July 1979

AGRICULTURAL TRADE: PROTECTIONISM, POLICY AND

THE TOKYO/GENEVA NEGOTIATING ROUND

James P. Houck

Department of Agricultural and Applied Economics

University of Minnesota

Prepared for the 1979 AAEA Summer Meetings

Pullman, Washington

ANDREW M. NOVAKOVIC AGRICULTURAL ECONOMICS

AAEA Meetings Pullman, Washington July 31, 1979

AGRICULTURAL TRADE: PROTECTIONISM, POLICY, AND

THE TOKYO/GENEVA NEGOTIATING ROUND

James P. Houck*

If Shakespeare's King Richard III had addressed Congress this summer,

he might have opened his speech with the same line he uttered to start the

drama that bears his name, "Now is the winter of our discontent." And Con-

gress would have nodded in full agreement. The U.S. economy is tormented by

persistent inflation, alarming energy shortages, and impending recession.

Major interest in trade and trade policy is focused on the fleecing we

are experiencing at the hand of OPEC, our huge negative bilateral trade

balance with Japan, and the sagging dollar. Not much front-page attention

is being captured by the r~sults of the Multilateral Trade Nego'tiations

(MTN) which ended this spring and whose implementing legislation is now

before Congress. Yet they are another important step in the evolution of

the multilateral approach to world trade problems. The implications, of the

MTN for U .S~ ag,ricultural trade' are central to this paper.

There are three main themes to follow. The first is a broad discussion

of the role of agricultural trade in the world economy with some considera-

tion of the U.s. position. The second is a rather brief look at the current

trade policy/protectionism picture as it relates, to. trade nego.tiations.

Third is an econo.mic analysis of how the MTN will affect U. S •. agricultural

trade in the short run. Full documentation of the data and other general

*Tbe author is a professor in the Department of Agricultural and

Applied Economics, University of Minnesota. The research behind this paper

was partially supported by the Committee on Finance, U.S. Senate.

2

information used herein will not be attempted. The basic data are from well­

known USDA sources and official publications of international agencies such

as GATT, the United Nations, DCED, and the World Bank.

Agricultural Trade in Perspective

Since about 1950-54 (a l.benchmark period for this section), the volume

of world production of all goods, agricultural and non-agricultural, has

more than tripled. Since then, the volume of total world trade has more

than quintupled. Consequently, the world as a whole is more dependent on

and economically-committed to trade than ever before.

Since 1950-54, the agricultural part of total trade has nearly tripled

in volume. This trade growth has significantly outpaced the expansion in

world agricultural production which has increased about 75 to 80 percent.

Thus, nations of the world also are more dependent upon one another than

ever before for food, fiber, and agricultural raw materials. However, agri­

cultural trade has fallen from about 30 percent of total world trade value

in 1950-54 to approximately 15 percent today.

Three main reasons lie behind this phenomenon. First is the pervasive

tendency for farm production to grow more slowly than industrial production.

This reflects the role food and fiber play in human life and the fact that

these products are still genera~ed by natural, biological processes, not

mechanical and chemical ones. The second reason is that the unit values

(prices) of agricultural products moving in trade have generally fallen

relative to other primary products such as minerals and fuels since 1950-54

while staying approximately constant relative to manufactures. Third, com­

plex barriers and impediments to agricultural trade have been erected over

the years via national policies. These barriers do not have exact counter­

parts in the industrial sectors.

3

Composition of World Agricultural

Trade and the U.S. Position

· Since 1950-54, the composition of world agricultural trade has changed

gradually. Food and feed products have grown from 45 percent of the total

to almost 70 percent today. The major growth items have been oilseeds, feed

grains, and livestock products (mainly meat). The effects of rising inter­

national affluence, the emergence of several centrally-planned nations as

feed and food importers, and the increasing food-deficit status of many less­

developed nations have fueled this trend.

Agricultural raw materials have dwindled in relative importance from

29 percent in 1950-54 to about 11 percent today. The major items in this

category display relatively stagnant markets. They are natural fibers,

tobacco, and rubber. The gradual substitution of synthetic for natural mate­

rials is a major reason behind these slower growth rates.

As world markets for farm products have evolved in the past 25 years,

the U.S. role has become larger and larger. Much of this growth is because trade

demand has grown and shifted toward products in which the United States has

unquestioned comparative advantage, such as grains and oilseeds. The relative

decline in the value of several agricultural exporters' currencies (including

the U.S. dollar) has helped to increase world demand for farm exports. But

important supply factors also have been at work. For example, developments

in mechanical and biological crop production technology have enhanced the

natural efficiency of the United States in temperate-zone food and feed grains.

Similarly, the evolution of U.S. agricultural policy during the past 15-20

years has reflected the vital role exports play in generating farm income by

keeping major U.S. farm exports competitive in world markets.

The net result is that the United States now accounts for about 16 or 17

4

percent of all world agricultural exports compared with about 12 percent in

1950-54. Our farm product imports from the rest of the world have grown

much less rapidly. Consequently, the U.S. share as an agricultural importer

has fallen. Our imports now account for about 8 percent of world agricul­

tural trade. This is aown from about 28 percent in 1950-54. Yet, we are

still a major agricultural importing nation--behind only West Germany and

Japan.

Export Products and Markets

Table 1 is a comparative profile of U.S. agricultural exports in

1953/54 and 1977/78. Note tl\e relative growth in today's three largest cate­

gories, oilseeds (mainly soybeans), feed grains (mainly corn), and wheat.

This group has virtually doubled in importance since the early 1950s with all

the relative growth coming from oilseeds and feed grains. These "big ticket"

commodities now represent almost two-thirds of U.S. farm exports.

Some traditional, politically-important crops like tobacco and cotton

have lost ground, and the myriad items in the "Other" category stayed constant

in proportion to the total. Many such as citrus, rice, and almonds have

grown in export sales and are politically-important because their production

is concentrated in rather small geographic areas.

Overall, the volume of U.S. agricultural exports has almost quadrupled

while farm output has increased by only 54 percent since 1950-54. (Oilseed

and grain export volumes have grown over this period at annual rates of 10

and 7 percent respectively.) Thus, a much larger share of U.S. output is

being exported now than 25 years ago. In fact, only about 10 percent of

cash receipts from farming came from exports in 1950-54. Now it is about

24 percent.

5

Table 1: Profile of u.s. Agricultural Exports, 1953/54 and 1977/78

1953/54 1977/78

Item ($3 billion) ($27 billion)

(percent)

Oi1seeds and products 11 27

Feed grains 7 32 21 62

Wheat 14 14

Tobacco and cotton 35 11

Livestock products 15 9

Other 18 18

Total 100% 100%

6

Today the vast bulk of U.S. agricultural export sales are for hard

currencies. Only about 6 percent are under special government programs.

Variously termed, "food for peace," "food aid," "P.L. 480," or "concessional

exports," these sales have steadily dwindled in relative importance since

the late 1950s and early 1960s. In the early days of Public Law 480 (the

Agricultural Trade Development and Assistance Act of 1954), concessional

shipments accounted for 25 to 40 percent of the value of our export tr~de,

averaging about 30 percent in 1954-60. These special sales to food-short,

politically-friendly nations were very important for wheat, rice, soybean

oil, cotton, tobacco, and non-fat dry milk. The nearly constant annual

dollar appropriation for such sales has forced both export volume and

relative importance downward since the early 1960s.

Over the past 25 years, the destinations of U.S. farm exports have

altered to some extent but not dramatically. Changes occur slowly in the

worldwide distribution of wealth, basic agricultural efficiency, the inter­

national network of farm and trade policies, and other factors influencing

the direction and composition of trade flows.

The five leading buyers of U.S. agricultural exports in 1950-54 were,

in order, Japan, United Kingdom, West Germany, Canada, and the Netherlands,

together taking 45 percent of all U.S. agricultural exports. In 1977/78,

the top five, in order, were Japan, the Netherlands, West Germany, Canada

and the Soviet Union (the U.K. was seventh, behind Korea). The top five in

1977/78 also accounted for 45 percent of all sales. Thus, at the top of

the heap, no major realignments occurred with the important exception of the

recent emergence of the USSR as a major market. Moreover, the nlne-nation

European Community (EC-9) can be viewed for most trade policy purposes as

a single market. Today, it dominates all destinations, accounting for

7

about 25-30 percent of U.S. agricultural exports. Japan takes about 15

percent. (Incidentally, OPEC now takes 7 percent of the U.S. farm exports,

a marked increase from very small quantities and values throughout the.

1950s and 1960s.)

U.S. Agricultural Imports in Perspective

Although the dollar value of U.S. agricultural imports has more than

doubled since 1950-54, the physical volume has increased by only 50 percent.

Many tropical items do not compete with domestic farm output. These com­

modities (officially called complementary imports) such as coffee, tea,

bananas, rubber, and cocoa now are about 40 percent of the total agricultural

import bill, down from 60 percent in 1950-54. The balance is competitive at

least to some extent with domestic production. Major items in this category

(officially called supplementary imports) are beef, sugar, dairy products,

wine, fruits, and vegetables. Of all food consumed in the United States,

imports have accounted for a relatively constant 9 to 12 percent share in

recent times.

The following list shows how imports shared in the U.S. consumption of

some important items in 1976/77.

Coffee, tea, cococa, bananas 100% Red meat 7%

Fish 57% Fresh fruit (not bananas) 6%

Wool 50% Fresh vegetables 6%

Sugar 43% Dairy products 2%

Fats and oils 10%

Some interesting changes have occurred in the mix of imports~ These are

illustrated in the profile of competitive (supplementary) agricultural imports

over the 25-year period, table 2. We now import relatively more meat, fruits

8

Table 2: Profile of U.S. Imports of Supplementary Agricultural

Products, 1950/54 and 1977/78

Item

Meat and meat products

Fruits and vegetables

Sugar

Wool

Oils and oilseeds

Dairy products

Tobacco

Wines and malt beverages

Other

Total

1950/54 average

($1. 9 billion)

9

6

23

16

10

2

5

2

27

100%

(percent)

1977 /78

($7.3 billion)

22

20

14

1

7

6

5

10

15

100%

9

and vegetables, and dairy products than ~~ did in 1950-54. The growth in

demand for hamburger meat (the principal import), the increasingly competi­

tive supplies of off-season fruits and vegetables from Latin America, and

the growth in sales of cheeses of all types are behind these increases. The

inroads of synthetic fibers and the slow growth in domestic textile manu­

facturing caused the relative drop in wool imports. Slow demand growth and

well-protected domestic production led to the relative drop in sugar's posi­

tion among our major farm imports.

For competitive products, the five leading suppliers in 1977/78, with

38 percent of the total, were the Philippines, Canada, Mexico, Australia,

and ~ew Zealand.

Balance of Payments and Exchange Rates

The strong contribution that agricultural trade makes to the troubled

U.S. balance of payments is well-known and needs little elaboration here.

The typical measure of agriculture's net contribution is the value difference

between annual agricultural exports and imports. Currently this measure is

running at approximately $10-12 billion annually and has been consistently

positive aince 1960. If competitive farm imports only are considered in

this calculation, the agricultural sector has, with only two exceptions (1936

and 1940)" contributed positively to the nation ' s annual trade balance back

at least as far as 1900.

The recent fall in the value of the U.S. dollar relative to spmeother

currencies is a much-discussed topic with implications for agricultural

trade but alao extending far beyond it. The fall in the dollar's value makes

our farm exports look relatively cheaper to buyers in nations whose currencies

are appreciating" such as Japan, Germany, Switzerland" e,te. If domestic

10

demand in such nations can respond to lower relative prices of farm imports,

consumption (hence imports) will be stimulated.

Yet U.S. farm exports have not increased to the extent that the casual

observer might suppose because currency devaluation relative to the yen and

the mark, also has occurred for other major agricultural exporters. Hence,

the U. S. market share has not boomed partly because the U.S. dollar has not

fallen much or at all relative to the currencies of Canada, Australia~

Brazil, and Argentina--our major competitors for world markets. In additi9n,

farm product prices in many large import markets do not fall (or rise) in .

response to world market changes. Insulating trade policies in the EC-9,

Japan, and elsewhere keep internal prices of many key commodities clearly

detached from world levels.

National Policy and Protection

Natural differences among lands and people are powerful forces shaping

the direction, magnitude, and composition of agricultural trade. The world's

agricultural trade flows approach those suggested by the pure theory of inter­

national trade and the concept of comparative advantage. Yet, major distor­

tions away from the theoretical model are evident. These result mainly from

trade policies and other decisions by national governments. For agricultural

products, these policies and decisions are almost always extensions of domestic

agricultural and food policies. Agricultural trade policy reflects and sup­

ports fundamental commitments made by governments to domestic farmers, food

industries, and (occasionally) consumers.

Barriers to agricultural trade are extremely diffi~ult to negotiate

internationally. Any change in these barriers toward more liberal trade

usually undermine Borne national farm or food policies by making them either

11

more costly or administratively-difficult to operate. Furthermore, no nation

has ever shown much willingness to negotiate the structure or terms of its

own, ' internal agricultural policy. Although they are imperfect and incon­

sistent everywhere, existing agricultural policies and programs have been

slowly and painfully constructed. They are not altered or put aside lightly.

These rigidities are reinforce.d by traditional trade negotiating pro­

cesses. The four major parties in worldwide agricultural (and industrial)

trade are the United States, Japan, the EC-9, and Canada. If agricultural

trade agreements of consequence are to be reached, one or more of these four

must be involved. Each has a complex domestic agricultural policy which

carries over into its trade policy in ways which severely restrict its ability

to negotiate broadly on agricultural trade. Moreover, the historical tendency

to treat agricultural negotiations in a separate package, largely isolated

from industrial agreements adds even more rigidity to the picture.

Let us consider some important elements of food and agricultural policies

in Japan" the EC-9, and Canada, insofar as agricultural trade is concerned.

This will set the stage for the subsequent examination of the major MTN agree­

ments on tariffs and quotas.

Japan

Year in and year out, Japan is the United States' largest agricultural

trade customer despite a basically trade-restrictive agricultural and food

policy. This is because the Japanese economy is wealthy and diversified.

Approximately 24 percent of Japan ' s 114 million people live in farm

households (Sanderson; DEeD, 1974b). Most Japanese farms are operated as

family units, but 90 percent of them a re part-time farms. The average farm

size is about 2.5 acres. Only about 6 percent of Japan's farms are more

than 5 acres in size.

12

Two foundation stones of Japan's agricultural policy are rice and

self~sufficiency. Rice accounts for about 35 percent of farm output and

33 to 34 percent of the total caloric intake of the people. Rice prices

at the farm are supported at levels several times higher than world prices.

This has far-reaching effects on all of Japan's agriculture. Input use for

other crops and livestock must compete with rice. Hence, the impact of the

artificially high rice price spreads throughout the agriculture and food

economy creating protectionist pressures virtually everywhere.

Although dependent on foreign suppliers for food and other raw mate­

rials, Japan still maintains a strong commitment to as much self-sufficiency

in food as practicable. Bitter past experience fosters this commitment.

Japan is about 72 percent self-sufficient in all foods; this includes 100

percent in rice, more than 90 percent in vegetables and eggs, more than 80

percent in milk, meat and fruit, 40 percent in feeds, and less than 10

percent in wheat and soybeans. Japanese consumers devote an average 25-27

percent of their consumption expenditures to food, with rice making up about

34 percent of total food intake.

Because Japan is densely populated and has only 15-16 percent of its

land suitable for agriculture, this rather high degree of self-sufficiency

and its distribution among commodities reflect a protective agricultural

policy. Much of the pressure for and support of protective policies on

behalf of Japan's farmers, at the expense of consumers and taxpayers, can

be traced to the special characteristics of that nation's political life

as it relates to agriculture (Sanderson, Houck). By any standard, Japan's

farmers are well-organized and well-situated for political action. With

the generally-reliable support of the Ministry of Agriculture, Forestry, and

Fisheries, the various farm organizations press for and obtain economic pro­

tec t ion on a broad front, including trade.

13

To implement policy decisions, Japan uses straightforward methods of

controlling food imports, namely government procurement (e.g. wheat), tariffs

(e.g. ' poultry), and quotas (e.g. beef and citrus). The allocation of quotas

is handled in several ways. Generally, the quotas are parceled out to pri­

vate companies, farmer co-ops and their affiliates, or to quasi-governmental

agencies.

In addition to these formal means of control, Japan's food distribution

system also forms an informal import barrier. Most food products are dis­

tributed to consumers through long chains of intermediaries closely bound to

traditional (domestic) sources of supply. Thus, it can be reasonably diffi­

cult to export food products to Japan even if there are no formal barriers

to entry.

The European Community (EC-9)

For all its anomalies and inconsistencies the Common Agricultural Policy

(CAP) is a joint Community policy (OECD, 1974a). In fact, an official pub1i-

cation of ' the EC-9 Conunission observes that the CAP '\oms introduced in 1962

and has unfortunately remained the only real joint Community policy" (European

Communities, p. 5). Without some common farm and food policy, it is unlikely

that the original six-nation Common Market could have been founded initially

or could remain intact today. Therefore, it is not surprising that European

government officials and political leaders will do nothing in international

forums and agencies to seriously undercut the fragile CAP from the outside.

There are plenty of internal forces shredding its fabric from day to day.

Prior to the formation of the original Common Market, each member

nation had its own complex and generally-protectionist agricultural policy

to which it was strongly committed. The only feasible way in the 1960s that

a mutually-acceptable policy, insuring substantial self-reliance in food and

14

agricultural raw materials, could be formed was through high common prices

and no direct production controls. Such a policy could be sustained only

by a thoroughly protective trade policy. There simply was no other workable

pathway to agreement. Even tpday, no apparent alternative exists except to

continually repair and re-patch the original scheme. Powerful farm organi­

zations , a widespread desire for food self-reliance, the general prosperity

of the Community, and the existence of chronic pockets of low farm income

add rigidity to the system, effectively precluding a substantial revamping.

High rates of self-sufficiency in grains, dairy, meats, fruits, and

vegetables are protected through the CAP by high internal price guarantees.

Arrived at politically, guaranteed farm prices are maintained within the

EC-9 via (1) market intervention by government agencies for surplus prod­

ucts and (2) import controls for deficit commodities. Most of the CAP's

bizarre complexities boil down to these two fundamental ideas.

When surplus production occurs, it is acquired and stored for future

disposition or exported with whatever subsidy is needed to sell it abroad.

For deficit products, the main import controls are (1) the well-known variable

levies (the difference between internal, guaranteed "target" or "threshold"

prices and world market prices c.Lf. Europe), (2) other tariffs, special

adjustable levies, and some quotas. Since these measures are extensions of

domestic policy, they are extremely difficult, if not impossible, to nego­

tiate internationally under current conditions.

Because each nation in the EC-9 still maintains its own currency and

much financial independence, the CAP price targets and support levels are

expressed in "units of account," an artificial Community-wide accounting

device. If the relative values of members' currencies are constant, "unit

of account" prices can reflect market harmony throughout the Community.

15

However, the modern floating system of international exchange rates has

allowed relative currency values to fluctuate, causing "unit of "account"

prices to rise and fall as they are translated into specific currencies.

Th is, in turn, spawned a complex layer of border tax adjustments which

are applied to intra-Community trade in farm products. Even though the

Community is now moving toward a more stable monetary system, there are

still separate exchange rates among European currencies applied only to

agricultural trade. This adds a baffling new tangle of complexity to the

CAP. It clearly narrows the short-run ability of the Commission to

negotiate internationally by further weakening the CAP's cohesiveness and

undermining its basic organizing principle.

Canada

Among the developed nations, Canada occupies a unique position in the

u.s. agricultural trade picture. Canada is a leading export customer for

u. s. farm products and an important source of our agricultural imports. In

1977/78, Canada was the fourth leading buyer of u.s. farm exports. (Two of

the three nations ahead of Canada are inside the EC-9; Japan is the third.)

Similarly, Canada is our third leading source of farm imports, exceeded in

1977/78 by only Brazil and Mexico.

Like the United States, Canada's leading agricultural export customers

are the EC-9 and Japan. The United States now ranks third having recently

been overtaken by Japan. We buy approximately 16 percent of Canada's total

farm exports. On the other hand, the United States currently supplies more

than half of Canada's agricultural purchases.

Much of this large trade flow is due to the proximity and vast geographi­

cal size of both nations. When not excluded by trade barriers, many prod­

u c ts can move across a long international border more economically than

16

they can within either nation. This happens when forces of localized com­

parative advantage in production and marketing are not overcome by national

trade policies. Trade statistics reflect this idea. They show that U.S.­

Canada farm trade is very diversified among products flowing in both

directions.

Broadly speaking, Canada and the United States face similar conditions

domestically and in their trading relations. For example, both nations rely

on agricultural trade to contribute positively to their international balance

of payments. However, the agricultural export/import ratio for Canada is

typically somewhat smaller than that for the United States (1.2 for Canada

in 1977 as compared with 1.7 for the United States). In addition, 70 to 75

percent of Canada's agricultural exports are grains, feeds, and oilseed prod­

ucts--for the United States it is about 65 percent. Consequently, like the

United States, Canada's trade policy and 'domestic farm policy are dominated

by the fostering of exports and the management of grain production and

inventories. The institutions and the extent of direct involvement by the

government differ markedly between the two nations and among commodities.

However, the problems are clearly similar.

A parallel also exists on the import side. The Agricultural Stabiliza­

tion Board of Canada has the responsibility to stabilize prices and "assist

the industry in realizing fair return •• • "(DECD, 1973, p. 29). Under

legislation, the Board must support the prices of various commodities at not

less than 80 percent of the previous ten-year average market or base price.

When imports of stabilized'or supported products interfere with tbis policy,

quota and tariff measures are readily available to Canadian authorities on

a commodity-by-commodity basis. Hence, domestic agricultural policy deci­

sions about farm prices and incomes tend to control Canadian trade policy

toward imports.

17

If agricultural trade between the United States and Canada were as

free as between our own individual states (no tariffs or quotas) -, it is

unlikely that vast changes would occur in the basic location of production

or in trade patterns. It certainly would be nothing comparable to adjust­

ments that would occur _in Japan or Europe under free agricultural trade.

Consequently, the scope for trade negotiations with Canada is related not to

f undamental differences in social philosophy, geography, or economic struc­

ture but to modest differences in agricultural resources, farm support sys­

tems, and the natural tendency for an economical flow of many products to

occur back and forth across a long, shared border.

International Trends in Protectionism

Going beyond the well-established network of formal trade policy, there

is substantial agreement that trade protectionism is growing, even in the

face of expanding trade and falling tariffs. Non-tariff trade barriers of

many varieties dominate this discussion. Such barriers have a long history

in agricu-Itural trade. Hillman has recently published an extensive study on

this topic. He builds the case that such trade-stifling barriers (both

official and unofficial) are becoming more pervasive and more effective.

Middleton also documents the importance of non-tariff barriers and their key

role in trade negotiations. Krause argues that this "new protectionism" is

a direct result of social processes and the welfare state.

Non-tariff trade barriers are difficult to negotiate internationally

because they are either (1) official extensions of non-negotiable domestic

policies , (2) outside the basic purview of traditional multilateral and

bilateral negotiating schemes, or (3) applied unofficially or covertly from

deep within modern government bureau.cracies. Reidel, in trying to document

18

the current concern about non-tariff protectionism, such as quotas, licensing

schemes, variable duties, writes (page 15)

"On the surface, it is not at all clear that we are presently

facing a 'rising tide of protectionism' as so many have declared.

The available evidence is mixed. But what is occurring below the

surface? This is the most disquieting aspect of the current sit­

uation, particularly because it is so difficult to monitor these

developments."

Much of the problem in monitoring protectionism today stems from its un­

official character. Reider also ponders (page 6-7)

"Because of the secrecy that surrounds unofficial arrangements

to restrain trade, there is no reliable way of monitoring these

actions or assessing their significance Are these reported

cases [of unofficial arrangements] no more than the tip of an ever­

growing iceberg?"

The basic objectives and final results of the Tokyo/Geneva MTN Round,

discussed next, reflect a serious effort to manage and possibly reduce the

effects of non-tariff trade barriers in both industrial and agricultural trade.

The Tokyo/Geneva Round in Brief

The official chronology shows that the 79-month Tokyo/Geneva Round,

concluded in April 1979, was the lengthiest formal trade negotiation in GATT

history. The previous record-holder was the 1963-67 Kennedy Round, which

lasted 54 months. The five GATT negotiating sessions before the Kennedy

Round were comparatively short because tariff cuts and tariff bindings were

the only major issues. Non-tariff trade barriers were largely bypassed.

Agricultural trade issues have formed a large part of the recent

19

negotiations. As mentioned earlier, such discussions are not completed

quickly or easily. In addition, both the Kennedy Round and the Tokyo/

Geneva Round produced some rather delicate changes in the basic legal and

institutional framework of the GATT itself. Also, di~ficult negotiations

on codes of conduct through which the agreement is implemented in practice

and through which non-tariff barriers are attacked were conducted.

The Legacy of the Kennedy Round

As in the Tokyo/Geneva Round, official statements were continually

advanced in the Kennedy Round about the crucial importance of agriculture

from the U. S. viewpoint. Here, as quoted by Schni ttker,. is a typical

example from a 1963 speech by Christian A. Herter, the U.S. Chief Negotia­

tor for the Kennedy Round.

"It is, of course, the firm position of my government that

negotiations must include agricultural products. This means that

my government will not be prepared to conclude the negotiations

until equitable tariff and trade arrangements have been developed

for agricultural products."

However, major breakthroughs in agricultural trade negotiations simply did

not materialize in the Kennedy Round. Those familiar with its history know

that the major parties were simply too far apart and too inflexible within

their own domestic policy constraints to maneuver toward anything new.

At the 1967 conclusion of the Kennedy Round, the political commitment

for substantive agricultural agreements was deemed to have been satisfied

in two main ways (U.S. Department of Agriculture, 1967). First, an Inter­

national Grains Arrangement was signed. It was an outgrowth of previous

International Wheat Agreements and contained a Food Aid Convention and an

20

ill-fated, price fixing Trade Convention for wheat. Secondly, a set of

tariff cuts and bindings was concluded for agricultural products whose trade

coverage, at that time, was $866 million on the U.S . export side and $860

mill i on on the import side . (Incidentally, at 1978/79· price levels, these

trade coverage values would now approximate $2.0 billion. This can be com­

pared with trade coverage values in the $3.0- 4.0 billion range now being

discussed in connection with current agreements.)

Herter's statement, quoted on page 19, is remarkably similar to our

official stance in the Tokyo/Geneva Round, which is buttressed by similar

language in the Trade Act 9f 1974 authorizing U.S. participation in the

round (U.S. Congress, 1975). As with the Kennedy Round, agricultural agree­

ments were again difficult to arrange and the final results are modest.

Major Agricultural Participants in the Tokyo/Geneva Round

Under negotiating procedures evolved in GATT since 1947, multilateral

tariff and trade concessions for commodities and industrial sectors occur

only when two or more of the leading trading nations in the relevant prod­

ucts are able to agree on the main terms of a· settlement. Then other

interested parties can join in and. by their participation, round out a

multilateral package in which all GATT members may share.

In the Tokyo/Geneva Round, much as with the Kennedy Round, center stage

in the agricultural negotiations was occupied by the United States, the

European Community , and Japan. (Though important in earlier rounds. the

United Kingdom is now submerged within the EC-9.) Other important nations on

the inner fringe, next to the "big three," are Canada, Mexico, Brazil,

Ar .gentina, and Australia. These few nations form the pool from which pairs

and other combinations must be drawn for any significant dealing to occur.

21

Results of the Tokyo/Geneva Round

The objectives of the round were set out in the so-called Tokyo

Declaration of September 1963, which. formally opened the negotiations

(U.S. Congress 1975). Much has been published on the general objectives

and the extent to which they were achieved as the negotiations unfolded

(U.S. Department of State; U.s. Department of Agriculture, 1979; U.s.

Congress, 1979 (a-b); Livernash; Twigs; Golt). However, three main cate­

gories of agricultural agreements can be identified from the economist's

point of view.

First are the specific tariff and trade barrier agreements similar

to those which have been the core of previous rounds. These were achieved

within the traditional bilateral "offer and request" framework. Second are

the behavioral codes, the most important of which for agriculture are the

"export subsidies/countervailing duty" code and the "standards" code. The

former seeks to tighten international responsibility and restraint insofar

as export. subsidies and retaliation are concerned; the latter is

designed to reduce the use of various standards, product certification, and

testing as barriers to trade. Third are international agreements for con­

sultations on dairy products, beef, and general agricultural policy. These

agreements have no substantive economic provisions.

Evaluation of the economic effects of the new codes and the inter­

national consultative agreements is completely subjective at this time.

Their potential value lies in their ability to reduce and help manage trade

conflicts. Interest groups and individuals, public and private, are now

having their say about this, and they disagree. However, it is possible to

estimate the net economic effects of the new tariff and quota agreements with

some standard tools of economic analysis. That is the subject of the balance

of this paper.

22

Economic Analysis of the MTN Agreements

for Agricultural Tariffs and Quotas

' In the negotiations, three main bilateral packages with Japan, EC-9,

and Canada were achieved. In addition, lesser agreem~nts involving about

30 other nations were signed covering both tariff and non-tariff items.

On the export side, we will look at the three main packages separately

and then consider the others as a single group. On the import side, we

will consider U.S. agricultural concessions as a group.

The Method

The method used to calculate new trade values resulting from tariff

changes comes from partial equilibrium analysis. For any given product, let

(1) r = C - S

where I = volume of imports

C = volume of domestic consumption

S volume of domestic production

T11en if P is the domestic price observed at the import level

(2) en ac as aP" ap -aP"

Then by making appropriate multiplications and divisions, equation (2)

can be restated in a general elasticity form as follows:

(3)

or

(4)

~. P ap I

where

23

Er = price elasticity of import demand

~ = price elasticity of domestic demand

ES = price elasticity of domestic supply

For purposes of this analysis, ES was taken to be equal to zero in all cases.

This rules out specific consideration of domestic supply response or stock

adjustments to changed prices as tariffs change. Thus

The import demand 'elasticity is the domestic demand elasticity (obtained

from various empirical research studies) weighted by the ratio of consumption

to imports, this ratio being greater than or equal to 1.0.

Finally, the percentage change in imports (% ~l) was calculated as

(6) (% ~I) = Er (% ~P)

where (% ~P) is the estimated percentage change in domestic price as the

result of a specified tariff change. This assumes that these import dftmand

shifts do not alter world f.o.b. or c.i.f. prices--a plausible assumption

in this context. To obtain the dollar value of "new" trade, the result of

equation (6) was applied to the 1976 base trade figures, used by the office

of the Special Trade Representation (STR) for negotiating purposes, on the

assumption that the United States maintains its 1976 market share of all

import markets.

The value of quota changes was estimated by assuming that the new

specific quotas would be filled at current world price levels by U.S.

suppliers. Both the tariff and quota analyses focus on the total adjust­

ments as negotiated without considering the intermediate staging that will

occur in their actual application beginning in 1980.

24

Japan

The U.S.-Japan settlement insofar as agriculture is concerned has

three major components. First is a set of tariff bindings. Second is a

series of tariff reductions granted by Japan on about 67 listed categories

of items, widely diversified. Third are increases in Japanese import

quotas of a few tightly-controlled items.

Tatiff Bindings. Tariff bindings covered some 14 items whose 1976

base trade value is $809 million. These bindings are scattered over a

number of product groups. However, the "free" binding on soybeans alone

accounts for $770 million, or 95 percent of this total. It is impossible

to calculate or predict the value of this trade concession. Most observers

value this concession highly and feel that a similar "free" binding on

soybeans obtained from the European Common Market during the 1962 Dillon

Round , and sustained since then, has been partially responsible for that

market's huge growth.

Tariff Cuts. Excluding bound items, the new tariff reductions average

35 percent, across the board. For purposes of analysis, the tariff reductions

were assumed to exert downward pressure on retail and wholesale prices inside

Japan. The economic value of a tariff reduction occurs because the total

market for the general product expands and because the market share of

imported items grows due to their relative price reduction.

Table 3 summarizes the results of calculations on the trade effects

of the negotiated tariff changes . They are to be viewed as approximations

indicating relative magnitudes; they are not precise predictions because,

among other things, they isolate only the effect of tariff changes • .

Almost 40 percent of the estimated trade increase is concentrated in

25

'~li>1Le]" iM1IlN 'R'arliff Pa'Cka~es,; 'SUJDInar¥ of "'lit. S. A,grritCuiLlturr,al .E~llOrl1: :[~n:Cl'.1eaSeB '1Ull1er JF1l111 Jrar.iff JReiluc.t!i.cims as N:ego!t.il.a'tr.ed",

[1t':em lBa'se 'tT,ade y.a1ue ,N'ew :vall.'lle OhaRge fLf9I7l6 »

;m11.11.:ltQn 'U • .8. cdo1l.1arrs Japan

.FJIilild.ltS ana v..egetab:ilres .1!6'8 .1Z971 +29 lP®altry Itf> 29 +il.3 Park 15ID .la.s +3''; ,O.tmerr,s TlID .125 +1.'5

'IJ)(!)\tel 444 '!i3'6 4'.92

EC-9

Ri.ce 11.'2/4 11.30 +6 (j)ffal:s '1.'11.7 1'S9 +42 Honnone :Prr®iucts (Liv.esitt'ock) S3 79 +2£ T,obacC'(!) Ail 11+2.3 +1'2 Animal (Ci):!l.1l.!S ],8 22 +~ JFTla.il.ltS aRd iY.e:getab1l.res <91. 99 .*, 18 IDur1~1e§1 lLe:gs '5 ,7 +:2 ®it1he:rr,s 4.8 . .sa +2

'Jr.Ci)ttal J3:6;7 9:6'9 ·+1«()J2

(Can:as'a

Pork .a.'5~ ~.(i)'2 -+414 ID.s.®'&fl'C1!) ala lPJI'oduc.bS 17 "iii. +~

Live anruma1.'s t6B 17.1. +3 '(!)x8Esge ]1l:lille'e '3r8 3:g +:ll. POCl.ta1l:(!)'es .2'5 :2(6 + ,11. «(j)tO'he'I1S JI.:ll.1 1l2i1il +:3

'Totta1. '~1l..'3 l4C69 "*5'.6

lGt:b err lNatt:!L:on'S

V<egettab.l!e (():ills {iJi)Iinll", JRep ,~ 14 (6 *:2 :&e>:W-1>e:am ilUeal (!K<Cilit'.ea) 2 ,~ 2 ((i)t:herrB (4:3 . ~'8 +.5

'lr'Ci)lta'll. 14i1 .'S:6 ,*' ~ !GnlliUd 'IDQttal :i1." ill7!l 2"tIDH +.2.SiI

26

the pork market. The calculation assumes that imported pork actually will

fall in relative price because of the negotiated settlement. However,

Japanese imports of pork are also subject to a complex duty formula which

resembles a variable import levy. Consequently, this part of the cal­

culation could be nullified if the relative price of imported pork is not

permitted to decrease despite the nominal tariff cut. The totals show

that trade values increase by an estimated $92 million or about 21 percent

of the base value of the covered items. Without pork, the $57 millian

increase represents 19 percent of the base value of cavered items.

Quata Increases. The U.S.-Japan settlement cantained impart quata

relaxation far four cammadities in which the United States has a sizeable,

direct interest: high-quality beef, .oranges, .orange juice, and grapefruit

juice. Table 4 illustrates the current quotas, the full relaxation implied

in the settlement, and the estimated trade value of the quata increases.

Japan Summary. Estimated values .of the tariff changes and the quota

adjustments by Japan are $215 million. To this must be added the unknawn

but possibly large future value of new tariff bindings, especially on

soybeans. Another positive point about this agreement is that the quota

adjustments do, in fact, reflect changes in significant non-tariff barriers.

The precedent-setting value of these concessions should not be minimized.

despite their relatively small dollar values.

The European Community (EC-9)

The EC-9 concession covers about $960 million warth of 1976 agricultural

trade. About $19 million involves a "free" tariff binding on peanut imports,

and $8 million reflects a tariff reclassification agreement for some poultry

items. The balance, about $933 million, involves trade affected by tariff

cuts and a new arrangement for high-quality beef.

27

Table 4. MTN Quota Agreements; Summary of Changes and Estimated Annual

Trade Value.,

Item

Japan

Beef

Oranges

Orange and

grapefruit juice

Total

EC-9

Beef (new tariff line)

Austria

Beef

Switzerland

Beef

Grand Total

E;./ Calculated at $2.50/lb.

'E../ Calculated at 30¢/lb.

s./ Calculated at $1.15/lb.

fi/ Calculated at $3.00/lb.

~/ Calculated at $2.75/lb.

i/ Calculated at $3.00/lb.

million lbe.

Original New

quota quota Change

(million 1bs.)

37.0 67.9 +30.9

99.2 180.8 +81.6

8.8 27.5 +18.7

+22.1

.7 1.4 + .7

.7 5.1 + 4.4

Annual value

of change

a/ $77.3 mil.-

$24.5 mil.~/

$ c/ 21.5 mil.-

$123.3 mil.

d/ $66.3 mil.-

$ e/ 1.8 mil.-

f/ $1l.8 mil.-

$203.2 mil.

for 1.5 million lbe. and $2.50/lb. for 2.9

28

EC-9 Tariff Cuts. The tariff concessions by EC-9 span about 30

products totaling $867 million in 1976 trade value. Their contribution

to expanded trade is shown in table 3 with full tariff cuts qssumed. The

totals show that trade values increase by an estimated $102 million or

about 12 percent of the value of covered items. None of the key products

in the CAP are involved substantively.

High:=Qtia1ity Beef Concession. A new tariff line for high-quality

restaurant and hotel beef will cover an informally-agreed upon import

volume of 10,000 metric tons (22.1 million lbs.) or less. The traditional

variable levy system will not apply to this line. At a per-unit trade value

of $3.00 per pound, this EC-9 concession will approximate $66 million in

new trade, table 4.

EC-9 Summary. The EC-9 settlement shows an estimated $102 million

tariff-related trade increase and $66 million in new beef trade for a total

of $168 million. The new trade value of the tariff-category reclassHication

in poultry is uncertain at this time as is the future value of the "free"

peanut tariff binding.

Canada

Canada's agricultural trade concessions to the United States involve

mainly the reduction and binding of existing tariffs. The 1976 trade coverage

is $423 million, of which $413 million is accounted for by commodities for

which tariffs were reduced. Almost $10 million reflects official binding of

"currently-applied" tariffs on prepared cereal foods. (These "currently­

applied" tariffs are approximately 40 percent lower than the official book

rates.) Less than a million is accounted for by Canada's agreement to open

the importation of canned turkey for "general licensing."

29

Table 3 shows estimated trade values of the proposed settlement with

Canada. The total new trade value is estimated at $56 million. On the

$413 million coverage base, this is a 13.6 percent trade gain strictly

due to the tariff cuts.

Other Nations

The United States reached MTN tariff and access agreements with about

30 other nations or groups of nations acting together. These agreements

cover tariff bindings and reductions as well as some adjustments in non­

tariff trade barriers. Their annual new trade value is $24 million.

Tariff Bindings. Approximately 60 individual tariff bindings were

achieved on products exp~rted by the United States. Twenty nations offered

these bindings with a total trade coverage of almost $450 million, 59

percent being concentrated in soybeans and soybean oil. They represent no

new trade but do represent insurance against future duty increases.

Tariff Reductions. Approximately 90 individual tariff reduction~ were

achieved with 18 nations on a wide variety of U.S. agricultural exports.

These negotiated duty cuts vary from large to very small. The 1976 trade

coverage of these tariff agreements is approximately $47 million. The

estimated value of new trade generated by these tariff cuts taken together

is only $9.0 million, table 3.

Two major items are included in this $9.0 million. Approximately $2

million comes from a sizeable tariff cut by the Dominican Republic on soy­

bean and peanut oil. Another $2.0 million comes from a duty reduction on

soybean oilcake by Korea. The other $5 million is widely scatter.ed among

88 or so other new tariff cuts.

Non-tariff Barriers. About 15 individual new agreements on non-tariff

30

trade barriers are in hand. They include quota increases, licensing

procedure changes, and bindings on import mixing regulations. Three of

these are import~nt enough to warrant separate consideration. Two involve .,

import quota increases on high-quality beef by Austria and Switzerland,

table 4. The third is a duty cut and mixing regulation binding on tobacco

imports by Australia, having an estimated new trade value of $1.4 million.

Thus, the value of these three non-tariff concessions is approximately

$15 million.

U. S. Agricultural Import Concessions

There are twb major categories of specific trade concessions offered

by the United States. First and most important is an enlargement and

rearrangement of Section 22 import quotas on cheese. The second is a wide

variety of tariff reductions on agricultural imports ranging from wool to

canned pineapple. In this section, estimates are presented for the dairy

import concession and for as many of the others as feasible. Their total

new trade value is calculated at $106 million.

Dairy Imports . The proposed MTN agreement on dairy imports enlarges

the quotas on foreign cheese, eliminates the current "price break" system,

and brings all "price break" cheeses under the new quotas. If the new quota

system had been in effect last year, approximately 15 thousand metric tons

of additional cheese could have been imported into the United States on an

annual basis. This is the equivalent of 275-300 million additional pounds

of milk on the domestic market, approximately one-quarter of 1 percent .of

total annual U.S. milk production . It also represents slightly less than

0.9 percent of total U.S. cheese production on an annual basis.

This potential increase in imports could depress milk prices by an

31

estimated 5.4 cents per cwt at the farm level (U.S. Department of Agriculture,

1975; Buxton and Fallert). Such a price decrease would happen only if noth­

ing else changed and if cheddar cheese prices were more than 1 or 2 cents

above support levels so that the downward adjustment actually could occur.

If not, government purchases would prevent the price from falling. Taking

the 1978 level of milk output as a basis, the cost of this trade concession

to U.S. dairy farmers is $66 million. This is about 0.5 percent of the farm

value of milk production in 1978.

OthetMTN Agricultu~al Concessions. No other MTN concessions in agri­

culture approach the value of the cheese import quota agreement. For the

most part these other concessions are tariff reductions across a wide

spectrum of products. Those susceptible to analysis are shown in table 5.

The coconut oil concession involves elimiQation of the current duty of

1 cent per pound. Lamb tariffs are to be cut from 1.7 to 0.5 cents per

pound. Tariffs on apparel wool are to be reduced by 60 percent. The

canned pineapple tariff will go from 3 to 1 percent ad valorem. The tobacco

concession involves tariff cuts on various cigars and cigar tobaccos • . On

canned beef, the duty cut is from 7.5 percent to 3.0 percent ad valorem.

The barley concession reduces the tariff from 7.5 cents per bushel to 5.0

cents.

The United States also agreed to cut tariffs on several products

covered by the Meat Import Law of 1964 and Section 22 import quotas. Since

the quotas themselves were not adjusted, estimates were not calculated for

"new" trade. Items in this group include meat (mainly beef), butter, cream,

and two specific staple lengths of cotton. Cheese tariffs will be cut

20-25 percent as the new quota system is put into place.

32

Table 5. Value of Miscellaneous MTN Tariff

Concessions Offered by the United States.

Import

value New import

Item (1976) value Change

(million dollars)

Coconut oil $179 $187 $+ 8

Lamb 21 29 + 8

Wool 54 60 + 6

Canned pineapple 68 73 + 5

Tobacco products 36 41 + 5

Cooked beef 68 73 + 5

Barley 53 56 + 3

Total +40

33

Concluding Comments

In the Tokyo/Geneva Round, th.e United States placed high priority

upon achieving improvements in agricultural trade through MTN agreements.

As with previous rounds, major breakthroughs in protectionist agricultural

trade policiea were not obtained, even though the Tokyo/Geneva Round lasted

for 5 1/2 years. However, a series of agreements were achieved that should

modestly enhance the highly favorable balance of trade exhibited by U"S.

agriculture. Changes in some non-tariff trade barriers achieved in the

Tokyo/Geneva Round may establish extremely valuable precedents for future

trade negotiations. Moreover, tariffs on some important U.S. exports to

major markets were bound against future increases. The consultative com­

modity agreements, the new behavioral codes, and the GATT framework changes

also negotiated at the Tokyo/Geneva Round were not emphasized in this paper.

The three major packages negotiated with Japan, the European Economic

Community LEC-9), and Canada will enhance annual U.S. agricultural exports

by an estimated $215 million, $168 million and $56 million respectively. A

series of agreements with some 30 additional nations will add $24 million

for an overall total of $463 million annually. This is approximately 2.1

percent of the 1976 base trade figures used throughout the report and by

the Office of the Special Trade Representative.

In addition, tariff bindings were obtained on products whose exports

totaled $1,278 million in 1976. About 80 percent of this total is accounted

for by a "free" binding on soybeans conceded by Japan and by other tariff

bindings on soybeans and their products offered by five othe.r nations.

On the agricultural import side, the United States has made a signifi­

cant quota adjustment for dairy products (cheese) and a series of tariff

34

reductions for other products. The value of these concessions in terms of

increased agricultural imports is approximately $106 million annually.

Thus, these concessions will increase agricultural imports by about 1.0

percent over the 1976 base trade figures.

The net change in overall agricultural trade due to the MTN agreements

is an increase of $357 million in 1976 terms. A plausible estimate of this

annual value in 1979 terms is about $400 million. Making a further adjust­

ment for value added, this increase in trade corresponds to the annual value

of sales of about 6,500 average-sized farm~ in the United States. No one

can argue that the MTN was a bonanza for U.S. agriculture, but the results

are not to be ignored either.

-• 35

REFERENCES

Buxton, B., and Fallert, R. "Impact of Dairy Product Imports on U.S. Milk

Price." Staff Paper P74-2l. Department of Agricultural and Applied

Economics, University of Minnesota, October 1974.

European Communities. The Agricultural Policy of the European Community.

Statistics Office of the European Communities and the Directorate-General

for Agriculture of the European Communities, 1976.

Golt, Sidney. The GATT Negotiations ~73-79, The Closing Stage, British North

American Committee, May 1978.

Hillman, Jimmye S. Non-tariff Agricultural Trade Barriers. Lincoln, Neb.:

University of Nebraska Press, 1978.

Houck, James P. MTN Studies (2): The Tokyo/Geneva Round; Its Relation

to U.S. Agriculture. CP 96-12, Committee on Finance, U.S. Senate,

96th Congress, 1st Session, June 1919.

Krauss, Melvin B. The New Protectionism: The Welfare State and International

Trade. New York: New York University Press, 1978.

Livernash, Bob. "Congress Faces Hard Choices on Trade Liberalization Pact,"

Congressional Quarterly, April 14, 1979, pp. 678-683.

Middleton, Robert M. Negotiating on Non-tariff_Distortions of Trade,

New York: St. Martin's Press, 1975.

Organization for Economic Cooperation and Development. Agricultural Policy

in Canada. Agricultural Policy Reports, 1973.

Organization for Economic Cooperation and Development. Agricultural Policy

in the European Economic Community. Agricultural Policy Reports, 1974a.

Organization for Economic Cooperation and Development. Agricultural Policy

in Japan. Agricultural Policy Reports, 1974b.

36

Riedel, James. "Monitoring Trends in Protectionism," Development Policy

Staff, World Bank, Feb. 1979, (mimeographed draft).

Sanderson, F. H. Japan's Food Prospects and Policies. The Brookings

Institution, Washington, D. C., 1978.

Schnittker, John. Statement before Sub-Committee on Foreign Economic Policy,

Joint Economic Committee of Congress, (mimeographed), March 19, 1970.

Twigs, Joan. "MTN: Breaking the Non-tariff Barrier," Current Focus, Pub!.

No. 546, League of Women Voters, March 1979.

u.s. Congress, House of Representatives, Background and Status of the

Multilateral Trade Negotiations, WMCP:94-5, 94th Congress, 1st Session,

Feb. 4, 1975.

U.S. Congress, Senate. MTN Studies (1-5), CP 96-11,12,13,14,15. Committee

on Finance, 96th Congress, 1st Session, June 1979a.

U.S. Congress, Congressional Budget Office, U.S. Trade Policy and the Tokyo

Round of Multilateral Trade Negotiations, Background Paper, March 1979b.

U.S . Department of Agriculture. Economic Research Service. The Impact of

Dairy Imports on the U.S. Dairy Industry . Agricultural Economic Report

No. 278, January 1975.

U.S. Department of Agriculture. Foreign Agricultural Service. Report on

the Agricultural Trade Negotiations oc the Kennedy Round. FAS-M-l93, 1967.

U.S . Department of Agriculture, Foreign Agricultural Service, U.S. Agriculture

and the Tokyo Round, (various Fact Sheets, mimeographed), May 25, 1979.

U.S. Department of State, MTN: Multilateral Trade Negotiations, Current

Policy 56 (revised), Bureau of Public Affairs, April 1979.