Implications of WTO Tariff Reductions for EU and US Dairy Policy

Transcription

1 Workng Paper Implcatons of WTO Tarff Reductons for EU and US Dary Polcy Mrana Pac Davd Blandford Kenneth Baley March 2009 IATRC Workng Paper #09-1

2 Internatonal Agrcultural Trade Research Consortum Implcatons of WTO Tarff Reductons for EU and US Dary Polcy By Mrana Pać, Davd Blandford, and Kenneth Baley * Workng Paper #09-1 The Internatonal Agrcultural Trade Research Consortum s an nformal assocaton of Unversty and Government economsts nterested n agrcultural trade. Its purpose s to foster nteracton, mprove research capacty and to focus on relevant trade polcy ssues. It s fnanced by Unted States Department of Agrculture (ERS, and FAS), Agrculture and Agr-Food Canada and the partcpatng nsttutons. The IATRC Workng Paper seres provdes members an opportunty to crculate ther work at the advanced draft stage through lmted dstrbuton wthn the research and analyss communty. The IATRC takes no poltcal postons or responsblty for the accuracy of the data or valdty of the conclusons presented by workng paper authors. Further, polcy recommendatons and opnons expressed by the authors do not necessarly reflect those of the IATRC or ts fundng agences. For a copy of ths paper and a complete lst of IATRC Workng Papers, books, and other publcatons, see the IATRC Web Ste A copy of ths paper can be vewed/prnted from the IATRC Web Ste ndcated above. *Mrana Pać s a former research assstant, and Davd Blandford and Kenneth Baley are professors at Penn State Unversty. Correspondence regardng ths paper should be addressed to the authors at: Department of Agrcultural Economcs & Rural Socology Penn State Unversty 112D Armsby Buldng Unversty Park, PA dblandford@psu.edu March 2009 ISSN Workng Paper #09-1 1

3 Implcatons of WTO Tarff Reductons for EU and US Dary Polcy Abstract The obectve of ths study s to measure the mpact of proposed Doha Round tarff reductons on the global dary ndustry and dary polcy. We examne how proposed tarff reductons affect global trade and prces, and the mplcatons for the European Unon and the Unted States. Snce nternatonal market condtons can vary, we examne the mplcatons of lberalzaton under two sets of market condtons. The frst corresponds to the year 2004 n whch there was a global surplus of dary products. In that year mport protecton ensured that U.S prces of dary products were above world prces. The second corresponds to 2007, when dary products globally were n short supply and U.S. domestc prces were at or below world prces. We show that proposed tarff reductons have dfferent mplcatons for dary commodtes dependng on polcy assumptons. For cheese and dry whole mlk, tarff reductons reduce supples and rase world prces due to reduced producton n the EU. However, wthout a change n EU polces global butter prces would declne due an ncrease n EU supples. Producton shfts away from cheese nto butter producton, ncreasng the supply of butter on the world market. We conclude that wth trade lberalzaton EU nterventon prces or mlk quotas would have to be reduced n order to counteract an ncrease n butter producton and ncreased use of export resttuton payments for that commodty. Introducton The Doha Round of World Trade Organzaton (WTO) negotatons began n It has been dffcult to reach agreement because of the dfferent nterests of WTO members. The U.S. s seekng concessons from other countres on market access reductons n tarffs and ncreases n tarff rate quotas (TRQs). The European Unon (EU) and a range of other countres are resstng ths. If the EU agrees to expanded market access t may have to change ts prce support polces for some mportant agrcultural products (Huan-Nem 2007) The world dary ndustry s one of the most heavly protected sectors (Melke et al. 1999). A key ssue n the current Doha Round s market access. Increasng market access by lowerng tarffs has been predcted to ncrease trade volumes and rase world prces (Zhu, Cox, and Chavas, 1999; Langley et al. 2003). Countres may be requred to expand TRQs and reduce over-quota tarffs. Reductons n bound tarffs and the creaton of TRQ s under the Uruguay Round Agreement on Agrculture (URAA) provded some ncrease n market access for dary products, but left many hgh tarffs n place. Reducng these hgh tarffs remans one of the man stckng ponts for agrculture n the Doha negotatons. Lberalzng border protecton n the EU would ncrease the competton faced by European dary farmers and would put nto the queston the contnuaton of EU prce support polces. Changes n world prces have hstorcally had only a lmted mpact on domestc dary producton and consumpton n the EU due to the protecton provded by 2

4 the Common Agrcultural Polcy. Producton s controlled by quotas, although these are scheduled for elmnaton n 2014/15. Currently, when world prces are below nterventon prces export subsdes are used to dspose of surplus producton. If world prces rse above nterventon prces export subsdes are elmnated and nternal prces rse, as occurred n If mport tarffs were reduced, the resultng ncrease n mports would place further pressure on the prce support polcy. In order to mantan nternal prces, the EU would be forced to consder reducng producton quotas or lower nterventon prces n order to prevent the buldup of nterventon stocks. It s for these reasons that the EU has ressted large reductons n tarffs n the Doha Round. Trade lberalzaton under the Doha Round may also put pressure on the U.S. domestc support program for mlk and dary products. Hstorcally, domestc prces for most dary products have been hgher than world prces and the U.S. market has been nsulted from global markets by tarff and non-tarff barrers. In recent years, U.S. mports have ncreasngly been drven by the demand for mlk components (mlk fat, proten, and lactose) used n the domestc food processng ndustry. Tarff reductons may result n further substtuton among domestc and nternatonal sources of components. On the other hand, f world market prces are hgh the U.S. could end up exportng dary products nstead of mportng them. The obectve of ths paper s to measure the mpact of proposed Doha Round tarff reductons on the global dary ndustry and ther mplcatons for polcy. We focus on measurng changes n over-quota mports n response to alternatve tarff reducton scenaros. Ths s accomplshed by developng a framework for analyzng tarff reductons and measurng ther mpact on domestc and nternatonal prces, and trade volumes. We use annual statc equlbrum models of the U.S. and global dary ndustry that explctly reflect the tarff structure of dary commodtes. These models were developed as part of an M.S. thess (Pać 2008). We use the lnked models to assess how lower tarffs wll affect dary polcy n the U.S. and EU. Market Access under the WTO In May 2008 a revsed draft of agrcultural modaltes was dstrbuted by the char of the WTO commttee on agrculture pror to further negotatons n Geneva n July (WTO 2008). Ths document proposed tered formulas for tarff reductons. For developed countres the proposed average tarff reductons are percent and for developng countres they are percent. It has not been possble to reach a fnal agreement on the modaltes, although some further changes have been ncorporated snce the breakdown of negotatons at the end of July The obectve of ths study s to examne the mpact of tarff reducton scenaros on the global dary market ncludng developed and developng countres. We do ths by developng a framework for analyzng the mpact of the May 2008 formula for tarff reductons on the U.S. and global dary ndustry. We refer to ths scenaro as the tarff reducton scenaro. 3

5 The proposed formula for developed countres uses the narrowest ters and the hghest reducton percentages. The frst tarff ter s 0-20 percent wth a tarff cut of between percent; the second ter s percent wth a reducton of percent. The thrd ter s percent wth a cut of between percent. Fnally, the fourth ter s for tarffs greater than 75 wth a reducton of between percent. 1 The proposal for developed countres provdes the largest reducton percentages across the tarff profle. For developng countres the formula has wder ters and lower tarff reducton percentages. The developng country frst ter s 0-30 percent wth a tarff cut of percent. The second ter s percent wth a tarff cut of percent. The thrd ter s percent and tarff cuts of percent. Fnally, the fourth ter s for tarffs hgher than 130 percent wth a cut of percent. 2 Based on these tered formulas new product ad valorem equvalent tarffs (AVEs) were estmated. Frst, we arranged countres nto developed, developng, and recently acceded members (RAMs). Second, we ranked exstng product-based AVEs and determned the ter to whch they belonged. Fnally, the proposed reducton percentages were appled to these product-based AVEs. Methodology Durng the past decade a number of models have been used to examne dary trade lberalzaton. The qualtatve results of the studes are smlar. They suggest that nternatonal trade lberalzaton wll result n lower global supples of mlk and dary products, hgher world prces, and a hgher value of dary trade. The effect of trade lberalzaton on ndvdual countres depends on the exstng level of protecton. Countres wth moderate to hgh levels of support and protecton such as the Unted States, EU, and Canada, may experence an ncrease n mports and reducton n producton, but ths wll depend on condtons n world markets. In contrast, countres such as New Zealand and Australa, wth low levels of protecton and producton costs, wll beneft from hgher prces and expanded export opportuntes. The global model developed n ths study s based on a statc equlbrum excess supply and demand trade model. It reflects supply, demand, market clearng condtons, and mport prces and tarffs as follows: Maor Exporters: Eq. 1 ES Maor Importers: Eq. 2 ED ( P ) = PRD + IMP EST ( IP ) = EST Market Clearng Condtons: ES = ED Eq. 3,, + CON PRD CON IMP 1 In ths paper we use average tarff reductons for developed countres as follows: 1 st ter 50%, 2 nd ter 57.5%, 3 rd ter 63.5%, and 4 th ter 69.5% 2 For developng countres we use average tarff reductons as follows: 1 st ter 33.3%, 2 nd ter 38.3%, 3 rd ter 42.3%, and the 4 th ter 46.3% 4

6 Tarffs and Import Prces: Eq. 4 IP = P + T where ES denotes excess supply, ED s excess demand, PRD s producton, IMP s mports, EST s endng stocks, CON s domestc consumpton, P s the world prce, IP s the mport prce, T s the tarff and and denote commodty and country, respectvely. The model was constructed usng elastctes taken from other studes. The maor sources were the PEATSIM model developed at Penn State and the Economc Research Servce of USDA, and the FAPRI global dary model. Our model nvolves twelve countres chosen for ther sgnfcance n global dary trade plus a resdual for the rest of the world. Countres are arranged nto two groups, mporters or exporters, based on hstorcal trade patterns, although ths does not affect the results snce the model solves for net trade for each country. The model s calbrated for two years: 2004 and 2007, and contans dary products that are traded globally: butter, cheese, nonfat dry mlk, and whole dry mlk. It solves for equlbrum world dary commodty prces. A separate but lnked model was developed for the Unted States that solves smultaneously for four wholesale dary commodty prces: butter, cheese, nonfat dry mlk, and dry whey (correspondng to data collected by the Natonal Agrcultural Statstcs Servce). The purpose of ths model s to analyze the mplcatons of trade lberalzaton for the Unted States n greater detal. Prces of U.S. dary products are affected manly by varatons n nternal supply and demand, due to the nsulatng effects of U.S. dary polces. In the rest of the world, prces are assumed to be determned largely on the bass of global supply and demand, but are nfluence by U.S. exports and mports. Our model reflects the current state of global mlk prcng n whch U.S. prces and world prces are separate but related. Ths dffers from most prevous models that assume a sngle global prce that s transmtted to the U.S. market. Both models solve smultaneously for dary commodty prces. In the U.S. model we solve for wholesale prces of cheese, butter, nonfat dry mlk and dry whey. In the rest of the world model we solve for the world prces of butter, skm mlk powder (nonfat dry mlk powder n the U.S.), cheese, and whole mlk. Results from the U.S. dary ndustry model are ntegrated nto the global dary trade model. Both models are connected va trade equatons that reflect U.S. mports and exports. The U.S. dary model dffers from the framework used for the rest of the world n another mportant respect. It uses a component-based methodology to account for the producton of processed products on the bass of ther proten, mlk fat, and other dary solds content. Ths type of accountng allows us to allocate components n the supply of mlk to flud mlk, ce cream (frozen products), soft manufactured products, and hard manufactured products. It provdes an mproved method for determnng the producton of processed dary products and allows us to reflect more accurately the mpact of the Federal Mlk Marketng Order (FMMO) system on flud and manufactured dary products. In the FMMO, Class I mlk relates to flud use, Class II to soft manufacturng products, Class III s cheese, and Class IV s for butter and nonfat dry mlk. The Federal 5

7 Order system meets the demand for flud mlk frst, and then allocates the remanng mlk to manufacturng uses. Dary product manufacturng and trade n the Unted States s ncreasngly drven by the demand for components, rather than products per se, so ths type of component-based model allows for an mproved representaton of how the U.S. dary market actually functons (Telloglu et al. 2007). The global dary trade model s constructed to analyze the mpact of alternatve tarff reducton scenaros. It s a gross dary trade model that accounts for total mports and total exports of each of the four commodtes n each country. Exports or mports by each country are derved from an excess supply or demand functon wth respect to the rest of the world. Aggregate exports equal aggregate mports n order to clear global markets. Through ths, the world prce for each product s lnked to domestc prces and affects producton, consumpton, and net trade. The man dary polces for each country are ncluded n the model. Trade polcy nstruments nclude specfc and ad valorem tarffs, and TRQs. These are reflected through a common specfcaton appled to all countres. In addton, the model ncludes mportant polcy measures that apply to certan countres, such as Canada and the EU. 3 In the EU these addtonal measures nclude specfc fxed tarffs n dollars per metrc ton, exchange rates, mlk producton quotas, and nterventon prces for butter and nonfat dry mlk. In Canada, the addtonal measure s the mlk producton quota. All the country models nclude farm-to-retal markups to reflect the dfference between producer and consumer prces for cheese, butter, nonfat dry mlk and whole dry mlk. Snce t s dffcult to obtan such data on a country-by-country bass, we appled the farm-to-retal mark up derved from U.S. data (n percentage terms) to all other countres. Tarffs are based on data for 2000 or the most recent year avalable. The model uses appled tarffs rather than bound tarffs under the WTO Uruguay Round Agreement. Apart from the U.S., modelng the EU was more complcated than the rest of the countres n the model. Ths s because of the need to reflect the Common Agrcultural Polcy. The EU employs hgh mport tarffs to keep domestc prces above world prces, mlk producton quotas to lmt producton, nterventon prces to set mnmum prces for butter and nonfat dry mlk, and export subsdes to dspose of surplus products. These polces are n place to protect the domestc market for dary products and each nstrument s requred to mantan market balance. Wth hgh domestc prces producton wll rse, requrng budgetary expendtures for export subsdes. One of the key aspects of EU polcy s the use of nterventon prces for butter and nonfat dry mlk. The EU uses nterventon purchases to absorb surplus manufacturng mlk components. Products acqured are exported usng subsdes. In the model, mport prces for cheese, butter, nonfat dry mlk, and whole dry mlk are represented by the world prce plus the over-quota tarff. Export prces for the four dary products are set equal to world prces. Processor and consumer prces for cheese and butter are modeled n the same way as for other mporters, whle the prces for butter and nonfat dry mlk are 3 The model uses an aggregate for the EU25. Data for the two most recent members (Bulgara and Rumana) were not avalable. 6

8 set equal to nterventon prces. Supply and demand for the four processed dary products are modeled n the same manner as n any other country. We do not explctly reflect other domestc subsdes n the model. The mport demand equatons for processed dary products are constant-elastcty functons n own mport prces. Actual quota mports are compared to the TRQs for the four products. The data on TRQs were taken from Food and Agrcultural Research Insttute (FAPRI) database. FAPRI provdes an hstorcal database on producton, consumpton, trade, prces, as well as quota nformaton for ndvdual dary countres. Fnally, n order to clear the markets, export denttes are specfed as producton plus mports mnus domestc consumpton. Tered Formula for Agrcultural Tarff Cuts In 2004, the WTO produced a document, called the Framework Agreement, to gude negotatons for a fnal agrcultural agreement. The document reflects agreement that all members must make substantal mprovements n market access for all products. In May 2008 a revsed draft of the agrcultural modaltes was presented (WTO 2008). Ths document offers ncorporate the progress made n the negotatng process to that pont. One of the changes ntroduced was a modfed tered formula for tarff reductons. A summary of the tarff reducton formula s gven n Table 1. We used ths tered formula for agrcultural tarff reducton to conduct our trade lberalzaton scenaros. New product ad valorem equvalents (AVEs) were estmated. To do ths countres were grouped nto developed, developng, and RAM developng (recently acceded WTO member) categores. Product-based AVEs were ranked to determne the ter to whch they belonged. The reducton percentages n Table 1 were appled to generate new product-based AVEs. Snce Russa s not a WTO member we appled the constant ad valorem over-quota tarff applcable n We subtracted 7.5 percent from the tarff reducton profle for Chna snce t s consdered a RAM developng country. The product AVEs derved from these calculatons are gven n Table 2. Baselnes and Scenaros We examned two scenaros under two baselnes. The baselnes were desgned to reflect two alternatve market condtons. The frst baselne s for 2004 and llustrates the tradtonal U.S. market stuaton n whch domestc dary prces are hgher than world prces. The second baselne was for 2007 when U.S. domestc prces were below world prces. There was strong global demand for dary products n 2007 generated by rsng ncomes, prmarly n Asa and the Mddle East. The strong demand confronted lmted global supples and world dary prces ncreased. In addton, Australa experenced a drought and ts dary exports declned. Tght world supply, coupled wth strong world demand, plus the added effect of deprecaton of the U.S. dollar meant that the U.S. had a compettve advantage n exports. 7

9 The two baselnes were used n the analyss of two polcy scenaros: a tarff reducton scenaro and an EU polcy scenaro. Our ntal focus s on the tarff reducton scenaro n the May 2008 draft modaltes. We used the model under the two baselnes to examne the mpact of tarff reductons on global supply and demand for dary commodtes. The second scenaro not only ncludes the tarff reductons, but polcy response n the EU. A key ssue s how the EU would respond to sgnfcant tarff reductons, and how ths response would affect global supply and demand. The followng summarzes the baselnes and scenaros used n ths study: Baselnes: Tradtonal Global Surplus (2004) New Global Shortage (2007) Scenaros: Tarff Reducton Scenaro Tarff Reducton Scenaro wth EU Polcy Response. Results The results of the Tarff Reducton Scenaro for the 2004 and 2007 baselnes are analyzed frst. The 2004 baselne, reflectng tradtonal global supply and demand condtons, s presented n Tables 3-6. The results for 2007 were broadly smlar and are dscussed below. Tarff Reducton Scenaro The mpact of the tarff reducton scenaro on the Unted States dary market s not dramatc. Ths s because current dary trade protecton n the U.S. s not as rgd as n Europe and Canada. The requred reducton n tarffs causes an ntal declne n mport prces for butter, nonfat dry mlk, and whole mlk powder under market condtons applyng n both 2004 and Generally speakng, the cuts n tarffs reduce mport prces and ncrease mport demand. The cheese mport prce, however, shows a slght ncrease n both years even though over-quota tarffs fall percent relatve to the baselne. Ths s because the reducton n tarffs s offset by an ncrease n the world prce. The same s true for whole dry mlk. The change n mports created by tarff reductons creates a new supply/demand balance wth a hgher equlbrum global prce. Generally speakng, changes n global supply and demand for cheese and dry whole mlk follow a smlar pattern. On the supply sde a maor reducton n the EU mport tarff causes a declne n the domestc prce of cheese. Wth fxed support prces for butter and nonfat dry mlk, the economcs of mlk allocaton result n a substantal shft from cheese to butter and nonfat dry mlk producton. As a result, the EU changes from beng a maor net exporter of cheese to self suffcency. That shft causes a szeable ncrease n the global prce of cheese, up roughly 28 percent from the 2004 baselne. The rse n world prces, whch offsets the effect of the lower mport tarff, result n a reducton n mports by maor countres. Chna and Russa, for example, reduce ther mports sgnfcantly n the face of ncreased world prces. 8

10 The results are substantally dfferent for butter and nonfat dry mlk. The reallocaton of mlk away from cheese to butter/nonfat producton causes sgnfcant growth n exports. Total excess supply of butter rses 19 percent relatve to the baselne n Ths large growth n supply reduces the world prce of butter by 6 percent. The lower tarff and lower world prce result n an ncrease n global excess demand of 34 percent relatve to the 2004 baselne. These results are agan due to a substantal reallocaton of mlk created by the sgnfcant reducton n the EU nternal cheese prce relatve to fxed EU nterventon prces for butter and nonfat dry mlk. Dfferences n results between 2004 and 2007 are due to the fact that the startng pont for global prces of cheese, butter, nonfat dry mlk, and whole dry mlk s hgher n 2007 than n As noted above, ths s due to reduced global supply and strong demand. Another maor dfference was the volume of butter traded n 2007, whch was half that n Under 2007 condtons the declne n global butter prces s much lower than under the condtons applyng n Wth tarff reductons, global cheese and butter prces move n opposte drectons the cheese prce ncreases whereas the butter prce decreases. Ths s due to the reallocaton of mlk away from cheese to butter producton n the EU. As a maor global player, changes n the EU market have a sgnfcant mpact on world prces under ths scenaro. Note, however, we assume that EU butter and nonfat dry mlk nterventon prces and the mlk producton quota are unchanged. Gven the strong reducton n the domestc prce for cheese compared to a fxed butter prce, such assumptons may not be realstc. Strong growth n EU butter and nonfat exports would requre ncreased use of export subsdes, whch are lmted under WTO agreements. EU Polcy Response Scenaros Because of the mportance of the polcy assumptons for the EU, we examned a second scenaro n whch both nterventon prces and the mlk producton quota are reduced. Ths causes the domestc prce of butter to fall to world market levels, thus preventng the need for export subsdes. Also, the lower domestc butter prce prevents a reallocaton of mlk from cheese to butter producton. In our model the EU nterventon prce affects the relatonshp between world and domestc prces. The EU s the only country (apart from the Unted States) n whch prce-support purchases for butter and nonfat dry mlk occur. All nterventon prces n 2004 were hgher than world prces, and ths also appled to butter n The world prce of nonfat dry mlk n 2007 was slghtly hgher than the nterventon prce and ths ncreases the nternal EU prce. As part of our alternatve EU scenaro we reduced the mlk producton quota n the EU by 3 percent n both years. We reduced the butter nterventon prce by 50 percent n 2004 and 25 percent n 2007 and the nterventon prce for nonfat dry mlk by 10 percent n We dd not change that prce n 2007 because t was already hgher than the world prce. Lower nterventon prces coupled wth a lower mlk producton quota 9

11 caused a decrease n processor prces for butter and nonfat dry mlk. Ths s because we defne the producer prce as equal to the hgher of the defned nterventon prce or the world prce. The butter producer prce falls by 29 percent to $2,796 per metrc ton n Ths sgnfcant drop n the EU butter prce causes a declne n EU exports of 92 percent n 2004 relatve to the baselne. Under the 2007 condtons EU butter exports fall by 58 percent relatve to the baselne. Other EU dary exports also declne. Under the 2004 condtons cheese exports fall by 64 percent, skm mlk powder exports by 92 percent, and whole mlk powder exports by 35 percent. As a result the need for EU export subsdes s reduced sgnfcantly. The mpact of adustments n EU polcy s dramatc. Global excess supply n 2004 declnes 249 thousand metrc tons and demand falls by 238 thousand metrc tons. Under ths scenaro, global butter prces n 2004 actually ncreased by 15 percent to $2,076 per metrc ton. The same result occurs n 2007 except that the ncrease to $3,000 per metrc ton s smaller n percentage terms (5 percent) due to hgher base prces. These results are opposte to those n the earler no-polcy-change scenaro. Although a reducton n the mlk quota helps to mprove market balance n the EU n response to trade lberalzaton, t s unlkely to be a realstc opton. As ndcated earler, the EU s on a path to elmnate quotas by 2014/15. Studes ndcate that a gradual phasng out of the quota wll result n an ncrease n the mlk supply. A soft landng approach, n whch the quota s ncreased by 1-2 percent per year s estmated to result n an ncrease n the mlk supply of roughly 5 percent, and a fall n the mlk prce of roughly 3 percent by 2015 n comparson to 2008 (Commsson of the European Communtes, Réqullart). To examne the mplcatons of ths for our analyss, we replaced the EU quota by a supply functon. We used the FAPRI supply elastcty of 0.35 and solved for the ntercept at the current quota level. We assumed that an expanson of the quota would result n a reducton n the margnal cost of producton as mlk prces drop and producton moves to more effcent areas of the EU. We re-solved our model untl we obtaned a 5 percent growth n the mlk supply. Ths not only mrrors the EU Commsson results, but also mples a reducton n the margnal cost of producton. In addton, we reduced nterventon prces by 40 percent n order to avod surplus producton and the need to use export subsdes. The results of the revsed EU scenaro are smlar to the results mpled from prevous trade lberalzaton studes. A reducton n tarffs under the 2004 baselne results n lower domestc prces, greater domestc demand, and hgher world prces. For the EU, the expanson and eventual elmnaton of the quota and a reducton n nterventon prces results n a more market-orented dary ndustry. Mlk producton expands, producton of cheese ncreases relatve to butter and skm mlk powder, and domestc consumpton grows. Exports of cheese expand sgnfcantly (up 19 percent), whereas exports of butter, skm mlk power, and whole mlk powder fall by 49, 39, and 15 percent, respectvely. Freeng up the quota and reducng nterventon prces creates an opportunty for the EU to meet growng nternal and export demand wthout the use of export subsdes. The 10

12 results under 2007 condtons are smlar except that exports of butter and nonfat dry mlk, ncludng cheese exports, grow to meet growng world demand despte the fact that world prces for butter and skm mlk powder are lower by 5 and 6 percent, respectvely. Summary and Conclusons The obectve of ths paper s to measure the mpact of proposed Doha Round tarff reductons on the U.S. and global dary ndustry, wth a partcular focus on the EU and US. We examne how proposed tarff reductons under the Doha Round affect the global pattern of trade and world prces under market condtons applyng n two years 2004 and We used the May 2008 draft WTO modaltes as a pont of reference and analyzed ther mpact on the global dary economy. In partcular we are nterested n how a reducton n the U.S. and world tarff profles for dary products mght alter the pattern of dary trade. A unque aspect of ths study s that t employs two dary trade models: one model for the U.S. market and one for the world. The U.S. dary trade model uses a componentbased methodology to account for the producton of processed dary products on the bass of proten, mlk fat, and other dary solds. Ths approach allows us to determne the supply of components from raw mlk and to allocate them to flud mlk, ce cream (frozen products), soft and hard manufacturng. The approach provdes an mproved method of analyzng changes n the producton of processed dary products. We focus on two dfferent but realstc sets of market condtons. The frst s for the year In that year U.S prces of dary products were above world prces. The second s for 2007 when U.S. domestc prces were below world prces due to tght domestc supples, strong global demand, and exchange rate changes. In that year the U.S. had a compettve advantage n exports. We fnd that under the tarff reducton scenaro, global cheese and butter prces change, but n opposte drectons. One would expect that lower mport tarffs would cause a reducton n supply and an ncrease n world prces. However, the butter prce s found to fall due to the reallocaton of mlk components away from cheese to butter producton followng a drop n domestc cheese prces relatve to butter/nonfat dry mlk prces. Ths depresses global butter prces. Also, a declne n global excess supply of cheese due to reduced cheese producton n the EU exceeds the declne n excess demand, causng an ncrease n world cheese prces. The reallocaton of mlk from cheese to butter producton n the EU s due to the fact that EU cheese prces are supported by hgh tarffs, whereas EU butter and nonfat dry mlk are supported by nterventon prces. When tarffs are cut, cheese prces fall. Wthout offsettng adustments n butter/nonfat dry mlk prces there s a substtuton away from cheese producton towards butter and nonfat dry mlk producton. The end result s much hgher producton of butter and nonfat dry mlk. Ths would lkely not be acceptable under WTO rules snce t would requre much hgher levels of export subsdes on butter and nonfat dry mlk exports. Consequently, a scenaro was analyzed n whch reductons n nterventon prces and a reducton n the mlk quota s used to 11

13 brng the EU market nto balance. The result s that nternal butter and nonfat dry mlk prces fall to global prce levels, avodng the need for export subsdes. In addton, the quota prevents surplus producton. Wth ths scenaro there s a rse n the global prce of butter whch s smlar to results found n other studes. A fnal scenaro was developed n whch the EU quota on mlk s elmnated and nterventon prces are cut sgnfcantly. Ths s a more lkely polcy scenaro gven that EU quotas are to be elmnated by Under such a scenaro the EU s free to react to changng world market condtons. As s the case wth every model, there are several lmtatons to the one developed n ths study. Frst, we assume commodty homogenety for all dary products (e.g., all types of cheese are ncluded n our cheese category). Second, we only provde specfc treatment of quota versus over-quota trade for TRQs for selected countres, namely the U.S. and EU, as data were readly avalable and these are large countres. Thrd, we only use component accountng for processed dary products for the U.S. The method would need to be expanded to other maor producng countres f ths approach s to be appled more generally. Fourth, under our alternatve scenaros, we assume that EU nterventon prces and U.S. support prces are fxed. Ths s a partcularly strong assumpton for the EU snce a drop n domestc cheese prces relatve to a fxed butter nterventon prce causes a maor shft n the allocaton of mlk. In the alternatve scenaros, we lowered the nterventon prce, and that caused a declne n the domestc prce of butter. The drop n domestc prce would prevent the reallocaton of mlk from cheese to butter producton. Despte the lmtatons of our analyss, t s clear that tarff reductons could create challenges for dary polcy n the EU snce they would requre reductons n nternal rates of support. The EU would have to follow through wth the gradual elmnaton of mlk quotas and reduce nternal support prces n order to avod the challenge of havng to deal wth surplus dary products. The tradtonal avenue for dsposng of such surpluses on world markets would be unavalable f agreement s fnally reached n the Doha Round and export subsdes were elmnated. 12

14 References Commsson of the European Communtes. (2008). Impact Assessment. Commsson Staff Workng Document accompanyng the proposal for councl regulaton on modfcatons to the common agrcultural polcy. SEC(2008) 1885, Brussels, May 5, Cox, T. L., J. R. Coleman, J. P. Chavas, and Y. Zhu. (1999). An Economc Analyss of the Effects on World Dary Sector of Extendng Uruguay Round Agreement to Canadan Journal of Agrcultural Economcs, 47: Doha Round Negotatons Market Access Proposals. (2005). WTO Doha Round: Agrcultural Negotatng Proposals, CRS Report for Congress,Washngton, DC.. Huan-Nem, Ellen. (2007). Market Access under the WTO: Identfyng Senstve Agrcultural Products n the EU. Agrfood Research Fnland, Workng Paper 146, Helsnk. URL: Fallert, Rchard F. (1973). Accountng for Butterfat and Nonfat Mlk Solds n the Dary Industry. Economc Research Servce, USDA. Proceedngs of Workshop on Systems Analyss n the Dary Industry. Aprl Herndon, VA. Food and Agrcultural Polcy Research Insttute (FAPRI), The U.S. and World Agrcultural Outlook, URL: Data accessed March Grant, J. H., T. W. Hertel, and T. F. Rutherford (2006). Extendng General Equlbrum to the Tarff Lne U.S. Dary n the Doha Development Agenda. Amercan Agrcultural Economcs Assocaton Annual Meetng, Long Beach, CA, July 23-26, Harry De Gorter and D. S. Boughner. (1999). U.S. Polcy and the Agreement on Agrculture n the WTO. Canadan Journal of Agrcultural Economcs, 47: Hanrahan C., and R. Schnepf. (2005). CRS Report for Congress, WTO Doha Round: Agrcultural Negotatons Proposals, Washngton, DC. Jesse, Ed. (2003). U.S. Imports of Concentrated Mlk Protens: What We Know and Don t Know? Department of Agrcultural and Appled Economcs, Unversty of Wsconsn, Marketng and Polcy Brefng Paper, Paper No. 80 Langley, S., A. Somwaru, and M. A. Normle. (2006). Trade Lberalzaton n Internatonal Dary Markets: Estmated Impacts. Washngton DC: U.S. Department of Agrculture, Economc Research Report No. 16. Langley, S., D. Blayney, J. Stout, A. Somwaru, M.A. Normle, J. Mller, and R. Stllman. (2003). A Trade Lberalzaton n Internatonal Dary Markets. USDA, Economc Research Servce. Paper prepared for presentaton at the Amercan Agrcultural Economcs Assocaton Annual Meetng, Montreal, Canada, July

15 Melke, K., S. Larvére, and C. Martn. (2001). Trade Lberalzaton n the Dary Sector: An Overvew. The Estey Centre Journal of Internatonal Law and Trade Polcy, 1: Pać, Mrana. (2008). The Impact of Tarff Reducton and Global Demand Growth on the U.S. Dary Industy. M.S. Thess, Department of Agrcultural Economcs and Rural Socology, The Pennsylvana State Unversty. Partal Equlbrum Agrculture Trade Smulator Model. (2007). Department of Agrcultural Economcs and Rural Socology, Penn State Unversty. URL: Réqullart, Vncent. (2008). Economc analyss of the effects of the expry of the EU mlk quota system. Insttut D Econome Industrelle, Toulouse. Stewart, Terence P. (1999). The GATT Uruguay Round: A Negotatng Hstory ( ). The Hague: Kluwer Law Internatonal. Stout, J. and D. Abler. (2003). ERS/Penn State Trade Model Documentaton. Department of Agrcultural Economcs and Rural Socology, The Pennsylvana State Unversty. URL: Telloglu, I, K. Baley and D. Blandford. (2007). Implct Tarffs on Imported Dary Product Components n the Unted States. The Estey Centre Journal of Internatonal Law and Trade Polcy. 8: USDA, Commodty Analyss Dvson, Agrcultural Stablzaton and Conservaton Servce. (1991). Methodology of Calculatng the Mlk Equvalent, Total Solds Bass, of CCC Purchases of Surplus Dary Products and of Imports of Dary Products. Aprl 1. Unted States Internatonal Trade Commsson. (2004). Condtons of Competton for Mlk Proten Products n the U.S. Market. Investgaton No Publcaton 3692 U.S. Department of Agrculture, Agrcultural Research Servce USDA Natonal Nutrent Database for Standard Reference, Release 18. Nutrent Data Laboratory Home Page, World Trade Organzaton (WTO). (2006). Schedule of tarffs and concessons by WTO members. avalable at: World Trade Organzaton (WTO). (2008). Revsed Draft Modaltes for Agrculture. Commttee on Agrculture Specal Sesson. TN/AG/W/4/Rev.2, May 19. URL: 14

16 Zhu, Yong, T. L. Cox, and J. P. Chavas. (1999). An Economc Analyss of the Effects of the Uruguay Round Agreement and Full Trade Lberalzaton on the World Dary Trade Sector. Canadan Journal of Agrcultural Economcs, 47:

17 Table 1. Tarff Reducton Formula for Developed and Developng Countres Developed Countres Developng Countres Ter Ters % Reducton % Ters % Reducton % 1st 0 <= <= nd > 20 <= > 30 <= rd > 50 <= > 80 <= th > > Source: Revsed Draft Modaltes for Agrculture, May 19, 2008, WTO, Commttee on Agrculture Specal Sesson. 16

18 Table 2. Average Tarffs, Ad Valorem Equvalent (AVE percents), Baselnes and calculated Tarff Reductons for Tarff Reducton Formula n 2004 Baselne AVE 2004 Model AVE 2004 Computed AVE's Tered Formulas Inda (developng) Butter Cheese NFDM WMP Mexco (developng) Butter Cheese NFDM WMP Russa (not a WTO member) Butter Cheese NFDM WMP New Zealand (developed) Butter Cheese NFDM WMP Canada (developed) Butter Cheese NFDM WMP Argentna (developng) Butter Cheese NFDM WMP

19 Table 2. contnued Baselne AVE 2004 Model AVE 2004 Computed AVE's Tered Formulas Brazl (developng) Butter Cheese NFDM WMP Chna (RAM developng) Butter Cheese NFDM WMP EU ($/mt) (developed) Butter 2,359 2, Cheese cheddar 2,079 2, NFDM 1,478 1, WMP 1,742 1, USA ($/mt) (developed) Butter 1,541 1, Cheese 1,620 1, NFDM WMP 1,092 1, Ukrane (RAM developng) Butter Cheese NFDM WMP Australa (developed) Butter Cheese NFDM Source: FAPRI Database for all countres except for the U.S. Cheese Tarff Schedule of the Unted States (2007) for the data on over-quota average tarffs $/kg. The data on over-quota butter, NFDM, and WMP avg tarffs ($/kg) were taken from Pać (2008). World prces of cheese, butter, NFDM, and WMP were taken from the Penn State/ERS model database. 18

20 Table 3. Global Cheese Excess Supply, Excess Demand, and Prce n 2004 Unts Baselne Model Change % Change CHEESE Excess Supply: kmt U.S EU R Canada R Australa New Zealand Argentna Ukrane Total 1,213 1, Excess Demand: kmt U.S Canada EU Australa Brazl Chna Mexco Russa Total ROW kmt Model World Prce $/mt 2,612 3, R = swtches from net exporter to net mporter 19

21 Table 4. Global Butter Excess Supply, Excess Demand, and Prce n 2004 Unts Baselne Model Change % Change BUTTER Excess Supply: kmt U.S EU Canada Australa New Zealand Argentna R Ukrane Brazl R Total 846 1, % Excess Demand: kmt U.S Canada EU Australa Chna Mexco Russa Inda Total ROW kmt Model World Prce $/mt 1,799 1, R = swtches from net exporter to net mporter 20

22 Table 5. Global Nonfat Dry Mlk (NFDM) Excess Supply, Excess Demand, and Prce n 2004 Unts Baselne Model Change % Change NFDM Excess Supply: kmt U.S EU Canada Australa New Zealand Argentna Ukrane Brazl R Inda Total Excess Demand: kmt EU Australa Brazl Chna Mexco Russa Total ROW kmt Model World Prce $/mt 2,019 1, R = swtches from net exporter to net mporter 21

23 Table 6. Global Whole Dry Mlk Excess Supply, Excess Demand, and Prce n 2004 Unts Baselne Model Change % Change Whole Dry Mlk Excess Supply: kmt EU Australa New Zealand Argentna Ukrane Brazl Total 1,592 1, Excess Demand: kmt Australa Brazl Chna Mexco Russa Total ROW kmt Model 1,448 1, World Prce $/mt 2,024 2,

24 Appendx A Component Accountng Methodology A unque aspect of the U.S. model used n ths study s that t smulates dary commodty producton usng a component accountng or mass balance approach based on the component content of mlk and dary products. One of the frst studes to account for mlk components was publshed by USDA n order to portray Commodty Credt Corporaton (CCC) purchase of surplus dary products and mports on a mlk equvalent (ME), total solds bass (USDA 1991). Ths was a reportng requrement of the Food, Agrculture, Conservaton and Trade Act of The methodology was to convert pounds of CCC purchases of butter, nonfat dry mlk and cheese nto equvalent amounts of mlk on a mlk fat, nonfat solds (or skm), and total solds bass (skm and mlkfat). Both the mlk fat and nonfat solds ME s were computed by usng estmated component representaton factors (CRF) whch represent the amount of components n both mlk and specfc dary products. These CRF s attempted to account for all mlk solds n fnshed products, and for by-products not reflected n the fnshed product totals. The total solds ME was then estmated by weghtng the ME mlk fat total by 0.4 and the ME nonfat solds total by 0.6. USDA s methodology for accountng for mlk products purchased by the CCC contnues to be used to approxmate total use of dary products on a ME bass. Ths s reported on both a ME mlk fat and ME nonfat solds bass and used to develop supply and demand tables for mlk. In essence, the methodology attempts to convert the mlk components n fnshed dary products nto the equvalent amount of mlk used to produce those components. But ME mlk fat converson presents one vew of mlk and ME nonfat solds presents another. And such approxmatons must make ad hoc assumptons regardng product yelds, by-product producton and surplus component use. Fallert (1973) argued that any model of the U.S. dary ndustry must consder both the mlk fat and sold-not-fat (SNF) sdes of the ndustry. To that end Fallert developed a methodology to determne the amount of mlk fat and SNF utlzed n the producton of all dary products reported each month by the Natonal Agrcultural Statstcs Servce. Ths approach was based on the mlk fat and SNF content of mlk, product yeld coeffcents, and some accountng assumptons for by-products, namely whey and buttermlk. He compared the mlk fat and SNF n net mlk sales (after accountng for onfarm use) to that used n domestc processng. Ths was a sgnfcant frst step n drect component accountng. A maor shortcomng of the approach, however, was that t dd not account for mports and exports of dary ngredents, although these were lmted at the tme. Another shortcomng was that the methodology focused on accountng for SNF. It would have been preferable to have separated proten from other dary solds snce the former has a much hgher market value than the latter. The methodology used n ths paper to account for sources and uses of mlk components (mlk fat, proten, other dary solds) employs the followng steps: 1. Start wth U.S. mlk producton 2. Compute the components n U.S. mlk producton 3. Evaluate the components n flud, other fresh, and frozen desserts. 23

25 4. Subtract those components from the mlk supply to determne the supply of manufacturng mlk components. 5. Allocate the mlk components frst to cheese. Then subtract the components used n cheese from the supply of manufacturng mlk. 6. Use the resdual components to determne the producton of butter and nonfat dry mlk. Mlk components contaned n mlk producton and n processed dary products are accounted for usng the followng equaton: (1) Ck = βk * X * α, s. t. β = 1 k k where C k s tons of component k (mf=mlk fat, pr=proten, os=other dary solds, and m=mosture) n fnshed dary products, β k s the percentage of component k n dary product, X s the amount of dary product, and α s the percentage of dary solds n product X. For example, regular ce cream must contan at least 20 percent dary solds. Thus one can assume that α s The balance of ce cream s mosture and non-dary solds (sweeteners, stablzers, and flavors). The dary solds porton of ce cream contans 18 percent proten ( β pr ), 60 percent mlk fat ( β mf ), and 22 percent other dary solds ( β os ). The source of component levels n dary products was USDA s nutrent database (2005). 24