commodities are the gainers in most of the FTAs signed by Washington, so these agreements have posed little overt challenge to domestic farm policy.

•Subtle policy impact. However, the situation is very different in the case of fruits and vegetables, sugar and livestock products, in which many of the countries that have signed FTAs with the United States have a cost advantage. It is in these products that the market has been most influenced by FTAs. Although bilateral trade agreements do not pose a threat to domestic support programs (sugar is an exception) these agreements do change the parameters of agricultural policy.

•Broader ramifications. Moreover, it is in the markets for these latter commodities that many other significant policy issues surface: food safety, invasive species, quality attributes, nutritional content and the challenges posed by supermarket leadership of food supply chains.

Policy ‘Europeanization’

As the era of generous safety nets for a small number program crops produced in the U.S. Midwest gradually passes (helped on its way by the ethanol boom) the thrust of farm policy is shifting toward ensuring a healthy and nutritious food supply and imposing obligations on farmers as stewards of the land. This ‘Europeanization’ of U.S. farm policy is unlikely to be accomplished in the 2007 Farm Bill, but it appears ultimately inevitable. The trend opens up the way for more imaginative policies that cover new regional markets, to provide regulatory competence that extends beyond borders. A framework for such a development is already at hand in the WTO, but it is likely to develop more rapidly at the bilateral and regional level — driven by FTA deals.

Oxford Analytica is an international consulting firm providing strategic analysis on world events for business and government leaders. See www.oxan.com.

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