NAFTA and Domestic Policy Reform: Observations from Canada

1. 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

2. 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? Silverado Symposium

3. 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 Silverado Symposium

4. 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 Silverado Symposium

5. 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) Silverado Symposium

6. Actual Policy Changes 2 • Centerpiece of new agricultural policy regime: Agricultural Policy Framework (APF) • Key features illustrated by its “5 pillars” • 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 Silverado Symposium

7. Balance of Agricultural Policy • Supply Management • 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 Silverado Symposium

8. 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) • 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 Silverado Symposium

9. 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 Silverado Symposium

10. Contrast with U.S. Position • 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 multi-lateral negotiations, and these would vary case by case Silverado Symposium

11. Apparent Causes of 1990s Reforms • Main elements of reforms: • 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 • 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 Silverado Symposium

12. Causes of Earlier Reforms • 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 • 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 Silverado Symposium

13. 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 • 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 Silverado Symposium

14. Negotiations and Reforms: Summary • 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. Silverado Symposium

15. 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 Silverado Symposium

16. 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 Silverado Symposium

17. 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 Silverado Symposium

18. 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 Silverado Symposium

19. 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 Silverado Symposium

20. 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 Silverado Symposium

21. 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 Silverado Symposium

22. 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 Silverado Symposium

23. 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 Silverado Symposium

24. 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 Silverado Symposium