Compatibility of National Policies
and Trade Agreements:
Concepts, Issues, and Approaches
Julian M. Alston and Daniel A Sumner
Department of Agricultural and Resource Economics
University of California, Davis
Silverado Symposium on
Agricultural Policy Reform
Napa, California
January 19, 2004
Key Points
• Policy compatibility requires policy reform
• Political economy – influences on
– Current policies
– Possibilities for reform
• Compensation as an element of reform
– Feasibility
– Efficiency and Equity
• Policy reform complements
– Transparency institutions
– Adjustment assistance
Achieving Compatibility
• EEC/EU Common Agricultural Policy
– Common external tariff
– Harmonized national policies
• CUSTA and NAFTA
– Some adjustments (e.g., ???)
– Some exemptions (e.g., supply managed)
– Some trade disputes (e.g., wheat)
Explaining Policies:
Efficient Redistribution
• Interest-group theory
– Policy serves to redistribute income to relatively
powerful interest groups
• Efficient redistribution
– Transfers involve net social costs
– Policies chosen to minimize cost of given transfer
• Implications for policy reform
– Nature of feasible reforms
– Prescriptive role for economists (and others)?
PS
Efficient Redistribution through
Commodity Programs
DWL
A
PSA
ΔPSA
E
PSE
45o Line
STC
0
CTSA
CTSE
ΔCTS
CTS
Extensions to the Model
• More than two groups
• Other elements of costs
– Introduction and implementation of policies
– Administration and enforcement of policies
– Costs of change
• Policy inertia
– Dynamic version of efficient redistribution
Policy Choice
PS
A
PSA
IC
ΔPSA
E
PSE
A’
F
STC
0
CTSA
CTSE
ΔCTS
CTS
Implications of Free Trade
• Change in STC
– Feasible instruments
– Economy-wide, general-equilibrium effects
– Dynamic efficiency gains
• Changes in political “preferences”
• Change in equilibrium
PS
Effects of Free Trade on STCs and
Policy Equilibrium
E’
F’
E
F
STC
0
STC’
CTS
Economics of Compensation
• Actual versus potential compensation
• Least-cost compensation – Quotas
– R = [r + p + g(p)]V
– R/V = 20-30 % (V = 3-5 times R, say)
– p + g(p) = 15-20 %?
• Other issues
–
–
–
–
Capitalization more generally
Efficiency and fairness
Implementation problems (compensation seeking)
Source and form of compensation
Other Policies
• Transparency institutions
– Australia’s Industries Assistance Commission
– IAC versus other factors in Australia
– ABARE
• Adjustment assistance
– Australia’s Rural Adjustment Scheme
– RAS as a foil for ad hoc assistance
Conclusion
• Redistributive commodity policies involve
net social costs
– Compensation should be feasible
– Partial compensation may be sufficient
• Policy reform may be facilitated by
institutional innovations
– Transparency institutions
– Adjustment assistance