NAFTA and Domestic Policy
Reform: Observations from Canada
Rick Barichello
University of British Columbia
Presented at University of California Silverado Symposium
on Agricultural Policy, Napa CA, January 19-20, 2004
Introduction
• Canada signed 3 major trade agreements since 1988,
CUSTA, NAFTA and URA
• Although trade very important to Canadian economy
(~40% of GDP), trade policy still secondary to domestic
policy
• Some see these trade agreements as facilitating unwanted
policy changes, others see them as facilitating needed
policy reforms
• Our focus: what effect has these trade agreements,
particularly NAFTA, had on domestic policy reform? Has
NAFTA really caused much change in domestic policy?
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Outline
• What are the ag policy reforms Canada has actually
undertaken since 1988
• What are apparent causes of this reform?
– Insights from Canada-U.S. Free Trade Agreement (CUSTA) and
NAFTA negotiations
– Reviewing the reforms
• Details of sample of trade disputes between Canada and
U.S. since 1988
– Long term disputes
– Anti-dumping and Countervail disputes
• Dairy Policy Reform Prospects?
• Conclusions
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Ag Policy Reforms since 1988
• Significant shift in ag policies during 1990s
– Movement to substantially less subsidized position
– Somewhat more open trade environment
• Canada’s PSE as percent of total farm receipts:
– Fell from 34% to 18% over 13 years from 1986-88 to 1999-2000
– Major component of border protection due to highly restrictive
TRQs which did not change significantly
– Therefore, most of PSE decline due to cuts in government subsidy
support
• Result: dichotomous policy environment today
– 80% of ag sector has little government budget support and little or
no border protection
– Remaining 20% (dairy, poultry production) heavily protected via
commodity marketing boards using domestic and import quotas
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Actual Policy Changes 1
• Major budget cuts in 1995/96
– Crow Rate freight rate subsidy eliminated: $800 M/yr
– Direct dairy subsidy phased out, 1996-2002: $300 M/yr
– Now, no commodity policy, no direct payments and no
government commodity purchases
• Stabilization Policy evolution
– Process of change from traditional price supports began
in 1970s; pace continued in 1990s
– Now stabilization policy is cross-commodity, insurance
style schemes, focus on aggregate farm gross margins
(revenue less purchased inputs) and crop insurance,
with moderate degree of subsidy (approaching C$1B)
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Actual Policy Changes 2
• Centerpiece of new agricultural policy regime: Agricultural
Policy Framework (APF)
• Key features illustrated by its “5 pillars”
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•
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Food quality and safety
The environment
Science and innovation
Sectoral renewal
Business risk management
– Focus on “niche markets, branding unique Canadian product,
controlling attributes throughout food chain”
• Environmental programs: reducing run-off, providing
wetlands and biodiversity
• Research spending maintained in real terms; extension
support under provincial funding has fallen substantially
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Balance of Agricultural Policy
• Supply Management
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Largely maintained unchanged since mid-1970s
Farm-level marketing quotas set: Prodn + Impts = Cons
TRQs @ 5-8% of domestic consumption
Over-TRQ tariffs {100-250%}; much water in tariffs
Economic rents high: Dairy quotas average $1M/farm;
poultry farm quotas similar (eggs, $2-2.5M/farm)
– Lobby strength legendary; sector extremely resistant to
policy change
• Canadian Wheat Board: -very large STE
– No supply control, no significant ongoing subsidy
– Monopoly export rights; domestic +international debate
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Evidence from CUSTA Negotiations
•
•
What precipitated this major reduction in subsidy?
– Due to commitments in trade agreements? NAFTA
or URA? Other pressures?
CUSTA negotiations (1985-87)
–
No major policy reform options embraced in those
negotiations
“both Canada and the U.S. made it crystal clear that they were
proceeding on the premise that while their mutual objective was to
eliminate all agricultural tariffs, the most sensitive existing quantitative
import restrictions would remain. This is in fact what finally occurred.”
(Mike Gifford, 2001)
–
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Could argue CUSTA led Canada to regulate further
its dairy industry…it imposed import quotas on ice
cream and yogurt where before there were tariffs
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Evidence from NAFTA Negotiations
•
Canada’s negotiating stance with Mexico similar
–
•
Willing to negotiate tariff reductions but not NTBs on
dairy, poultry and eggs (potential gains in other areas
not worth the risk)
– URA negotiations were in mid-stream and Canada
wanted no risk to its position in those negotiations
concerning GATT Art.11 which permitted Canada to
impose import quotas for supply managed commods
– Canada clearly chose to put its major policy areas
(supply management, CWB) on the negotiating table
only in the GATT negotiations (as least re market access)
Same position in FTAA: TRQ levels, over-TRQ tariffs,
and STEs are matters only for the Doha Round
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Contrast with U.S. Position
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Bilateral between U.S. and Mexico in NAFTA was very
different
US and Mexico agreed to tariffy all import quotas as well
as phase out all ordinary tariffs and tariff equivalents
Result: border protection for even sensitive commodities
was to be removed
Why? Gifford argues, the value of market access gained,
plus the greater ease politically of selling a no-exceptions
approach, was worth the risks of damage from the greater
competition that would be felt in sugar and dairy
Conclusion: it was simply a calculation of political costs
and benefits, not more general view of bilateral vs multilateral negotiations, and these would vary case by case
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Apparent Causes of 1990s Reforms
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Main elements of reforms:
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removal of export grain freight subsidy and dairy direct subsidy,
changing of commodity-based stabilization programs, and
reduction of variety of smaller subsidies
Federal govt budget cutting pressures clearly primary
reason for the policy changes, particularly large expensive
policies
Reform of Crow freight subsidy also influenced by URA
•
–
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Export subsidy commitments including cutting back Crow, but this
required only 36% over 5 years, not 100% in 2 years
Dairy subsidy: some cut would meet domestic support
commitments but actual cut well beyond minimum req’d
So strong impression that these two cuts were primarily
budget pressure-induced
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Causes of Earlier Reforms
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•
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Changes in stabilization programs earlier in
decade have closer connection to trade policy
Change not for a NAFTA or URA commitment
Rather due to trade remedy law, countervail
provisions
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Canada vulnerable to countervails due to previous
design of stabilization programs
Shift to whole farm, cross-commodity,, insurance-style
program was substantially a response to U.S.
countervail procedures in effort to avoid US CV duties
These concerns were discussed widely since mid-1980s
when hogs and pork were subject to a series of CVD
examinations
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Other Causes of Policy Changes
•
The changing role of farm lobbies could also be argued to
be an important factor in at least some policy changes in
the 1990s
More sub-groups of producers began to exert
independence from the monolithic positions of the key
farm lobbies
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Farm lobby groups became more fragmented by commodity,
region, between different farm sectors, and between farmers and
processors
With producers holding more mixed positions, the lobby
position for certain policies weakened, and the government
was left with more latitude to cut programs without clear
and consistent opposition, including cuts that would not
have been feasible a decade or two earlier
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Negotiations and Reforms: Summary
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Role of trade policy appears to be secondary in reforms
undertaken by Canada since mid-1980s
In those cases where trade policy was important, it appears
that NAFTA was much less important than URA
Same observation holds for Canada’s CUSTA, NAFTA,
UR and FTAA negotiations: key policy areas where
reforms might be major have kept off the table in the
CUSTA, NAFTA and FTAA negotiations
U.S. negotiation strategy quite different in NAFTA (Mex)
Exception in earlier stabilization program reforms where
key objective clearly to reduce the vulnerability of new
programs from countervailing duty claims. Here trade
policy considerations were critical in program reform.
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Selected Dispute Studies: Dairy 1
• Series of border disputes in dairy since CUSTA
– all brought by US,
– on issues of unilateral imposition of import quotas, the validity of
tariffication as done to implement URAA, and export subsidies
• 1988 ice cream and yogurt case brought by US after
Canada imposed ice cream and yogurt import quotas
unilaterally after CUSTA negotiated
– US won this case; Canada responded via Uruguay Round
implementation in 1995
• 1996: Did Canada’s tariffication for URA violate NAFTA
rules? Which agreement dominates?
– Ruling supported Canada; URA provisions had priority over
NAFTA
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Dairy 2
• Late 1997, early 1998: US (and New Zealand)
brought complaint to WTO against Canada for
subsidizing milk exports
– Canada’s milk product exports to US grew substantially
in period after 1995 implementation of URA
• 5 years of appeals and challenges, requests for
compliance panel, need for new data; only resolved
in Dec 2002
• US/NZ win case with major repercussions for
Canada’s supply management sector: all exports
above 1995 levels are deemed to be subsidized and
must be stopped
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Dairy 3: Lessons
• Reasons for disputes?
– Canada’s very high over-TRQ tariffs upon URA implementation
invited challenges
– Milk revenue pooling was partly opportunistic at outset, invited
challenge also
– US has strong belief it is more competitive than Canada in milk
production and can successfully dominate Canadian market
– US has strong suspicions about Canada’s supply management
regime; fears EU might adopt similar measures to result in much
larger export subsidies
– Neither side seems interested in compromises
• In these trade policy disputes, NAFTA played a small role,
but mostly the issues were WTO-related
• In the one case where tariff reduction rules differed
between the two, WTO rules were judged to dominate
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Selected Dispute Studies: Horticulture
• Red Delicious apples
– Long history of free trade, but 1989 bumper crop in
Pacific NW so Canada claimed Washington State was
dumping Red Delicious apples into Canada
– Classic agricultural case: exporting at below cost was
easy to prove as was injury in Canada: Result: AD
duties were imposed
– Second case in 1994, same result. Removed 2000.
– Lessons:
• not area of longstanding dispute; no cases since 1994
• Opportunistic application of AD regulations
• Solution: reform of AD rules, at least as applied to agriculture
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Greenhouse/Fresh Tomatoes 1
• Two cases, 2001-2002, both AD, one by Canada, one US
• US case concerned greenhouse tomatoes
– Rapid growth in exports from Canada to US over 1990s
– Critical element of case was definition of like product:
are greenhouse tomatoes different from fresh field
tomatoes?
– Dumping was found, preliminary and final
– Injury was not found in final examination due to like
product issue: greenhouse tomatoes were small part of
fresh tomato market and no price effects were due to
greenhouse tomato imports. No AD duties, case closed
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Greenhouse/Fresh Tomatoes 2
• Canadian case involved fresh field tomatoes
– Complaint filed several months after US case launched
– Dumping was found to have occurred
– Injury claim rejected
• Strange result: Canadian complainants withdrew complaint
near conclusion, two months after US cases decided against
imposition of AD duties
– Apparent case of tit-for-tat
• Lessons:
– Not area with potential for major policy reform; rather trade friction
– Only NAFTA cases filed, and only for questions of whether
national procedures followed were appropriate
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Examining Ag Trade Dispute Data
• 53 specific complaints over 1988-2003 period
• From 30 different case types
• 22 disputes brought before NAFTA
– These covered 14 of the 30 cases
– But almost all (20/22) involved AD or CVD, as illustrated
in the Horticulture cases detailed above
– 9 were brought by the U.S.
– 13 were brought by Canada
• In areas of major bilateral dispute where significant
policy reforms could occur, most have been taken to
WTO panels, not to NAFTA
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Dairy Policy Reform Prospects
• Reform in a mechanical sense would involve either
– reducing over-TRQ tariffs from 100-250% range to 25-35% range
(much water in these tariffs)
– Increasing TRQ levels
– The first would ultimately lower domestic milk prices, the second
would involve a loss of quota sales in the short run and prices if
TRQs rose significantly
• Both steps would be resisted very strongly
• Indications of strength of opposition:
– Value of milk quotas nationally = $16-22 Billion, $1 million/farm
• Compensation almost certainly required; lobbies have stated
this publicly
– Level of compensation could not approach the full value of quotas
– Crow Rate compensation cost was $1.6 B
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Conclusions I
• Effect of NAFTA on domestic ag policy reform
appears to be minimal from every angle
– True in negotiations and in 1990s period of reforms
• WTO/GATT agreement (URA) associated with
some major actual or potential policy reforms
– Post-URA implementation did require some kinds of
policy reform, however modest for the most part
• No absence of policy reforms in Canada recently
– These reforms due primarily to budget pressures by both
federal and provincial governments
– Some reform pressures from URA implementation
– Increased lobby fragmentation may have contributed to
some reforms
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Conclusions II
• US experience quite different in comparing role of NAFTA
with WTO/URA agreements; all commodities with no
exceptions on table with Mexico-US NAFTA bilateral
negotiations
– This seems due to due to weighing political costs and benefits, not
for philosophical reasons of merits of either type of trade agreement
• Reviewing major bilateral ag trade disputes since 1988 again
supports contention that NAFTA has played secondary role
in terms of dispute types it has been used for (AD, CVD)
– Significant policy dispute or reform areas have gone to WTO panels
• Dairy sector: potential for major reform
– Politically very difficult; quota values aggregate to $16-22 Billion
– Compensation critical; experience from Australia, Crow relevant
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