Minor Project 1

Agricultural Economics 855 Minor Project #1

Prepared by Ruslan Kakenov Submitted to William A.Kerr

Introduction Price support enables farmers to sell their output at higher prices, than otherwise would be. Higher prices meant increasing output resulting in surpluses of agricultural commodities. And, because EU is a large exporter country it has great impact on the world markets, resulting in lower world prices and less exports for small export countries such as Canada. While direct payments to farmers could restrict output and maintain high enough income for them. However, this domestic subsidy is trade-distorting as well. Because without that inefficient agricultural firms would exit the market and more efficient importers would fill the remaining domestic demand. Thus, domestic subsidies work as tariffs, and prevent the domestic market from foreign entrance. Trade implications from Ackrill article Export subsidies are the most trade-distorting cause in the international trade system. As the WTO commitment, EU had to decrease its export subsidies. Instead, it has increased domestic subsidies to protect its agricultural producers. Ackrill, in his paper, states that EU underwent reforms and changed its price supportive policy to direct payments to their farmers. That is clearly seen from figure 4, when CAP spending in the years from 1992 to 2006 on export refunds and storage had decreased dramatically, while direct aid and rural development costs

had increased instead. However, total CAP spending has increased from ECU/€ 35bln t o 50bln. Furthermore, member states of EU agreed to replace the existing direct payments with ‘Single Farm Payments’ which, by being further decoupled from production should reduce trade-distorting effects of CAP. Even though EU shares of the world agricultural exports has decreased dramatically due to lessened export subsidies. From figure 2, it is clearly seen that total milk exports, butter and milk powder world export shares has fallen significantly. However, none of imports for selected agricultural products has increased during these years, but cereals in a small amount. All that approves what was mentioned before regarding EU’s market access, which has not been opened enough due to domestic subsidies. Implications for Canada • All subsidies are trade-distortive. • Canada enjoys higher world prices and larger exports for agricultural commodities due to decrease in EU’s export subsidies spending. • Access into agricultural market of EU has not opened enough due to increasing domestic subsidies to EU’s farmers.

Conclusion Canada shall not lower its tariffs for its agricultural products and provide greater access to its domestic market, because as we have seen, EU didn’t open its markets, but comply with WTO rules to lessen its trade distortive practice of export subsidies. Canada is not warranted to change its negotiating position. If Canada lowers its tariffs, imports will eventually rise, and to sustain higher domestic agricultural production, it shall increase domestic subsidies to protect its farmers.