Impacts of WTO Policy Reforms on U.S. Rice

Consequences of the WTO ruling on the Brazilian cotton case for commodities in the U.S. in addition to cotton are of concern. This paper uses the global GTAP model to provide a preliminary assessment of the consequences for U.S. rice if the ruling had applied in 2001. Two scenarios are estimated with a 36% and 100% elimination in the PSE on U.S. rice in 2001. The results show that if loan deficiency payments, production flexibility contract payments and market loss assistance payments along with export credits were reduced or eliminated the U.S. rice industry would be significantly and negatively affected. The results should be received with caution since the PSE peaked at 52 percent in 2001 and has averaged 32 percent over the past 10 years. Impacts of WTO Policy Reforms on U.S. Rice A number of WTO issues are likely to influence U.S. rice policy in the future. The July, 2004 Framework, while still vague, provides enough information to suggest that additional reform in domestic support, export subsidies and market access will impact on the U.S. rice policy and market opportunities. In addition, several U.S. domestic programs that apply to rice are under scrutiny after the findings by the WTO Dispute Panel in the cotton case brought by Brazil against the U.S. (WT/DS267). The report of the panel, released on September 2004, found that several U.S. programs such as counter-cyclical payments and export credit guarantees under the GSM 102, GSM 103 and SCGP export credit guarantee programs are in violation of several articles of the Agreement on Agriculture. The panel recommends that the U.S. withdraw the prohibited subsidies without delay. On October 14 th , 2004, the U.S. presented an appeal to review the findings of the panel, arguing the programs under question are in compliance with the statements in the Agreement of Agriculture. However the appellate body’s report issued on March 3, 2005 upheld essentially all of the findings in favor of Brazil’s claims. With respect to rice the findings of relevance include: 1) the export credit guarantee programs were prohibited subsidies, 2) the counter-cyclical and direct payment programs, by prohibiting production of fruits and vegetables on base land eligible for payments can not be notified as green box. Regardless of the final results of this case, the objective of this paper is to estimate the potential effects of bringing the U.S. domestic programs in compliance with the Dispute Panel findings. Partial equilibrium analysis of the impacts on the U.S. and global rice economy has been analyzed using the Arkansas Global Rice Model. This model specifies the U.S. price and income support mechanisms directly in the supply response models for the U.S. Simulations of the model under current and alternative program expenditures in previous studies have provided information on the impact of “prejudice” on the global rice economy from U.S. subsidies. The general equilibrium analysis is done using the Global Trade Analysis Project (GTAP) model developed by the Center for Global Trade Analysis at Purdue University, and the GTAP 6.0 beta version database provided by the same source. This database represents the situation of the global economy as of 2001. Domestic support to agriculture is represented in this database by the rates of total domestic support and the percentage shares of output subsidies, intermediate input subsidies, land-based payments, and capital-based payments to total domestic support. The potential impact of a reduction in the budget devoted to specific programs such as direct payments as determined by the Dispute Panel in the case WT/DS267 are simulated by shocking the different variables of support cited above. Reduction of expenditures on counter-cyclical payment and direct payment programs are simulated by shocking the level of output subsidies. Reduction in export subsidy expenditures are simulated by shocking the export subsidy variable defined in GTAP. Results are presented for the rice sector and related factor markets. According to the Dispute Panel, loan rate gains, loan deficiency payments, marketing loan payments, certificate exchange gains, CCC commodity loan interest gains, and counter-cyclical payments are not decoupled based on the provisions in Annex 2 of the Agreement on Agriculture (AA), since their expenditures are related to prices applying to production undertaken after the base period. The Panel also found that the Direct Payment program is not decoupled given that the amount of such payments is related to the type of production undertaken in any year after the base period. Therefore, by not being decoupled, these programs are in violation of article 13(a) 1 and, when included in the estimation of AMS, in violation of article 13(b.ii) 2 . These findings raised concerns about the situation of other commodities receiving domestic support and export subsidies and the potential for legal disputes. This study assesses the potential impact of reducing expenditures in those programs for other commodities besides cotton. The first scenario considers a 30 percent decrease in payments done under the programs above for rice, wheat, cereals, oilseeds, and sugar. Previous research on trade liberalization in rice Previous analysis of trade liberalization in rice has found that the most significant trade policy distortions are tariffs in developing countries on long grain rice and tariff rate quotas (TRQs) in developed northeast Asian countries on medium grain trade (Wailes, 2005). The analysis has examined the relative contribution to distortion in trade volume and world reference prices from export subsidies, domestic supports, and import tariffs and TRQs. The effects of domestic price supports and trade policy were captured in the supply and demand framework of AGRM (Arkansas Global Rice Model). For this study, policy interventions in rice supply that were trade-distorting (“amber box” in WTO 1 Namely, these programs are not exempt from reduction commitments as stated in Annex 2 of AA. 2 Namely, the granted support to a specific commodity exceeds the level decided during the 1992 marketing year. parlance) were removed. At the time of this analysis, direct payments and countercyclical payments were not included in the trade-distorting set of policy interventions. To place the impacts of the removal of domestic policies on rice trade in perspective, the model was also simulated for the removal of import tariffs and export subsidies as well. Finally the AGRM was used to examine the net effect of the combination of policy reforms including domestic support, import protection and export subsidies. The AGRM baseline global trade projections were 27.9 mmt in 2005 increasing to 33.6 mmt by 2012. The world reference export price of long grain is the Thai 100 percent B and the reference export price for medium grain is the US California No. 2 Medium grain price. Long grain prices in the baseline begin at USD 232/mt in 2005 and increase to USD 277/mt by 2012. Medium grain prices increase from USD 332/mt in 2005 and increase to USD 406 by 2012. The impact on global rice trade from the removal of tariffs dominates all policy reform scenarios. Trade increases by 3.5 mmt in 2005 and continues to expand over time to 5.3 mmt above the baseline. The removal of export subsidies reduces global rice trade in the short-term by 720 thousand mt but the effect in the long term is negligible. Taken together, removal of import tariffs and export subsidies, the effect on global rice trade is swamped by the tariff effects. Trade is higher in 2005 by 2.7 mmt and by 2012 higher by 5.2 mmt. Elimination of domestic supports in the United States, the European Union and Japan reduces trade very slightly and not at all over the longer term. The combined effect of the removal of tariff barriers, export subsidies, and domestic supports increases trade by 2.4 mmt in 2005 and by 4.9 mmt by 2012. The impact on global export prices follows the impact on trade with the dominant impact on prices resulting from removal of import tariffs. The long grain price is higher in the short term by USD 23/mt and in the longer term by USD 43/mt. In the more highly protected medium grain market, tariff removal causes prices to be higher by USD 291/mt in 2005 and by USD 340/mt by 2012. The impact of removal of export subsidies is important only in the short term with long grain export prices higher by 6 percent and medium grain prices higher by 5 percent. The removal of domestic supports is negligible throughout the projection period. The aggregate effects of policy reforms, including tariffs, export subsidies and domestic supports is significant for both long grain and medium grain prices. Long grain export prices are higher by 18 to 22 percent. Medium grain prices are higher than baseline projections by 70 to 80 percent.