CONFERENCE PROGRAM
Overview - Won W. Koo, Director, Northern Plains Trade Research Center
Welcome - Joe Chapman, President, North Dakota State University
Moderator - David Lambert, North Dakota State University
CUSTA: Good or Bad?
James Rude, University of Saskatchewan and Andrew Schmitz, University of Florida
Major Trade Issues
Under CUSTA: A Canadian Perspective
M. N. Gifford, Former Director General, International Trade Policy Directorate,
Agriculture and Agri-Food Canada
Major
Agricultural Trade Issues Under CUSTA, One U.S. Perspective
Cathy Jabara and John Reeder, U.S. International Trade Commission
Moderator - Demcey Johnson, North Dakota State University
The Impact of
CUSTA on U.S. and Canadian Agricultural Trade
Thomas Vollrath, Economic Research Service, USDA
The Canada - U.S.
Free Trade Agreement: The Case of Wheat
Vincent Smith, Montana State University
The
Dynamics in the Wheat and Wheat Products Sector: United States - Canada Comparisons
Karl Rich and Ronald Babula, U.S. International Trade Commission, and Robert Romain,
Laval University
Discussant - Hartley Furtan, University of Saskatchewan
Lunch Speaker - Robert Trotter, Director, Field Operations, U.S. Customs
Service
Introduction - Won W. Koo, Director, Northern Plains Trade Research Center,
North Dakota State University
Moderator - James Johnson, Montana State University
Major Issues in the
U.S. Livestock Industry under CUSTA
Harlan Hughes, Professor Emeritus, North Dakota State University
CUSTA’s
Impacts on Bilateral Trade of Livestock: Pork and Poultry
Terry Crawford, Economic Research Service, USDA
CUSTA and U.S./Canadian Beef Trade
Issues
Gary Brester, Montana State University
Discussant - Craig Jarolimek, President, National Pork Producers Council
Special Address: Senator Byron Dorgan
Introduction - Won W. Koo, Director, Northern Plains Trade Research Center,
North Dakota State University
Moderator - Cole Gustafson, North Dakota State University
Changes
in the Canadian Grain Marketing System and the Role of the Canadian Wheat Board in U.S.
and Canadian Grain Trade
Ted Allen, President, United Grain Growers
Changes
in Grain Marketing Industries in the United States and Canada
William Wilson, North Dakota State University
Changes
and Issues in the Canadian Grain Transportation Industry: Impacts of Technology in
Marketing
Barry Prentice, University of Manitoba
Discussant - Hartley Furtan, University of Saskatchewan
Dinner Speaker - Timothy J. Galvin, Administrator, Foreign Agricultural Service,
USDA
Introduction - Patricia Jensen, Vice President for Agricultural Affairs,
North Dakota State University
Moderator - Walter Armbruster, President, Farm Foundation
Do We Need Further
Integration of the North American Agricultural Market?
Brian Paddock, Agriculture and Agri-Food Canada
Harmonization of
Agricultural and Trade Policies
David Schweikhardt and Monika Tothova, Michigan State University
An
Alternative Approach to the Resolution of Canada-U.S. Disputes over the Canadian Wheat
Board
Hartley Furtan and Murray Fulton, University of Saskatchewan
Exchange Rates and Relative Pricing
MinKyoung Kim, William Nganje, and Won W. Koo, North Dakota State University
Moderator - David Saxowsky, North Dakota State University
Major Issues in Trade
Disputes and Future Direction
Jon Lauck, University of Minnesota Law School
Trade
Disputes: The Anti-dumping and Countervailing Duty Laws and the Role of Quantitative
Economic Analysis
Dennis Featherstone, Canadian International Trade Division, and Ihn H. Uhm, Canadian
International Trade Tribunal, Ottawa, Canada
What Have We Learned
About Trade Disputes Under NAFTA?
R.M.A. Loyns, Prairie Horizons Ltd., Manitoba, Canada
Discussant - Cathy Jabara, U.S. International Trade Commission
Moderator - Won W. Koo, Director, Northern Plains Trade Research Center,
North Dakota State University
Panel Members:
Charlie
Mayer, Former Minister responsible to Parliament for the Canadian Wheat Board
Robert Carlson,
President, North Dakota Farmers Union
Vincent Smith,
Co-Director, Montana Trade Research Center
Blair Rutter, United Grain Growers
Andrew Schmitz, University of Florida
- Timothy J. Galvin, Administrator, Foreign
Agricultural Service, USDA
- Won W. Koo, Director,
Northern Plains Trade Research Center,
North Dakota State University
There has been a significant increase in Canada-U.S. two-way trade since the
implementation of CUSTA in 1989. However, it is difficult to separate out how much of this
trade is directly attributable to CUSTA. This study estimates that approximately one
quarter to one third of this trade is due to other macroeconomic factors, such as income
growth and the weakening Canadian dollar. This leaves a significant amount of unexplained
trade that could have been the result of CUSTA. In order to examine the impacts of CUSTA,
this study looked at a number of sub-sectors in terms of the degree of trade
liberalization that took place and other major factors that may have affected trade. Even
in cases where the impacts of CUSTA are hard to assess, the trade agreement may still be
influential in that it facilitates investments and acts as an incentive to look for trade
in new markets.
In order for further investments to occur, CUSTA must be viewed as an evolving
mechanism that is committed to trade liberalization and capable of separating politics
from trade considerations. CUSTA can be judged in terms of how effective it has been as a
commitment mechanism. Or put differently, how many unfulfilled commitments have there
been? On these grounds CUSTA comes up short. The commitment to develop new bilateral trade
remedy rules has never been realized, and it now appears to be forgotten. Harmonization of
grading standards and other technical regulations has never happened. And the elimination
of border inspections of live animals has never occurred.
These unfulfilled commitments reveal as much about where we are going as about where we
have been. There has been plenty of opportunity for consultation. How effective these
consultations have been is not yet evident. Cooperation is needed to bring down existing
barriers and to bring heavily protected sectors, such as supply management and sugar, into
the fold of the agreement. Complete policy harmonization may not be necessary for
integration, but some harmonization is necessary. Certain regulations need to be addressed
and harmonized. Domestic support is a touchy issue. To have a truly open border, it is not
possible to have very large imbalances in the levels of support provided to primary
agriculture. Some of these issues will have to be solved multilaterally. However, a
successful regional agreement also requires cooperation on multilateral issues. This
cooperation may not be forthcoming with disparate levels of domestic support.
Many prairie grain and oilseed producers believed that CUSTA and NAFTA would bring
added prosperity to the farm sector. In late 2000, prairie grain and oilseed producers
find themselves in one of the lowest income positions in history, and have become
pessimistic about the so-called gains to be obtained from freer trade. But one has to
recognize, of course, that Canada trades with many nations, not only the United States.
Even if all the agricultural trade barriers for grains and oilseeds were removed between
the two countries, the gains would be small. To maximize the gains from trade
liberalization, all sectors of agriculture have to move in the
direction of freer trade, not just the grains and oilseeds sectors. An additional
frustration for prairie grain farmers is the relatively high level of government support
afforded to American farmers. To the extent that these farm programs are not totally
decoupled, Canadian farmers are competing in a world market with one hand tied behind
their backs.
Major
Trade Issues Under CUSTA: A Canadian Perspective
M. N. Gifford, Former Director General, International Trade Policy Directorate,
Agriculture and Agri-Food Canada
Canada - United States agricultural trade more than tripled between 1989 and 1999, far
surpassing growth to markets outside North America. However, the surge in bilateral trade
has sometimes been marred by trade frictions which reached a peak in 1998 when certain
U.S. states took unilateral measures to limit imports from Canada. The border flare-ups of
the last few years indicate that the two federal governments cannot assume that once they
have signed a free trade agreement their role is over. As tariffs are eliminated,
differences in domestic support and marketing policies and differences in technical
regulations can easily become lightning rods. Irritants can easily fester and become very
politicized unless they are dealt with quickly and fairly.
The CUSTA model was essentially a customs union between two countries that have
considerably different government programs, transportation systems, and marketing
organizations. Over time, it was expected that the U.S. and Canadian programs - whether
direct agricultural support, marketing programs, food, veterinary or farm chemical
regulations or the other myriad government functions - would be harmonized. But in fact,
this has not occurred. Non-tariff measures (NTMs), applied in a largely tariff-free
environment, have formed the basis for most of the issues and disputes under the CUSTA.
The trade flow data suggest that U.S.-Canada agricultural trade has been influenced by
a large number of factors that likely go far beyond the CUSTA. Factors affecting trade
flows include WTO implementation, changing domestic programs, exchange rates, and a
divergent regulatory environment. Given the large and growing trade between the United
States and Canada, particularly in areas of processed food products, it would seem that
the next important step under CUSTA is to harmonize these divergent NTMs. This will ensure
that growth in trade between the two countries is due to comparative advantage,
efficiency, and natural advantages, and not due to niche markets that have developed
because of protection afforded to certain commodities and divergent regulations.
The objective of this paper is to present a broad overview of the impact of CUSTA on
U.S. and Canadian agriculture by examining the established trade record from various
angles. The focus is on the agricultural sector and its four subsectors: bulk commodities,
processed intermediates, fresh produce & horticultural products, and high-value
processed products. The empirical record shows that both countries have benefitted from
trade in the post-CUSTA period, especially with respect to value-added agriculture. The
United States experienced a positive shock in the first year of the agreement. Canada has
continued to make in-roads capturing market share in the United States.
This paper examines the impacts of the 1988 Canada-United States Free Trade Agreement
(CUSTA) on trade between Canada and the United States in wheat. The paper begins with a
brief review of CUSTA’s wheat provisions and discusses their effects on trade in
wheat between the two countries. The evidence shows that imports of Canadian wheat into
the United States increased substantially, beginning in 1989. In particular, imports of
hard spring wheat and durum wheat expanded rapidly. In contrast, almost certainly because
of the operations of the Canadian Wheat Board (CWB), Canadian freight rate subsidies, and
relatively inefficient components in Canada’s grain handling system, imports of U.S.
wheat into Canada changed very little and remained negligible.
The sharp growth in U.S. imports of Canadian durum wheat immediately led to a trade
dispute over possible Canadian dumping that dragged out over the three year period, 1989
to 1992. Ironically, a binational panel eventually determined that they could find no
evidence of dumping by the CWB largely because senior U.S. officials made a serious error
in defining the CWB’s acquisition price. A sharp rise in U.S. imports from Canada in
the 1993/94 crop marketing year resulted in a trade dispute based on Section 22 of the
1933 Agricultural Adjustment Act (which has since been revoked). Under Section 22, the
U.S. government could take countervailing action against imports of an agricultural
commodity if those imports were adversely impacting the operation and budgetary costs of
U.S. domestic farm programs. The U.S. International Trade Commission determined that
Canadian wheat imports were damaging and, through bilateral negotiations, the Canadian
government agreed that on a one year basis (for the 1994/95 crop year) the CWB would
restrict wheat exports to the United States to no more than 1.5 million tons.
Implicitly, although the formal agreement was only for one year, the terms of the
agreement were not violated until the late 1990s. In 1998, the U.S. government expressed
concern about increasing levels of CWB exports to the United States and in late 1998 a
memorandum of understanding between the governments of the two countries was signed and
appeared to, but in fact did not, resolve several U.S. concerns over U.S. access to the
Canadian grain handling and transportation system. Subsequently, during a period of
historically low world wheat prices, U.S. farmers and organizations continued to be
concerned about the potential for unfair trading practices by the CWB, and in September
2000 filed a complaint with the U.S. Trade Representative’s Office under Section 301
of the 1974 Trade Act.
The evidence suggests that CUSTA has been a failure with respect to North American
wheat markets in that it has failed to create a free trade area in wheat or an environment
in which wheat trade disputes between the United States and Canada do not occur. There is
a core reason for CUSTA’s failure with respect to wheat. It is simply not possible to
have a free trade area for a commodity when, through an export marketing State Trade
Agency, one of its participants rigorously controls and restricts major flows of the
product through the country’s grain handling and marketing system.
The purpose of this paper is twofold. First, a vector autoregression, or VAR, model is
built for each country and used to test whether the market dynamics have fundamentally
changed as a result of CUSTA. Second, the VAR models for each country are used to glean
the similarities and differences in the dynamics of both the wheat and wheat products
markets. The model illustrates a number of observations with respect to the U.S. and
Canadian wheat and wheat products market over the last 15-20 years. In the era since
CUSTA’s implementation, changes in U.S.-Canadian trade in wheat and wheat products,
both in terms of volumes and patterns, have been significantly altered. However,
statistical evidence does not support the existence of structural change. That is, there
has been no change in the structure of the dynamic relationships among the variables in
the wheat and wheat product market in both countries as a result of CUSTA. This result is
important, as it implies the impact of the CUSTA was not so much to change the structure
of the markets, but rather facilitate their movements without border impediments. The same
unaltered market mechanisms in both countries seem to be handling larger volumes of wheat
and wheat products in the post-CUSTA era. Further, events associated with the periods of
CUSTA, NAFTA, and the temporary TRQ seemed to have little or no individual effects on the
fourteen endogenous variables modeled.
The model simulations suggest that the commodity markets in both countries are quite
similar, in terms of their response to shocks in prices, despite major differences in the
marketing of wheat. Moreover, shocks in wheat supply appear to affect prices much less in
Canada than in the United States because of the small size and export orientation of the
Canadian market. Such a result has an important policy implication, in terms of
understanding U.S. farmer reactions to surges in wheat imports. On the downside, both
markets appear to behave differently when the prices of intermediate inputs, such as
flour, are changed, suggesting that the integration of the two processed food markets has
not altered many of the structural and institutional differences of these markets in
either country. These institutional differences, though, may be fairly small, given the
slight differences in the reactions of downstream markets, such as flour mixes and cookies
and crackers, to shocks in intermediate inputs, such as flour.
A number of factors impact the North American beef industry: differences and
similarities in beef production between countries; increased beef production per cow;
changes in beef demand (decreasing demand for beef led to lower real prices, which led to
lower quality, which, in turn, led to lower beef demand; demand, however, appears to now
be increasing); exchange rates; cattle cycles; economic impacts of 1990s price depression;
and trade disputes.
Canada is both a major destination for U.S. beef in the East and a major foreign
supplier of beef in the West. During the last 10 years, U.S. imports of beef and veal from
Canada grew from 243,564 animal equivalents in 1988 to 1.018 million animal equivalents in
1997. Canadian net imports (imports minus exports) of beef and veal have ranged from a
negative 51,200 animal equivalents in 1991 to a positive 614,500 animal equivalents in
1997.
Combining live animal trade with meat trade illustrates that U.S. total imports from
Canada have risen in the last decade while U.S. total beef exports to Canada rose in the
early part of the decade and since then have remained rather stable. In 1997, Canada
exported 1.38 million head of cattle to the United States. Including the 1.018 million
animal equivalents of beef and veal, Canadian exports to the United States totaled 2.4
million animal equivalents in1997. The United States, in 1997, exported approximately
500,000 animal equivalents to Canada. This nets out to 1.9 million animal equivalents from
Canada in 1997.
If Canadian imports had been eliminated, total U.S. beef supplies would have been 2.1
percent smaller in 1988 and 6.6 percent smaller in 1997. On the other hand, if U.S.
imports plus exports to Canada were eliminated in 1998, total U.S. beef supplies would
have been about 1.9 percent smaller. Without Canadian beef trade in either direction in
1997, U.S. beef supplies would have been 5.6 percent smaller. Using a crude 1.6 percent
price flexibility, a 5.6 percent drop in U.S. beef supplies could result in a 9 percent
increase in U.S. beef prices. For $60 per hundredweight slaughter cattle, 9 percent would
be $5.40 per hundredweight, or $65 per 1,200 pound slaughter animal. If Canada were to
sell that meat on the world market, U.S. exports to other countries would probably
decrease, reducing beef prices back toward today’s $60 cattle.
It is my professional judgement that banning Canadian imports would not have solved the
1990s price problem brought on by the record meat (beef, pork, and poultry) supplies. The
answer to the record North American beef production, and the resulting low prices, is some
form of supply reduction. I believe that the marketing system is currently signaling a
reduced beef supply. Cattle feeders in both countries, however, are doing everything in
their power to increase beef production through heavier carcass weights. In spite of
cattle feeders, beef supply is projected to be on its way down in 2001 and beyond, and
beef prices are projected to remain strong or get stronger through the year 2003.
CUSTA appears to have had a limited effect on the trade of pork and poultry between the
United States and Canada. There were not any tariffs or quotas on the pork trade between
the United States and Canada before CUSTA, which remained so after. Canada had a sanitary
ban on U.S. hog imports due to the presence of pseudo-rabies in the United States. Poultry
meat was free of tariffs and quotas for imports to the United States, but Canada had
import quotas on poultry meat and eggs, which was increased and continued under CUSTA,
allowing for modest increases in imports. While trade increased, most notably for Canadian
exports of hogs to the United States, changes in trade flows appear to have been primarily
determined by factors other than CUSTA.
United States participation in trade liberalization agreements with Canada through the
Canada-U.S. Free Trade Agreement (CUSTA) has generated intense debates in agricultural
sectors. CUSTA mandated that live cattle and beef trade among Canada and the United States
be based on competitive factors and include legal safeguards to deal with arbitrary trade
restrictions. Nominal U.S. cattle prices generally increased throughout the 1970s and
1980s, but have declined steadily throughout the 1990s. Over the same period, the total
U.S. beef supply increased from 25 billion pounds to 28.5 billion pounds. Imports (both
beef and beef obtained from live cattle) accounted for almost 0.5 billion pounds, about 14
percent, of this increase. Canada’s share of U.S. beef supplies increased by slightly
over 3 percentage points during the 1990s. As a consequence, of the $8/cwt decline in
slaughter price during this period, about $0.35/cwt was attributable to increased Canadian
imports. The R-CALF anti-dumping challenge to U.S. imports of Canadian fed cattle lacked a
logical basis and, had it been upheld, would not have had a significant positive effect on
U.S. cattle prices. However, this action and future decisions regarding country-of-origin
labeling and the potential restriction of USDA grade stamps to only meat produced by U.S.
beef cattle will continue to generate trade tensions.
There have been three important changes in the Canadian grain marketing system. First,
oats was removed from the marketing jurisdiction of the Canadian Wheat Board (CWB). This
change has been beneficial to Canadian farmers. Canadian oat exports to the United States
has increased significantly since the early 1990s, but without the resulting friction as
in the case of wheat. U.S. oat acreage has decreased over this time period, while Canadian
changes in oat acreage have been small. Oats have been a textbook example of comparative
advantage at work. Second, the Ontario Wheat Board allowed voluntary participation. The
use of voluntary, instead of mandatory, participation has been beneficial to Ontario
farmers and illustrates major differences with the CWB. Finally, there have been changes
in the Canadian Wheat Board, but the changes have not been significant and have not been
helpful for U.S. relations. The 1993 continental barley market was a successful experiment
for Canadian farmers, but the policy was overturned. A survey showed that younger Canadian
producers are less supporting of the CWB, indicating that future changes may be likely.
It is important to note that trade surpluses and deficits are not necessarily bad. It
is important to look at the bigger picture. Trade liberalization may lead to surpluses or
deficits in certain sectors, but if we look at the bigger picture, we are most likely
better off in the end. Special interests in a democratic society, unfortunately, get
special privileges, which taken separately may not seem that significant. The
accumulation, however, of these special privileges weakens society economically.
This paper describes some of the features of railroad deregulation, which provides some
of the impetus for many of the changes that have occurred; a number of comparisons of the
changing market structures in each country are made; implications are made for the grain
handling and trading industries, and for farmers; and a number of issues are identified
that are pertinent for the emerging North American grain trading industries and the
pressures toward integration.
The grain trading industry has changed radically during the past two decades. Following
rapid growth in world trade during the 1970s, there was a subsequent expansion in
exporting capacity which generally came on steam during the 1980s. Besides this expansion
in exporting capacity, the 1980s began to experience the effects of rationalization and
concurrent development of excess capacity in the country grain handling industry as a
result of deregulation of the railroad industry. In addition, the industry was impacted by
an escalation in government intervention in grain transactions notable through the use of
EEP during the 1980s. Perhaps the most important feature of the later 1990s will be
implications of the increase in privatization of grain transactions.
This sector has gone through radical changes over the past two decades, and the scope
of these changes has important implications for all market participants. Changes have also
occurred in the structural organization of this industry in both the United States and
Canada. Major changes in the United States have evolved for 20 years, commencing with
deregulation of the railroad industry. That in Canada is more sporadic and generally much
more regulated, and the intensity of regulations seem to be escalating. There are several
major themes developed in this paper. First, U.S. farmers have benefitted immensely from
the competitive environment in grain handling resulting in continuous investment in the
industry, reduced costs, and adequate capacity. Second, many policy analysts seriously
underestimate the intensity of competition and its positive virtues. Third, the Canadian
system is hemorrhaging trying to find new rules and regulations that are generally
compatible with numerous conflicting and fundamentally incompatible objectives. Finally, a
number of these changes have implications for changes in the North American grain
marketing system.
This paper examines whether continuing declines in transportation and communications
costs may further decentralize the marketing of grain. The analysis begins with a survey
of the factors that favor decentralization of marketing. Subsequently, the economic
factors that led to the shift from sacks to bulk handling are briefly reviewed and the
current system is described. The discussion continues with the impact that new innovations
are having on marketing costs. The paper concludes with a short case study on the
decentralization of oats marketing and Canada-U.S. trade.
Marketing channels for agricultural products become more decentralized as
transportation and communication costs fall. The grain industry is an interesting mix of
centralized and decentralized marketing. Grain has retained a more centralized marketing
structure than other agricultural products, but over time, the processing of grains and
oilseeds has become more decentralized. Transportation, handling, communications and
information innovations, as well as standardization and quality control have each
contributed to decentralization of the grain and oilseed industries. New oilseed crushing
and milling plants are located in production areas and are largely served by semi-trailer
trucks. These trucks also serve a railway-based network of country and terminal grain
elevators.
The first phase of decentralization in grain handling ended by 1900. Despite a century
of technological progress, the centralized system of bulk grain marketing remains largely
intact. The bulk handling system has relied on economies of size to compete with the
decentralizing effects of technological change. The high fixed costs of the grain industry
encouraged an oligopolistic industrial structure and a re-centralization of marketing.
Re-centralization of the grain industry is taking the form of consolidation and merger.
This may change as technological changes favor decentralization. The increased demand for
identity preserved grains, the increased supply of unitized transport, and the increased
supply of information and communications are favoring decentralization of grain marketing.
Benefits from further integration of the North American agricultural market include
more efficient patterns of trade, more competitive markets, lower transaction costs, and a
discipline on policy, forcing policies to be less distorted. There would also be a high
degree of investment between countries. If further integration is to occur, we need to ask
where we should integrate. Some areas are more difficult to integrate than others.
Impediments to integration include differences of support levels, especially wheat, and
differences of views on collective marketing. A more productive field for integration
would be regulations, which form partial barriers to trade. There is already much
integration between the United States and Canada, but areas that are not integrated occur
where there are differences in policy approach. There are also a number of minor areas
that could be improved.
The Canada-U.S. Trade Agreement was a remarkable accomplishment that had escaped policy
makers for a century. The achievements of that agreement should not be underestimated, but
another stark truth should not be avoided: The policy agenda that must be addressed if
further economic integration is to be achieved in North American food markets is more
complex than the agenda that was accomplished in the original free trade agreement. If
policy makers intend to pursue deeper economic integration of these trading partners, they
will find that agricultural issues will occupy a portion of their negotiating agenda. Any
movement toward increased economic integration in North American food markets must deal
with at least four areas of policy: issues related to bilateral and external trade
barriers; issues related to agricultural subsidies; issues related to trade remedy laws,
including dumping and countervailing duty laws; and issues related to monetary
integration.
Deeper economic integration could provide additional welfare gains, but this ignores
the question of whether the gains realized from bilateral negotiations will be larger than
the gains that might be realized by pursuing other policy issues. There is reason for
suspicion that the history of U.S.-Canadian agricultural trade relations suggests that an
excessive level of resources is being spent on issues that provide little net benefit to
North American agriculture, while issues in which the countries might realize joint gains
are ignored. The pursuit of deeper economic integration in North American food markets is
only justified if it provides greater gains than other policy alternatives - such as
opening other markets - that might be achieved by negotiators.
The Canadian Wheat Board (CWB) is the source of many of the agricultural disputes that
have arisen between Canada and the United States over the last 10 to 15 years. Within
Canada, a great deal has been written about the merits and the demerits of the CWB. There
are also international concerns with the CWB. From time to time, U.S. producers and the
U.S. government on their behalf, express concern over the pricing of CWB grain in both the
United States and in third markets. The concern is with the single desk nature of the CWB
and with the price pooling system that the CWB administers, both are believed to lead to
various forms of unfair competition, such as dumping. However, these two features are key
to the operation of the CWB and many observers believe without these features the CWB
could not function.
This paper examines a number of issues that are associated with the CWB and are closely
linked to the trade disputes. First, there is the issue as to whether or not the CWB
follows the WTO rules on the operations of state trading enterprises. Second, there is an
issue regarding the commercial benefits associated with grain marketing and handling and
who captures these benefits. Third, there is the issue of political differences among
farmers in Canada over the policy of single desk selling. Finally, there is the issue of
income support levels in the two countries and the effect they have on border disputes.
These issues form the basis for a proposal that might remove or reduce Canada-U.S.
border disputes. This proposal is based on the observation that the role of the CWB can be
changed if there is widespread political support for its removal. For this removal to
occur, other policy regimes have to be changed. First, farmers in the United States and
Canada would be provided identical farm programs. Second, both governments agree to change
the anti-dumping and countervail provisions currently in place, and all challenges go to a
NAFTA type dispute panel. Finally, all state trading in wheat and durum would be removed.
The result of these changes would be a single market with identical farm programs. As long
as both governments followed the rules, grain could flow back and forth across the border
as economically required. Without this broad approach to solving the problem, the industry
will likely maintain the current squabbling.
Exchange Rates and
Relative Pricing
MinKyoung Kim, William Nganje, and Won W. Koo
North Dakota State University
During the last decade, the U.S. dollar has appreciated against major currencies,
including the Canadian dollar, Japanese yen, and Eurodollar. Specifically, the U.S. dollar
has appreciated by about 33 percent in real terms compared to the Canadian dollar.
Theoretically, the U.S. dollar appreciation will cause U.S. exports to decrease and
imports to increase, which could lead to a considerable trade deficit with continuous
dollar appreciation. The impact of the exchange rate on the U.S. trade market has long
been debated.
This study examines how macroeconomic forces affect the trade balance between the
United States and Canada. Variables used in this study are exchange rates, agricultural
trade balance, agricultural GDP, GDP growth rates, and interest rates. More specifically,
the question of exchange rate impacts on international trade between the United States and
Canada is examined.
These markets are found to interact with one another. Exchange rate markets have short
run dynamic relationships with agricultural trade balance, and U.S. dollar appreciation
causes the U.S. agricultural trade deficit to increase. Cointegration is found among these
markets for the entire time period, 1981 to 1999, and becomes stronger in the post-CUSTA
era, 1990 to 1999. Meanwhile, no significant relation is found among markets before CUSTA.
Beside the evidence of an equilibrium relationship among these markets in the long run, a
short run relationship is found between exchange rates and agricultural trade balance.
U.S. dollar appreciation causes the U.S. agricultural trade deficit to increase in the
short run, and this phenomenon is significant under CUSTA based on the test of causality
and impulse response. In addition, agricultural income has suffered from exchange rate
shock based on the results of impulse, while no substantial impact on interest rates is
found.
Trade disputes between the United States and Canada have mainly focused on
institutional differences such as the Canadian Wheat Board versus free enterprise in the
United States. However, the findings in this study indicate that macroeconomic factors
like exchange rates may have substantial impacts on trade flows. Thus, macroeconomic
factors should not be ignored when trade policies are formulated, especially when the
markets are strongly integrated.
It is my intention to make some comments on the current health of the international
trading system, specifically where agriculture is concerned. Much of the present
controversy is linked to the adoption of the Canada-U.S. Free Trade Agreement, which
served as a model for the adoption of NAFTA and the Uruguay Round agreement in 1994, which
created the WTO. One of the most prominent areas of trade friction in recent years has
centered on the cattle industry; in particular, the sharp increase in the number of
Canadian and Mexican cattle imported into the United States and the absence of a
comparable increase in U.S. exports of cattle. American producers believe that the surge
in imports is related to the collapse in prices and have accused the Canadians of dumping
in the R-Calf case of 1998. In the end, the relevant agencies found that in fact Canada
was dumping cattle in the United States, but they found that the dumping did not cause a
"material injury," a seemingly implausible and contradictory finding that
aggravated American cattlemen who were barely hanging on to their livelihoods. In addition
to the wider debate about dumping, the imports of foreign meat have contributed to a
debate about labeling. The prominence of the Canadian Wheat Board in the cattle dispute is
linked to another lingering and contentious issue on the trade horizon. The United States
has placed the elimination of the Canadian Wheat Board, and other such
State-Trading-Enterprises, high on the agenda for the current negotiations.
There is now less unanimity when it comes to relying on agricultural exports as a
safety valve for U.S. agricultural problems and a greater recognition that freer trade
causes as many problems as it solves. In part, this is because exports as a remedy for
farmers’ problems has been oversold. The long history of the interaction between
agricultural and trade policy should have been more prominent in the 1996 policy debate
and the potential volatility of the export markets better understood. When constructing
agricultural policy in the near future, it is critical that the prospects of agricultural
export growth be assessed realistically. The dangers of basing policy on unpredictable
export growth was fully realized after the collapse of the Asian market. A shift in
foreign preferences is also a danger. Currently, a movement is growing in Europe to
constrain the spread of American food products. There is also much concern about the
ability to sell American GMO crops. In addition to growing resistance to American food
exports, the prospects for greater degrees of agricultural trade liberalization, which
many hoped would open previously closed markets to American products, are no longer so
bright. Perhaps the greatest reason to doubt the prospects for greater trade
liberalization is the Battle in Seattle and its repeat performances at the IMF and the
World Economic Summit and other occasions.
My preference is for a certain kind of global capitalist development. To deny the
long-term economic benefits of free trade and global economic convergence would be
foolish. But to deny the criticism that globalization compounds economic inequality and
gives corporations and international capital excessive control and influence would also be
foolish. Political leaders would be wise to promote policies that promote decentralized
economic power, such as antitrust laws and small business promotion policies, and policies
that promote entrepreneurship and economic independence.
The Special Import Measures Act (SIMA) provides the legal framework which
authorizes the enforcement agencies in Canada to use trade remedial measures to protect
domestic producers from injury caused by the unfair trade practices (i.e., dumping and
subsidization) of foreign exporters. The WTO signatories are, however, prohibited from
imposing remedial measures in the absence of the "injury determination" which is
a crucial element of international trade administrative law. In North America, there are
two general approaches to injury determination in investigations into complaints of
dumping and subsidization. They are called the bifurcated, or two step procedure, and the
unitary approach. Economists generally criticize the bifurcated approach as a way to
assess the effect of dumping on the domestic industry. Economists prefer the unitary
approach because of its potential to isolate the effects of dumping from all other
non-dumping effects on the domestic industry. Description of two quantitative economic
approaches used in the unitary approach are described and illustrated.
This paper reports on evidence and conclusions gathered from an ongoing program which
conducts workshops on trade disputes with NAFTA. The program, designed to produce and
distribute economic information on policy trade relations and trade disputes, is in its
seventh year of operation. There are a number of overriding conclusions which come out of
the workshops:
1) a trade agreement does not assure harmony in trade relations, nor does it provide a
dispute free trade environment; 2) there are more disputes to come; 3) the most effective
way to resolve disputes is to avoid them; 4) despite the free trade agreement, there
remains intractability in several areas of policy and trade within the NAFTA countries; 5)
the role and contribution of economics to dispute resolution is limited; and 6) too few
disputes are investigated and resolved within NAFTA protocols. The paper presents
comments, evidence, and examples in support of these conclusions.
Four areas of discussion: the high level of trade between the United States and Canada,
growth in other markets, problems with Europeans, and issues for tomorrow. The open border
between the United States and Canada results in increased bilateral trade volume. The high
levels of trade results in trade disputes. Growth needs to be in markets outside of the
United States and Canada, such as Asia and Mexico. The economies of developing countries
are small but growing. These areas need to be targeted. We have larger problems with the
Europeans. The Europeans spend too much on agricultural policies; Europe produces a food
surplus and dumps it on the world market. There are a number of other issues and problems
for the future such as environmental issues. Other issues are more important than the
little skirmishes between the United States and Canada. Both countries should focus more
on these issues, on growth in other markets, and on the problems with Europe. Trade should
be beneficial to all.
One reason for the trade irritants is that farmers have not figured out how to profit
from freer trade. From the perspective of a U.S. producer, complaints about freer trade
include more competition, the loss of the option of using supply management programs
(e.g., EEP and land set-aside programs), and a lower safety net. Harmonization should not
mean the elimination of programs to meet at the lowest common denominator. A better
response would be a multinational marketing agency. This would include a voluntary North
Dakota pool which would cooperate with the Canadian Wheat Board. A study at North Dakota
State University indicated that this would work for durum, but not for hard red spring
wheat. The idea of a North Dakota pool has been favorable to North Dakota farmers. There
are many hurdles, though, to overcome. There are questions regarding if it will work, and
the CWB has some concerns. The pool still is an appealing idea, especially with low
prices. Producers need to think in a more innovative manner.
, Co-Director, Montana Trade Research Center
The price effects of the CWB are difficult to determine. Trade dispute mechanisms may
be bad, but they are necessary. The North Dakota durum pool is not very viable, due to
supply responses. Also, the costs associated with a marketing board are significant.
, United
Grain Growers
We need to build on the success of the Uruguay rounds. Three achievements from the
Uruguay rounds include capping support, a dispute settlement mechanism, and tarrification
of all import barriers. These achievements can be built upon by the greening of all forms
of support (not being concerned with absolute values) and by respecting the choices of
other countries, as long as these choices are non-distorting and do not harm the citizens
of other countries.
There are a number of losers and gainers in the process. The losers in free trade need
to be compensated. Supply management in Canada needs to be eliminated, and the losers in
the process should be compensated. Harmonization is very difficult, Canada needs to
address its problems before harmonization is possible.
Remarks
Timothy J. Galvin, Administrator, Foreign Agricultural Service, USDA
Even a cursory glance at the numbers since the Free Trade Agreement took effect would
lead one to conclude that our trade relationship with Canada has flourished. Two-way
agricultural trade between the two countries is substantial, though Canada has fared
better than the United States in this arena. A number of factors have contributed to the
growth in U.S.-Canada trade, including the market-opening provisions of the Free Trade
Agreement, a booming economy in the United States, and economic growth in Canada as well.
But another obvious factor, especially in explaining the end of the U.S. trade surplus and
the growth of Canada’s surplus, is the exchange rate. It should also be noted that in
Canada, 43 percent of GDP and one-third of all jobs are dependent on international trade;
in the United States only 11 percent of GDP is trade-related. Another revealing indicator
is Canada’s dramatic increase in its reliance on a single market, the United States,
as an export destination.
With agricultural exports between the two countries showing steady year-to-year gains,
it is clear that our mutual interest lies in continuing to expand bilateral trade, rather
than looking for ways to close borders. In that regard, we have made good progress the
past couple years in strengthening our bilateral trade relationship in agriculture, and
the United States and Canada have many common goals as we approach the next multilateral
round of trade negotiations under the World Trade Organization (WTO). One subject that has
provoked strong emotions on both sides of the border is the cost and availability of
pesticides, and the apparent lack of harmonization between our two regulatory systems.
Much work has been accomplished recently regarding these issues.
Despite the real progress being made in a number of areas, there remains several rather
high profile issues that continue to generate some controversy, and they tend to revolve
around trade in grain, livestock, and meat products. These disputes reflect some
differences over the issue of domestic subsidies and the transparency of our respective
export systems. U.S. support levels have been higher in the past few years, but the gap is
not the wide discrepancy that some in Canada are claiming. The issue of export competition
remains controversial as well, and will likely remain so as long as questions persist
about the marketing practices of the Canadian Wheat Board (CWB). In my view, those
questions will continue until the operations of the CWB are made more transparent.
Despite differences on some specific issues, the record of cooperation between the
United States and Canada on several larger trade policy issues is a good one. We seem
united on the elimination of export subsidies as a principal objective in the next round
of WTO negotiations. We also agree on other major WTO objectives including improved market
access in the form of further reductions in tariffs or increases in TRQs, new disciplines
on domestic subsidies, preservation of the Sanitary and Phyto-Sanitary Agreement and its
requirement that SPS measures be based on sound science; and we take a similar view with
regard to the adoption of biotechnology in modern agriculture. We see eye to eye on many
issues and have much to gain by working together. And even though we often come to the
debate with a different perspective, we should make every effort to stick to the facts,
and to dispel the myths where we can.
U.S. producers have much at stake in making sure the focus is on opening markets rather
than building walls. If the United States does not pursue further trade liberalization,
other countries will. There is a real risk that if the United States does not engage in
further trade liberalization, we will find ourselves on the outside looking in as other
countries move ahead to finalize their preferential trade deals and exclude the United
States. Unless we pursue the trade opportunities we have worked so hard to create,
producers in other countries will reap the benefits of trade reform.
Concluding Comments
Won W. Koo, Director, Northern Plains Trade Research Center,
North Dakota State University
Papers presented in the conference focused on the issues related to agricultural
trade between the United States and Canada under CUSTA. They are (1) CUSTA’s impacts
on bilateral agricultural trade, (2) recent evolution of the U.S. and Canadian
agricultural marketing systems, (3) major issues for further commercial integration, (4)
recent development in U.S. and Canadian transportation system, and (5) trade disputes and
negotiations.
Although most presenters agreed that CUSTA has been good for both the United States and
Canada, concerns were raised in agricultural trade. One of the concerns discussed during
the conference is the substantial increase in Canadian exports of agricultural commodities
relative to U.S. exports to Canada since the inception of CUSTA, which resulted in several
trade disputes between the two countries, and its impacts on the Northern Plains
agricultural economy. Some factors that have affected the flow of Canadian exports to the
United States are differences in agricultural policies and marketing systems and
appreciation of the U.S. dollar against the Canadian dollar during the last ten years.
Harmonization of agricultural policies and marketing systems between the two countries may
be very difficult, but it is necessary to have some harmonization to promote a
"fair" trade between the two countries under the free trade agreement. In
addition, the two countries should cooperate rather than continually having
confrontations. One type of cooperation is Canada’s voluntary export restraints of
wheat exports to the United States; another is a joint effort in marketing wheat to North
American and offshore markets. A North Dakota State University study found that a
marketing pool for durum wheat in North Dakota is economically feasible with cooperation
from the Canadian Wheat Board (CWB). Gains from the marketing pool would be significant
for both durum producers in the United States and the CWB through exercising limited
market power in the North American market and improving marketing efficiency.
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