V. Recent U.S. Trade and Agricultural Policies and Their International Implications1
1. During the past year, U.S. trade policy has moved in apparently conflicting directions (Box 1). The United States has promoted trade liberalization in the context of the 2001 Doha Ministerial Round, as well as in work toward regional and bilateral free-trade agreements. At the same time, however, recent U.S. tariffs on steel imports and hikes in agricultural subsidies have triggered threats of retaliation from trading partners and have raised questions regarding the momentum for progress under the Doha Round. Legislation to grant Trade Promotion Authority (TPA) also remains under debate in Congress and risks being encumbered by amendments that would restrict the authority to liberalize trade in textiles and the rules governing anti-dumping and countervailing duties (AD/CVD).2
2. This chapter focuses on the narrow issue of the impact of U.S. steel tariffs and agricultural subsidies to illustrate the costs that these recent U.S. trade actions impose, both domestically and abroad. The estimates described below suggest that recent U.S. initiatives in these areas will have an adverse effect on U.S. welfare and impose a substantial burden on the rest of the world, especially among developing country exporters. This illustrates the potential additional costs that could arise if recent U.S. steel and agricultural policies worsen trade relations and hinder progress toward multilateral liberalization agenda.
A. Global Impact of the U.S. Steel Safeguard Tariffs
3. In October 2001, the U.S. International Trade Commission (ITC) ruled that steel imports during January 1996–June 2001 had injured the domestic industry, and in March 2002 the Administration imposed safeguard tariffs. Duties ranging from 8–30 percent were applied in the first year, and the rates are scheduled to fall to 7–24 percent and 6–18 percent, respectively, in the subsequent two years. A broad range of products were exempted, as were all imports from Canada, Mexico, and many developing nations. As a result, tariffs applied to around half of the imports covered by the original investigation.3
Box 1.Recent U.S. Trade Policy Developments1
Trade Promotion Authority (TPA): TPA would allow the Administration to bring negotiated trade agreements for ratification by Congress without the possibility for amendments. So far, the House and Senate have passed different versions of the bill, which must be reconciled in conference committee and voted on again by the House and Senate. The House version identified over 200 products (mainly agricultural goods and textiles) where Congress sought additional consultation and information from the Administration in order to help set the U.S. negotiating position. The Senate version would exempt agreements that altered U.S. trade remedies from TPA.
Trade Adjustment Assistance (TAA): TAA provides assistance to workers who lose their jobs from trade. It is expected to be expanded and reformed as part of the TPA legislation.
Doha Round: The United States has played a key role in advancing the Doha Round, broadly endorsing the Doha Declaration, proposing the liberalization of 11 services sectors, and advancing a proposal for the liberalization of the movement of labor. On Trade Related Intellectual Property Rights (TRIPS), the United States has called for developing economies to address their concerns about drug patenting by using existing exemptions in treaties and a limited waiver program, rather than more fundamental changes in the agreement.2 The United States has also emphasized that it would seek to preserve the effectiveness of existing mechanisms in anti-dumping and countervailing duty laws.
Regional and bilateral trade arrangements: Efforts are under way toward free trade agreements with Chile and Singapore and toward completing the Free Trade Agreement of the Americas (FTAA). At the April 2001 summit in Quebec, participating nations agreed on the goal of completing FTAA negotiations by 2005.
WTO dispute settlement: U.S. trade policy has been challenged on a number of fronts, including the consistency of U.S. AD/CVD laws and safeguard measures with WTO rules. Among the issues at various stages of the WTO dispute resolution process are: (i) the Antidumping Act of 1916 that allows private lawsuits in U.S. courts to stop alleged cases of dumping; (ii) the methodologies used to calculate dumping margins; (iii) the injury standards in safeguards cases (iv) the Byrd Amendment—the Continued Dumping and Subsidy Offset Act—which specifies that anti-dumping duties collected from violators are to be redistributed to the firms that originally petitioned for anti-dumping relief. Disputes over U.S. duties in lumber and steel are also now under consideration by WTO panels.3
Unresolved trade disputes: Other contentious issues include disputes with: (i) the EU over the Foreign Sales Corporation (FSC) tax subsidy and beef hormones; (ii) Canada on CVDs on softwood lumber; and (iii) Mexico on AD duties on high-fructose corn syrup (HFCS) and U.S. barriers to Mexican trucks.
(i) A WTO panel has ruled that the FSC is a WTO-inconsistent export subsidy. Delays in U.S. implementation have allowed the EU to impose $900 million in duties, which the EU threatened to apply if EU concerns about the steel safeguards were not resolved. New legislation to change the FSC is currently under consideration in the U.S. Congress. U.S. retaliation is possible on EU goods because of WTO-inconsistent barriers to hormone-treated beef.
(ii) In March 2002, U.S. CVDs were imposed on Canadian softwood lumber after nearly a decade of trade disputes over Canadian timber practices, which the U.S. Commerce Department found to act as an export subsidy.
(iii) Trade disputes also tarnish relations with the United States’ other NAFTA partner. Despite losing a WTO case, Mexico has continued to impose AD duties on U.S. exports of HFCS. The United States has continued to impose limits on Mexican trucking services (through new regulations announced in June 2002) despite a NAFTA commitment to open U.S. borders.
Preferential access: Enhanced access to the U.S. market is provided to developing countries under the Generalized System of Preferences (GSP), the Andean Trade Preferences Act (ATPA), the Caribbean Basin Trade Partnership Act (CTPA), and the African Growth and Opportunity Act (AGOA). The CTPA and the AGOA offer enhanced duty-free access to the U.S. market for countries in these regions for a number of products, particularly textiles and apparel. The ATPA and GSP both expired near the end of 2001 (after 10 and 26 years in operation, respectively), but they are expected to be reauthorized in the context of the legislation governing Trade Promotion Authority.
Labor and environmental issues: The current Administration has generally not sought to require specific changes to partner country labor laws in trade agreements.4 However, it has adopted other methods of promoting labor and environmental policy objectives. For example, the Administration has recently granted trade preferences under the GSP and bilateral agreements to provide an incentive for the reform of labor laws in Guatemala and Cambodia. In addition, the Administration is conducting environmental reviews of regional free trade agreements with Chile, Singapore, and the FTAA.1For additional detail on the U.S. agenda, see USTR (2002)2See, for example, para. 4 of the Doha Round declaration in WTO (2001a). The United States has also indicated that it would be willing to support a limited waiver program that would allow compulsory licensing of drugs, to permit countries to produce their own versions of drugs. However, it is much more limited (with stricter export controls) than proposals from developing countries.3WTO (2002c) details the status of the following cases: (i) WT/DS136 and WT/DS162 (1916 law); (ii)WT/DS247 (dumping margins in Canadian softwood lumber); (iii) WT/DS177 and WT/DS178 (injury test used in the lamb safeguards); and (iv) WT/DS217 (rebate of AD duties in a steel case). The steel case is challenged in WT/DS248, DS249, DS251-254, DS258-259.4Sec Ambassador Zoellick’s testimony to the House Ways and Means Committee on October 9, 2001.
4. U.S. trading partners are challenging the WTO consistency of the steel safeguard action. According to WTO rules, a member may impose temporary trade barriers when an import surge causes, or threatens to cause, serious injury to a domestic industry. However, the barriers must: (i) apply to imports from WTO members in a proportionate manner, (ii) be liberalized after the first year, and (iii) be eliminated by the end of three years unless compensation is offered. A developing country is also exempt from a safeguard action if it accounts for less than 3 percent of imports of that product and if all developing countries with less than 3 percent import shares (collectively) account for less than 9 percent of total imports of that product. It will take some time before the dispute settlement panel reaches its final decision; however, previous U.S. safeguard cases have run into problems at the WTO.4
5. The U.S. safeguard tariffs on steel appear likely to cause important welfare losses, both domestically and abroad (Table 1). For example, illustrative estimates based on a general equilibrium model of the international economy suggest that U.S. steel imports would fall by nearly 12½ percent, leading to welfare losses to the United States of around $1.2 billion (in 1997 dollars, equal to around $1.3 billion in 2001), and roughly equal net losses overseas.5 Losses abroad would be concentrated in the countries of the EU, the former Soviet Union (FSU), and Japan. some countries—e.g., Canada, Mexico, Brazil, and South Africa—would benefit from the U.S. steel sector would increase by 2¾percent, the net welfare cost would be up to $250,000 per job.6
|Volume of Steel Trade|
(Millions of 1997 dollars)
|Canada and Mexico||425||5||19||2|
|Former Soviet Union||-901||-4||-6||-2|
|RSA and Namibia||84||I||3||0|
|Rest of the world||333||0||1||0|
6. These estimates are similar to those reported elsewhere. Hufbauer and Goodrich (2002) calculate that welfare losses arising from the ITC’s initial recommedations, which covered a broader range of items and tariff rates—would range from $300 million to $1.1 billion for the United States ($ 150,000 to $250,000 per job gained).7Francois and Baughman (2001) report similar losses and suggest that employment gains in the steel sector (4,000 to 9,000 persons) would be more than offset by losses of 36,000 to 75,000 jobs in other sectors. However, these estimates—and those reported above—may overstate the effect of the actual measures imposed, which contained significant exclusions.
7. The response of U.S. trading partners to the steel tariffs could substantially increase these costs. In March 2002, the EU announced import surcharges as a temporary safeguard (in the form of a tariff rate quota on steel imports in excess of 5.7 million tons of steel) on about 40 percent of its steel imports. Most of the tariffs are concentrated on products exported by the FSU.8 In addition, the EU announced its intention to impose duties of between $340 million and $890 million on U.S. exports worth around $2 billion. These duties would be direct retaliation for the steel safeguards announced by the U.S. Administration9. China and Japan have also announced retaliatory tariffs of up to $100 million each on U.S. exports of steel and soy Products.
8. Estimates of a second scenario—in which it is assumed that the EU imposes additional duties on steel imports—suggest a further reduction of global welfare by around $0.8 billion, less than the initial loss arising from the U.S. action. However, if retaliation spreads, total welfare losses from retaliation could exceed $1 billion.
B. U.S. Farm Policy and the Global Impact of Agricultural Liberalization
9. The recently enacted Farm Security and Rural Investment Act of 2002 (the “Farm Bill”) locks into place for the next six years a mechanism for providing subsidies that had previously been given as emergency payments in recent years in compensation for the global downturn in commodities prices. The Congressional Budget Office (CBO) has estimated that the Farm Bill would increase subsidies over FY 2002–FY 2011 by $58 billion—to $146 billion—relative to the baseline implied under 1996 legislation (Box 2).
10. The Farm Bill appears to undermine 1996 reforms that sought to improve efficiency and discourage overproduction by reducing price supports in favor of income supplements. The Farm Bill maintains the existing system of fixed income supports and loan deficiency payments (LDPs), and it adds a system of counter-cyclical payments. Since most of the increased support is directed to programs (the counter-cyclical payments and LDPs) that are linked to prices, it would further reduce the sensitivity of U.S. producers to market forces. The Farm Bill also increases the number of commodities eligible for support.
11. This subsidy program comes while trade negotiators are working against a March 2003 deadline to complete negotiations on a global agreement to liberalize agriculture under the Doha Round. Indeed, the 2002 Farm Bill reflects a broader global problem of active government intervention to encourage domestic agricultural production, thereby limiting agricultural imports (Table 2). While U.S. subsidies under the Farm Bill are high (especially for cotton), subsidies in the EU remain substantially higher, and tariffs on agricultural products are especially high in Japan.10 Effective tariff rates on agricultural products are between two to eight times higher in the “Quad” economies (United States, Canada, EU, and Japan) than tariff rates for all imports.11 Moreover, these tariffs tend to represent an important barrier to agricultural imports from developing countries, since Canada, United States, and the EU impose higher tariffs on agricultural imports from non-Quad countries.
|Tariffs on Imports of 1/|
|All Goods and Services|
(Billions of U.S.1997 dollars)
|Rest of Asia 3/||6||6||24||21||0.3||0.0||0.0||0.4|
|Former Soviet Bloc 4/||9||8||21||16||0.1||0.0||0.0||0.1|
|N. Africa and Middle East||12||13||51||46||0.0||0.0||0.0||0.0|
|India and China||14||16||43||26||0.0||0.0||0.0||0.0|Box 2.Recent U.S. Farm Policy and Levels of Support to Agriculture
The 2002 Farm Bill represented a retreat from market-oriented reforms instituted in the 1996 Federal Agricultural Improvement Act (the “FAIR Act”) and substantially increased spending on U.S. farm subsidies. The 1996 FAIR Act reformed U.S. agricultural policy by replacing price supports with a system of fixed payments to support farm incomes. Because the FAIR Act payments were independent of prices and output, they distorted production decisions less than the previous price supports. The 2002 Farm Bill—which takes full effect in FY 2003—increases spending to about $18½ billion in the first three years, more than triple the level of spending under the FAIR Act (see table)
|Fiscal Year||Spending (billions of dollars)|
The decline in agricultural prices in 1998 led to sharply higher “emergency” payments to U.S. farmers. Emergency payments started at the end of FY 1998, and total support quickly rose to almost $30 billion. Much of the emergency payments funded programs that partially restored the price-support system and provided payments based on current prices. These payments (along with favorable growing conditions) encouraged a dramatic increase in U.S. production of soybeans (primarily rice, com, and wheat).
The 2002 Farm Bill seeks to compensate producers for low prices without returning fully to price supports and government management of farm production. As a result, while the Farm Bill maintains existing programs of fixed payments and subsidies and provides subsidies to producers of crops that had not previously received support, it also introduces a new “counter-cyclical” program that ties support to prices but not production.
Key programs under the Farm Bill are:
Production Flexibility Contracts (PFCs). PFC payments are based on historic crop plantings in a base year and a fixed payment rate. Most field crops qualify for PFCs, and the 2002 Farm Bill expands coverage to oilseeds (soybeans).
Loan Deficiency Payments (LDPs). LDPs (and related “marketing loan gain” payments) provide subsidies to producers when prices for their crops fall beneath a loan rate. The 2002 Farm Bill expands coverage to include peanuts, wool, mohair, chickpeas, lentils, and dry peas.
Counter-cyclical payments. Producers that qualify for PFCs also can receive counter-cyclical payments, which are based on current prices (as opposed to the PFC’s fixed payment rate), but output is calculated in a similar manner as PFC payments.
Both PFCs and counter-cyclical payments provide producers considerable flexibility on what crops to grow (farmers could receive payments based on soybeans grown in 1998, but plant corn in 2003). In addition, the base acreage and crops may be updated to reflect levels in 1998-2001.
Scenario 1: U.S. subsidies and tariffs are cut by 50 percent. U.S. exports would decline significantly, and the welfare benefits of unilateral U.S. liberalization would be focused on agricultural exporters, especially in developing countries. Cotton exports would increase by more than 10 percent in most regions of the world, with the largest increases occurring in Sub-Saharan Africa and the former Soviet Bloc (primarily the Ukraine). Western Hemisphere cotton exporters would post significant gains. Asian and Western Hemisphere countries would benefit from higher exports of field crops (rice from Asia, and wheat, corn, and soybeans from Brazil and Argentina). However, welfare in poor food-importing countries would fall.
Scenario 2: Quad subsidies and tariffs are cut by 50 percent. Liberalization by the Quad economies magnifies the benefits and dramatically increases exports for non-Quad economies. Quad exports and production of field crops and cotton fall, resulting in higher global agricultural prices (on average 6 percent). Gains for the developing nations are less, because they are not assumed to have reduced barriers, and many are net food importers. In particular, cotton exporters achieve gains since barriers to cotton imports are low in the non-Quad economies. Field crop exports increase sizably, especially for Asian rice producers, who can export to a relatively more open Japanese market. Lower barriers to sugar imports, especially from the EU, would increase exports significantly from the Western Hemisphere and Sub-Saharan Africa. U.S. and EU exports of field crops (U.S. exports of cotton) would fall off significantly. The EU would experience a significant (near ¼ percentage point of GDP) increase in welfare because of the distortions removed in the EU economy.
Scenario 3: Global tariffs and subsidies are cut by 50 percent. Global liberalization of agriculture would yield substantial gains for developing economies. Liberalization would result in a welfare gain of almost ¾ percentage point for North African and Middle Eastern countries, with smaller but still significant welfare gains among field crop exporters from Latin America, Canada, and Asia (outside of Japan). Exports of African cotton and of Latin American, Caribbean, and African sugar would also increase substantially.
(In millions of 1997 dollars;
percent change in parentheses)
|Field Crops 1/||Cotton||Sugar|
|Scenario I: U.S. Liberalization|
|European Union 3/||210||(7)||24||(7)||-||-0.01||5|
|Rest of Asia 4/||409||(8)||126||(10)||102||(5)||-0.01||2|
|Former Soviet Bloc 5/||96||(5)||202||(10)||8||(2)||0.00||2|
|N. Africa and Middle East||46||(9)||83||(13)||6||(5)||-0.03||2|
|India and China||354||(12)||73||(18)||8||(2)||-0.02||1|
|Scenario II: Quad Liberalization|
|European Union 3/||-2,030||(-68)||200||(59)||-1,620||(-63)||0.24||-76|
|Rest of Asia 4/||3,040||(62)||28||(2)||354||(18)||0.09||11|
|Former Soviet Bloc 5/||313||(17)||182||(9)||144||(26)||0.01||17|
|Africa and Middle East||302||(60)||93||(14)||73||(69)||-0.13||9|
|India and China||1,948||(64)||87||(22)||185||(50)||-0.04||4|
|Scenario III: Global Liberalization|
|European Union 3/||-1,755||(-59)||161||(47)||-1,593||(-62)||0.29||-76|
|Rest of Asia4/||4,301||(87)||43||(3)||530||(27)||0.39||3|
|Former Soviet Bloc 5/||596||(32)||109||(5)||411||(73)||0.18||2|
|N. Africa and Middle East||322||(64)||1,211||(185)||125||(118)||0.72||-14|
|India and China||6,326||(209)||-14||(-4)||281||(76)||0.28||3|
13. It is important to recognize that liberalization could adversely affect farm balance sheets, which could complicate the process of reaching an agreement unless producers are compensated. The last column in (Table 3) illustrates that U.S. farmland values could fall by around 40 percent if the United States were to liberalize unilaterally. Sharp declines in land prices could also arise elsewhere—including in North Africa, the Middle East, and the EU—as protection of the agricultural sector is eliminated. 13 This illustrates the difficulties that may arise in reaching agreements in multilateral negotiations that seek to achieve significant liberalization in agriculture.
14. The challenge facing policymakers, therefore, will be to promote liberalization in agriculture in the context of programs that support farm incomes in a manner that does not distort pricing or production decisions. The 1996 FAIR Act contained income support payments that others have noted as providing support while minimizing distortions to producer behavior.14 This suggest that there would be merit in the United States returning to the original goals of the 1996 FAIR Act, and its use by other nations as a model for income-support for producers.
CBO, 2002, “Cost Estimates of H.R. 2646, Farm Security and Rural Investment Act of 2002, relative to CBO’s March 2002 Baseline,” unpublished estimates, May.
Francois, J. and L.Baughman,2001, “Estimated Economic Effects of Proposed Import Relief Remedies for Steel,” December (Washington, D.C.: The Consuming Industries Trade Action Coalition). Available at http://www.citac-trade.org.
Hertel, T.,1997, Global Trade Analysis: Modeling and Applications (Cambridge: Cambridge University Press).
Hufbauer, G. and B.Goodrich,2002, “Time for a Grand Bargain in Steel?” IIE International Economics Policy Briefs. (Washington, D.C.: Institute for International Economics) No. 02-1, January.
Leibowitz, L.,2001, “Safety Valve or Flash Point? The Worsening Conflict between U.S. Trade Laws and WTO Rules,” Center for Trade Policy Studies—Trade Policy Analysis (Washington, D.C.: Cato Institute) No. 17, November6.
MacDonagh-Dumler, C.,2001, “Recent Changes in U.S. Agricultural Support Policies and their Impact on Other Countries” in United States—Selected Issues, IMF Staff Country Report No. 01/145.
Morehart, M., J.Ryan, and R.Green,2001, “Farm Income and Finance: the Importance of Government Payments,” Agricultural Outlook Forum 2001 (Washington, D.C.: ERS, USDA), February22.
OECD, 2001, Market Effects of Crop Support Measures (Paris: OECD).
USDA, 2002, Agricultural Outlook, (Washington, D.C.: ERS, USDA), May, Table 35.
WTO, 2001, “Declaration on the TRIPS Agreement and Public Health,” World Trade Organization—Doha WTO Ministerial 2001, WT/MIN(01)/DEC/2, 20November.
WTO, 2002a, “European Commission Notification Under Article 12.1(A) of the Agreement on Safeguards,” World Trade Organization—Committee on Safeguards, G/SG/N/6/EEC/1, April2.
WTO, 2002b, “European Commission Immediate Notification under Article 12.5 of the Agreement on Safeguards,” World Trade Organization,—Committee on Safeguards, G/C/10, May15.
Prepared by Chris MacDonagh-Dumler (WHD), Yongzheng Yang (PDR), and Geoffrey Bannister (PDR).
TPA, or “fast-track,” allows the U.S. President to negotiate trade deals that Congress may either reject or accept, but cannot change. Without TPA, partner countries may be hesitant to negotiate trade agreements with the United States, since the U.S. Congress could seek to alter the negotiated agreement.
The analysis in this section accounts for only the original exemptions when the duties were announced in March 2002. The Administration has invited firms to submit requests for exclusion, and it has received over 1,200 applications, of which 224 had been approved by end-June 2002.
Specifically, the United States lost a case to Australia and New Zealand on the “injury test” used by the ITC under U.S. law. (See WTO (2002c), WTO cases: WT/DS 177 and WT/DS178.) However, WTO decisions are not based on U.S.-style “common” law where precedent helps shape die implementation and judicial interpretation of the law so die impact of such decisions on future WTO cases may be limited.
Global Losses are estimated to be around $1 billion. The model used was the Golbal Trade Analysis project(GTAP), using 1997 policy and data baselines. See Hertel (1997) for a description.
In 1997 dollars. Following a surge of imports in 1998, U.S. trade policy sharply limited steel imports. As a result, the model uses import data that are broadly similar to 1997, except for China and Brazil, implying that the losses China-and gains to Brazil-are significantly understated.
The range of estimates assumes tariffs could be as low as 9.2 percent for the “Joint Remedy” or as high as 20.7 percent for the remedy proposed by Commissioners Devaney and Bragg. Both cases exclude steel imports from Canada and Mexico.
See WTO (2002a).
See WTO (2002b). These duties are part of the duties that were authorized when the United States failed to meet deadlines imposed by the WTO to change its tax law as part of the FSC dispute with the EU. However, the EU has also agreed to delay implementation pending the outcome of negotiations with the United States. The final decision is expected in mid-July 2002.
There are a number of methods for calculating the level of subsidies. These data are from the GTAP database, which measures the effect of subsidies on the value added to production. As a result, the totals do not equal the budgetary expenditure on subsidies. In addition, subsidies spent to support prices are measured indirectly as tariffs, so the tariff rates in Table 2 may be higher than as reported by the authorities for 1997.
Effective tariff rates in the GTAP database include applied tariffs and the effect of price supports (which by encouraging domestic production, discourage import consumption). These rates, however, exclude preferential access programs (such as GSP) that impose low or no duties on developing country imports. As a result, the effective tariff rates may be overstated somewhat.
This exercise updates the GTAP database with subsidies from the 2002 Farm Bill, where FY 2003 is assumed to be a representative year. Fortuitously, subsidies in 1997 were about Vi of this level, and because most of the U.S.’s effective tariff rate is comprised of market price supports, this first scenario measures the approximate effect of the 2002 Farm Bill.
This result is similar to previous staff estimates and other research that suggests that recent emergency payments through 2000 elevated land prices by at least 25 percent. See MacDonagh-Dumler (2001) and Morehart, Ryan, and Green (2001).
The Production Flexibility Contracts in the FAIR Act were an example of “decoupled” income support programs that do not appear to significantly distort producer behavior because they are based on historical (and not current) production. Simulations by the OECD that compared the impact of agricultural policies show such historically based payments had the smallest impact on prices, output, and welfare. At the same time, they were just as effective in providing income support to agricultural producers as other more traditional and more distortionary programs. See OECD (2001).