Export assistance and agricultural trade reform. By David Harris

Transcription

1 Export assistance and agricultural trade reform By David Harris

2 Export assistance and agricultural trade reform by David Harris June 2015 RIRDC Publication No 15/057 RIRDC Project No PRJ

3 2015 Rural Industries Research and Development Corporation. All rights reserved. ISBN ISSN Export Assistance and Agricultural Trade Reform Publication No. PRJ Project No. 15/057 The information contained in this publication is intended for general use to assist public knowledge and discussion and to help improve the development of sustainable regions. You must not rely on any information contained in this publication without taking specialist advice relevant to your particular circumstances. While reasonable care has been taken in preparing this publication to ensure that information is true and correct, the Commonwealth of Australia gives no assurance as to the accuracy of any information in this publication. The Commonwealth of Australia, the Rural Industries Research and Development Corporation (RIRDC), the authors or contributors expressly disclaim, to the maximum extent permitted by law, all responsibility and liability to any person, arising directly or indirectly from any act or omission, or for any consequences of any such act or omission, made in reliance on the contents of this publication, whether or not caused by any negligence on the part of the Commonwealth of Australia, RIRDC, the authors or contributors.. The Commonwealth of Australia does not necessarily endorse the views in this publication. This publication is copyright. Apart from any use as permitted under the Copyright Act 1968, all other rights are reserved. However, wide dissemination is encouraged. Requests and inquiries concerning reproduction and rights should be addressed to the RIRDC Publications Manager on phone Researcher Contact Details Mr David Harris D. N. Harris & Associates 8 Irvine Street Glen Iris Victoria 3146 Phone: dnharris@hotkey.net.au In submitting this report, the researcher has agreed to RIRDC publishing this material in its edited form. RIRDC Contact Details Rural Industries Research and Development Corporation Level 2, 15 National Circuit BARTON ACT 2600 PO Box 4776 KINGSTON ACT 2604 Phone: Fax: rirdc@rirdc.gov.au Web: Electronically published by RIRDC in June 2015 Printed by Union Offset Printing, Canberra ii

4 Foreword Export assistance through export subsidies and export financial support has been an issue of concern in agricultural trade for some time. It s widely accepted these support measures have had substantial distortion effects on world trade. The issue is a key discussion point in the Doha WTO negotiations but so far an agreement has not been reached. It s a source of some frustration for many of the world s economies engaged in agricultural trade. Global trading conditions have been favourable in recent years and political economy pressures to use export assistance have abated. While the trade distorting effects of these measures have diminished, the volatile nature of global commodity prices is well known. There are likely be periods in the future when unfavourable conditions will re-emerge with renewed pressures for increased assistance. In the world economy experienced a period of very high food price inflation. It was followed by the recessionary effect of the Global Financial Crisis which coincided with weaker agricultural commodity prices. One of the responses was a re-activation of EU export subsidies for dairy products which triggered a corresponding reaction by the US to re-activate dairy export subsidies. At the same time there was an increase in the use of US export credit guarantees. These developments highlight the risks associated with the continued availability of these support measures. Exporters and producers in both importing and exporting markets have a strong interest in effective trade reform. To lock-in the benefits of a trading environment free of the distortions from export assistance it s vital that a multilateral agreement is reached. But there are concerns the opportunity for lasting reform has been hindered by the impasse on other aspects of the WTO Doha trade negotiations. This study was undertaken to assess the trade distorting effects of export assistance. An appreciation of the way the measures distort trade outcomes is important. It shows why a WTO agreement on this issue should be vigorously pursued. The analysis focused on how the measures have distorted world trade in recent times. This is the primary consideration for a collective decision to commit to reform and achieve a permanent improvement in the global trading environment The project was funded from RIRDC core funds provided by the Australian Government. The project was funded through the Global Challenges R&D Program. This program addresses impediments and opportunities to the Australian agricultural sector. An important area of research for the program is international and domestic trade policy. This report is an addition to RIRDC s diverse range of over 1800 research publications. Most of our publications are available for viewing, downloading or purchasing online through our website: Craig Burns Managing Director Rural Industries Research and Development Corporation iii

5 Acknowledgements The author has been involved in research on the effects of trade related policy reforms on agriculture for many years. He has an extensive background in quantitative analysis of trade restrictions on global commodity markets. His professional experience was developed during periods of employment at the Australian Bureau of Agricultural and Resource Economics (ABARE), the Centre for International Economics (CIE), Bonlac Foods Ltd and the OECD Secretariat in Paris. This report examines an issue of interest to the Doha Round of WTO trade negotiations. In recent times the author has prepared reports on other issues associated with multilateral trade negotiations that may be of interest to the reader. These studies were funded and published by the Rural Industries Research and Development Corporation (RIRDC). They include reports on Special Safeguards and Agricultural Trade Liberalisation, Food Aid and Agricultural Trade Reform Agricultural Industry Support and Structural Adjustment and a recent study on Effective Administration of Agricultural Tariff Quotas. Copies of the reports are available on the RIRDC web site. Financial support for this project was provided by RIRDC and is gratefully acknowledged. A number of people from representative organisations and agencies provided background information and these contributions were greatly appreciated. The assistance of Ian Shaw in collecting data for the analysis is gratefully acknowledged. iv

6 Contents Foreword... iii Acknowledgements... iv Executive summary... vii 1. Introduction... 1 Project aim and objectives Use of export subsidies... 4 Capacity for subsidised exports... 4 Global trading conditions and use of export subsidies... 6 Concessions for developing economies Markets targeted for subsidised trade Effects of subsidised exports Rate of assistance from export subsidies Pricing effects of export subsidies Economies affected by subsidised exports Use of export financing support Availability of export finance support Markets targeted for exports with finance support Effects of export finance support Rate of assistance from export credit guarantees Economies affected by export credit guarantees Conclusions Appendix A: Use of export subsidies in world trade Appendix B: EU market prices Appendix C: Destination of subsidised trade Appendix D: Conceptual view of export subsidies Appendix E: Assistance from export subsidies Appendix F: EU export prices Appendix G: Economies affected by subsidised trade Appendix H: US trade with export credit guarantees Appendix I: Assistance from export credit guarantees Appendix J: Economies affected by export credit guarantees References v

7 Charts A World indicator prices of beef, pig & chicken meat... 8 B World indicator prices of WMP, SMP & WhP... 8 C World indicator prices of cheese & butter... 8 D World indicator prices of wheat & corn... 9 E World indicator prices of rice & sugar... 9 F World indicator prices of soybean products... 9 Tables 1 WTO expenditure caps for export subsidies Subsidised export capacity for major suppliers Subsidised exports and global trading conditions Average usage rates of volume caps on subsidised exports Selected examples of average export subsidies Major regional destinations for subsidised trade Dairy products Major regional destinations for subsidised trade Meat products Assistance from EU export subsidies Changes in EU export prices & world indicator prices Dairy products Changes in EU export prices & world indicator prices Meat products Economies affected by EU subsidised exports Use of export finance support in agricultural trade by major exporters Export finance tenors used by the major exporters Product composition of export finance support by major exporters Change in US export credit guarantees for cereal & oilseed products Major markets for US exports with credit guarantees Cereal products Major markets for US exports with credit guarantees Oilseed products Assistance form US export credit guarantees Cereal & oilseed products Changes in US exports with credit guarantees Economies affected by US exports with credit guarantees Subsidised exports subject to WTO commitments Quantity usage rates of export subsidy caps Average export subsidy for trade with WTO commitments Unrestricted subsidised exports by WTO Members Expenditures on unrestricted subsidised exports by WTO Members Average export subsidy for unrestricted trade EU market prices during the GFC Major regional trade supported by export subsidies Dairy products Major regional trade supported by export subsidies Meat products Market composition of regional trade EU assistance from export subsidies Cereal & sugar products EU assistance from export subsidies Dairy products EU assistance from export subsidies Meat products EU export prices for regional markets Dairy products EU export prices for regional markets Meat products Economies affected by EU export subsidies Dairy products Economies affected by EU export subsidies Meat products US exports with credit guarantees Cereal products US exports with credit guarantees Oilseed products Regional markets eligible for US export credit guarantees Assistance from US export credit guarantees Cereal products Assistance from US export credit guarantees Oilseed products Interest rates for short term credit finance in selected economies Economies affected by US credit guarantees Selected products vi

8 Executive summary What the report is about The report examines concerns about the distortion effects of two forms of export assistance export subsidies and export finance support. Export subsidies are a highly trade distorting form of support. Indirectly they contribute to increased output and higher export supplies from economies that provide the assistance. This comes at the expense of distorting world trade. Subsidised trade increases global price volatility, lowers market returns and displaces trade by other export suppliers. Concerns about subsidised exports often skim over the differentiated distortion effects that can arise. Some import markets receive larger amounts of subsidised trade. They can experience a more direct, disproportionate price impact and a greater adjustment burden if commercial use of the subsidy leads to stronger competition for sales. When developing economies are targeted for subsidised sales it can have implications for industry growth and development. Export finance support is another concern in the provision of export assistance. Finance re-payment guarantees backed by governments are an export contingent input subsidy that lowers the transaction costs of imports. They create an incentive for importers to favour the export suppliers that offer the assistance which causes a displacement of competing exports into other markets. Who is the report targeted at? The study provides an assessment of the trade distorting effects of export subsidies and export finance support. It was undertaken to show the impact of these kinds of assistance measures on exporting and importing economies. The analysis focused on how the measures distort world trade. It highlights the multilateral nature of the issue and the need for a WTO agreement that not only eliminates export subsidies but imposes disciplines on the use of export financing support. Exporter gains from FTA tariff concessions can be eroded by subsidised trade. Therefore effective disciplines on export support measures would be in the collective interests of all trading economies. The issue can t be resolved through FTA or RTA negotiations. A multilateral agreement is needed which is a compelling reason for pursuing reform in the WTO Doha trade negotiations. The report is aimed at trade policy advisers and industry representatives in all trading economies. The analysis shows the trade distortion effects do not discriminate between the developed and developing economies. All types of economies are affected and the disciplines incorporated in a multilateral agreement need to apply to all types of economies. The findings of the analysis may be useful for future deliberations on a WTO Doha Round agreement on export competition. Background In recent times export subsidy use has been well below the WTO allowances. The diminished use is a welcome development. But the fact remains the policy option remains in place. Many economies have dormant or eliminated programs that could be resurrected if trading conditions change. There are also a number of subsidy programs that remain active today, some without a clear WTO entitlement. Strong commodity prices have reduced the pressure for export assistance. But the volatility of traded product prices is well known. There are likely to be periods of unfavourable trading conditions in the future. Political pressures to use export subsidies and finance support to alleviate domestic adjustment concerns will resurface during these periods. The risk associated with the continued availability of these assistance measures is clearly illustrated by events in vii

9 In 2007 and 2008 the world economy experienced a period of very high food price inflation. This was followed by the recessionary effects of the Global Financial Crisis (GFC) in 2009 which coincided with a weakening of traded product prices. One response was a re-activation of EU export subsidies for dairy products which triggered a corresponding re-activation of US dairy export subsidies. At the same time there was a substantial rise in the use of US export finance guarantees. Use of concessionary credit and risk products based on government guarantees is an issue of some concern. Export financing support has been the subject of WTO disputes and found to constitute an export subsidy. Previous research has shown assistance from credit guarantees is smaller than export subsidy support but it s generally accepted to have similar trade distorting effect. Concerns have been raised about the potential for finance support to circumvent a loss of export subsidy allowances. The Agreement on Agriculture (AoA) allowed for unrestricted use of some forms of export subsidies by developing economies for a limited period. All forms of export subsidies have distortion effects and this includes export contingent input subsidies. There has been some growth in subsidised trade using the Article 9.4 exemption including strong growth in India s sugar exports. Legal entitlement for the Article 9.4 exemption lapsed at the end of the AoA implementation period. But WTO notifications show use of the transitional exemption has not ceased. A further notable development is reports of India providing an export subsidy of around $US$65 per tonne for up to 1.4 million tonnes of sugar in There is no WTO entitlement for this assistance. Aims/Objectives The aim of the study was to assess the trade distortion effects of export subsidies and export finance support to show why a WTO agreement on export competition should be vigorously pursued. The specific objectives were: review the use of export support measures in the context of fluctuating commodity prices; examine the destination of trade supported by export assistance; assess the differentiated distortion effects that can arise and the extent of spill-over effects; a comparative evaluation of assistance from export subsidies and financing support; and summarise the findings to establish the key considerations for reform. Methods used Selected examples of the use of export subsidies and export finance guarantees were used to evaluate trade developments since Meat and dairy products were used in the review of export subsidies. Cereal and oilseed products were used in the assessment of export finance guarantees. These products were the primary focus of the respective support measures in the sample period. WTO notifications were a central element of the assessment of export subsidies. Data on trade flows, commodity prices and export prices were used to illustrate the trade distorting effects. Usage of export credit guarantees and program conditions were the basis of the assessment of export finance support. Data on trade flows and finance cost differentials provided supplementary information. Key findings The total global allowance for export subsidy expenditures is US$12.2 billion and it s dominated by allowances for a small group of developed economies. The capped concessions are generous and they remain a threat to the global trading environment. Use of the allowances has varied and in recent times it has declined. While this is a welcome development the policy option remains in place. viii

10 A key factor in use of export subsidy allowances is changes in traded product prices. The subsidies have been extensively utilised in periods of relatively weak to moderate prices. The more recent decline in usage has coincided with a period of high prices. But developments associated with the food price crisis and GFC in the period underline the risk for future trade disruptions. In 2009 the EU reactivated export subsidies for dairy products which triggered a corresponding reactivation of US dairy export subsidies. These developments weakened market returns for other export suppliers. EU export subsidies were suspended in 2008 during the food price crisis and there had been no subsidised sales of US dairy products since Ad hoc use of export subsidies is destabilising for commodity markets and the policy actions highlight the risk associated their availability. There has been some growth in the subsidised trade by developing economies using the Article 9.4 exemption in the AoA. As use of the capped export subsidies has declined, trade supported by the uncapped measures has became the major contributor to global trade distortion effects in some cases. The Article 9.4 exemption was a transitional concession that expired when the AoA implementation period ended. But WTO notifications show use of the transitional exemption has not ceased and there is no legal entitlement for the continued use of subsidy measures under Article 9.4. Growth in subsidised trade using the Article 9.4 exemption will undermine the spirit and intentions of a WTO agreement on export competition. There is no justifiable case for allowing the use of any form of export subsidy by either developed or developing economies and this includes export contingent input subsidies. The trade distortion effects that arise affect all other trading economies developed and developing. Transitional exemptions provide a way to evade a ban on direct export subsidies. Therefore they should be included in the WTO policy reform effort. Concerns about subsidised exports can sometimes skim over the differentiated distortion effects that can arise. Some import markets receive large subsidised sales and experience a more direct impact. For example, before the food price crisis and GFC period the subsidised sales of butter and cheese trade shares were over 40% of total trade in Eastern Europe and the Middle East. In Africa subsidised sales of whole milk powder (WMP) and milk had regional trade shares exceeding 50%. There are numerous instances of a one-off surge in regional subsidised sales which can be traced back to specific markets. These trade developments suggest opportunistic sales encouraged by adjustments in subsidy rates. Examples where this may have occurred include US butter sales to most regions in 2008, EU skim milk powder (SMP) sales to Asia and the Middle East in 2009, US SMP sales to South America and the Middle East in 2008 and EU beef sales to Eastern Europe in the period. The targeting of less advanced developing economies is an adverse consequence of export subsidy programs. Opportunistic sales and price discounts will lower market returns for domestic suppliers of competing products and cause greater volatility. The distortion effects are detrimental for producer incomes and poverty alleviation. They also discourage investment for industry development. The level of assistance is a key factor in the trade distortion effect of export subsidies. If a subsidy is generous relative to the gap between accumulation costs and the world price there is a greater export incentive and more opportunities for discounting. EU illustrative examples show how the rate of assistance can vary. For example, in the 2005 to 2006 period: butter assistance was 66%, WMP was close to 30%, SMP was 7% and cheese was 25%; meat product assistance was 17% for beef, 40% for ham and 30% for chicken meat; and sugar assistance averaged around 118%. High rates of assistance suggest an intent to enhance the export incentive. A comparison of changes in world prices and EU assistance shows this was the case at certain times. The subsidy adjustments were more aligned with increasing exports rather than maintaining a competitive position in world trade. ix

11 Price discounting is another aspect of the trade distorting effect of export subsidies. Comparisons of EU export prices with a world price indictor show several instances of significantly different price movements. For example, world prices of WMP rose by almost 100% in 2007 but EU export prices increased by less than 50%. The divergence in price movements indicate some importing markets experienced more acute pricing impacts The effects of subsidised sales undermines the trading activities of many economies. Disruptions are not limited to a few major export suppliers or importers. Smaller economies also experience trade adjustment pressures. For example, 41 Middle East economies were affected by EU subsidised sales of meat products in the period and 32 economies were affected by subsidised dairy product sales. This highlights the multilateral nature of the issue and is a strong reason to pursue a collective agreement on reform in the WTO Doha Round negotiations. Export finance support is the other area of concern in the provision of export assistance. Trade with finance support is a very small portion of total trade by Australia, Brazil and New Zealand. It s more significant for Canada and the US accounting for between 2% and 6% of total exports. The value of US trade with export finance support has averaged around US$3.1 billion since Canada s trade with export finance support averaged around US$1.4 billion over the same period. The use of export finance support has grown. In the food price crisis and GFC periods the supported trade increased substantially. US exports with finance support increased by 112% in 2008 and 75% in Canada s trade with finance support rose by almost 80% in Usage has largely remained at the relatively higher levels ever since. The growth may in part reflect the strength of traded product prices but this doesn t fully explain the growth. There has been a sustained rise in the proportion of trade with export finance support. This indicates an increasing use of financing support. Most of the export finance support is provided in the form of re-payment guarantees on trade finance. Trade distortion effects are strongest in the global markets for cereal and oilseed products. The US is a large user of credit guarantees and at times they have been extensively used to support sales to specific markets. For example, in 2009 concessional finance on sales to Korea supported almost 80% of wheat exports, two thirds of the corn exports and 98% of the soybeans exports. US export finance guarantees have provided significant assistance. Rates of assistance were relatively high for the period from 2009 in most Central American markets and some South American markets. For example the average rate of assistance in Costa Rica, Dominican Republic, Colombia, Guatemala, Honduras, Peru and Venezuela was between 11% and 20%. The assistance was lower for most of the Asian markets. In Korea it averaged around 3% and in Indonesia it averaged 12%. The length of the tenor is a key factor in the value of a credit guarantee and its attraction to importers. The US currently has maximum tenors of 1.5 years compared with the 6 month tenors offered by most other exporters. Extended tenors can be highly beneficial for buyers. But the key factor affecting the value of the tenor period is the interest rate differential. The incentive to use the finance guarantees is weaker if the dollar value of the interest cost differential declines. The global economy has experienced a sustained period of low interest rates in the post-gfc period. The interest rate environment will change at some point. Should this lead to higher interest rates or a larger differential between the US and importing economies the dollar value of the support from GSM-102 guarantees will rise and the attraction of the supported finance will strengthen. In recent years shorter tenors in conjunction with low interest rates have reduce the financial benefit and usage of the GSM-102 guarantees. But short tenors may not be a complete solution. Lower tenors in FY 2011 did not translate into reduced US exports of wheat, corn and soybean meal with finance support. World commodity prices strengthened considerably in This suggests the level of traded product prices is another factor that will affect the attraction of using concessional finance. x

12 Strong commodity prices increase the dollar value of export transactions and the corresponding cost of credit finance. This means the value of the benefit from the interest cost differential is higher and the attraction of the supported finance to importers is stronger. Tenors of 1.5 years are not sufficient to remove the trade distortion effects of finance guarantees in measures such as the GSM-102 program, especially in periods of high interest rates and high prices for traded products. There is still a material financial incentive to use the finance and trade displacement effects will continue to arise. There is a risk that firmer global interest rates and strong commodity prices will lead to stronger demand for export finance guarantees. Restricting tenors to 6 months will be highly beneficial for global trading conditions as it will substantially diminish the attraction of the finance. But it will not fully remove the trade distortion effect as a limited financial advantage will still exist in some markets. The financial gain will be stronger in conditions of high interest rates and strong commodity prices. The rate of assistance from finance guarantees is significant and it has trade distorting effects in many markets. Policy reforms that impose disciplines on the use of export finance support are necessary and they need to be part of a WTO Doha Round agreement on export competition. Elimination of the trade distortion effects would require an end to all forms of export finance support. However, the proposed 6 month restriction on tenors for export credit support should significantly curtail the distortion effects and it should be adopted. Since 2009 there have been substantial US exports of wheat, corn and oilseed products with finance guarantees in most years. This suggests trade displacement effects have been a de-stabilising factor in global trading conditions. For example, US guaranteed sales of wheat averaged 2.7 million tonnes in the period. The corn trade was over 9 million tonnes in 2009 and averaged 3.7 million tonnes in the following three years. There were no subsidised exports in this period and US credit guarantees were the leading source of distortions in the world trade for cereal products. The effect of export finance guarantees undermines the trading activities of many economies. Large changes in the availability of guarantees are destabilising for the export trade of competing suppliers. But trade displacement effects are not limited to a few major export suppliers. Incursions of exports with credit support can also disrupt localised inter-regional sales by smaller exporting economies. For example, over the period 26 exporting economies were affected by US cereal product sales with finance guarantees in Asian markets. In South America 12 export suppliers were affected by US credit supported sales and 5 export suppliers were affected by sales in Central America. This highlights the multilateral nature of the issue and the need for a WTO Doha Round agreement on export competition that includes disciplines on the use of export finance support. Implications and recommendations for relevant stakeholders The long standing concerns about the use of export assistance are well founded. Export subsidies, export contingent input subsidies and export finance support have trade distorting effects. At times the distortion effects on commercially driven trade flows have been substantial. The WTO Doha negotiations provide an opportunity to permanently remove export subsidies and put disciplines on the use of export finance support. Allowances for export subsidies are an anomaly trade subsidies for industrial products were outlawed in the 1950s. The treatment of export subsidies in the AoA was seen as an intermediate step on the way to elimination in future negotiations. The current benign pressure for using export subsidies should not be a reason to allow the matter to drift. Reduced use of export finance support in very recent times is largely due to the low interest rate environment. Commodity prices are volatile and economic conditions will change at some point. xi

13 There are likely to be periods of unfavourable trading conditions in the future and political pressures to use export subsidies to alleviate domestic adjustment concerns will resurface. The risk associated with the continued availability of export subsidy allowances is clearly illustrated by events in A WTO agreement on export competition that prohibits the use of all forms of export subsidies would highly beneficial for agricultural commodity markets. The global economy has experienced a sustained period of low interest rates for some time. The interest rate environment will change at some point. Should it lead to higher interest rates or a larger differential between exporting and importing economies the attraction of export finance guarantees will strengthen and the trade distortion effect are likely to intensify. Disciplines on export finance support would be highly beneficial for the global trading environment and they need to be part of a WTO agreement on export competition. It s in the collective interests of all trading economies to finalise and adopt a multilateral agreement that incorporates effective reforms on these two forms of export assistance. An agreement would be highly beneficial for exporters and for producers in both importing and exporting economies. All types of trading economies would benefit from the reforms developed and developing. The adoption of an agreement on export competition can play a constructive role in advancing other aspects of the WTO Doha trade negotiations. A reluctance to commit to improved market access may in part reflect concerns about the potential for a re-emergence of large subsidised exports. Adoption of an agreement on export competition would lessen these concerns. This study has provided evidence of the trade distortion effects of export subsidies and export finance support. The results have highlighted the key issues for deliberations on the proposal for a multilateral agreement on export competition. These include: export subsidy allowances are generous and provide considerable scope for significant price discounting when global trading conditions deteriorate a ban on export subsidies would eliminate a major source of instability in market returns for all export suppliers and producers in the importing economies; a ban on export subsidies would benefit all types of trading economies developed and developing; export subsidies have unintended adverse consequences for longer term industry development, food security and poverty alleviation in the less advanced developing economies a ban on export subsidies would be highly beneficial for these economies; continued use of the Article 9.4 transitory exemption for export contingent input subsidies by developing economies has no legal entitlement in the AoA and are a significant risk to the effectiveness of a ban on export subsidies they have trade distortion effects that affect all other trading economies (developed and developing) and measures that use the Article 9.4 exemption should be included in the agreement to eliminate export subsidies; export finance support provides significant assistance and has significant trade distorting effects in many markets disciplines on the use of finance support are necessary and they need to be part of an agreement; and elimination of the trade distortion effects of export finance support would require an end to all forms of government assistance but the proposed 6 month restriction on tenor periods will be highly beneficial for global trading conditions and it should be adopted. xii

14 1. Introduction Export assistance measures are a long standing issue of concern in global agricultural trade. Export subsidies, export contingent input subsidies and export finance support have trade distorting effects. The disruptions to commercial trade can be substantial. Recipients of the assistance gain an artificial competitive advantage that penalises other exporters and producers in importing markets. It s generally accepted that export subsidies are the most trade distorting form of agricultural support. Indirectly they contribute to higher output and increased export supplies in the economies that provide the assistance. The subsidised trade increases global price volatility, lowers market returns and displaces trade by other export suppliers. These distortion effects have been a feature of global commodity markets since the late 1970s. Use of export subsidies has tended to be ad-hoc. Changes in product eligibility, subsidy levels and the rate of assistance caused significant shifts in the commercial incentive for exports. The resulting fluctuations in subsidised trade added a de-stabilising element to global trading conditions. The initial direct effect of providing subsidies is lower returns in the importing markets. This occurs through a combination of price discounting and increased product availability. Competing suppliers face lower prices which can lead to the displacement of exports into other markets domestic or foreign. The lower returns can also curtail output in the importing markets. Ultimately the result is a lower average world price due to larger global export supplies. In effect the export subsidies transfer adjustment pressures from supported markets to producers in other markets. Price effects are amplified when there s competition in providing the subsidies. If a suppler raises the subsidy level, others may respond with a matching increase to maintain competitiveness. Concerns about subsidised exports often skim over the differentiated distortion effects that can arise. Some import markets receive large amounts of subsidised trade. They can experience a more direct, disproportionate price impact and a greater adjustment burden if commercial use of the subsidy leads to stronger competition for sales. When developing economies are targeted by exporters the subsidised trade can have implications for industry growth and development. Competitive pressures and product substitution effects ensure the distorting consequences ultimately spread to other markets. Impacts are not quarantined to specific markets there are spill-over effects. The impacts spread because of the trade displacement that occurs when other export suppliers elect to withdraw or reduce their market involvement rather than accept lower returns. It is often not appreciated that the consequences can spread across numerous exporting and importing markets. Small exporting economies engaged in localised regional trade are affected just as much as the major global export suppliers. Importing markets may also experience reductions in support. This occurs if tariff protection is eroded by the price effects of subsidised trade. Exporter gains from FTA tariff concessions can be eroded by subsidised trade. Therefore eradicating the use of export subsidies would seem to be in the collective interests of all trading economies. The issue can t be resolved in FTA or RTA negotiations. A multilateral agreement is required and it s a compelling reason for pursuing reform in the WTO Doha trade negotiations. Export finance support is another area of concern in the provision of export assistance. Concessionary credit based on government guarantees is also used to artificially enhance export competitiveness. It s a form of assistance that has trade distorting effects similar to export subsidies. 1

15 Finance guarantees are an export contingent input subsidy that lowers the transaction costs of imports. They create an incentive for importers to favour export suppliers offering the assistance. The primary distortion effect is a displacement of competing exports into other markets domestic or foreign. This may have a spill-over effect on product returns for other export suppliers. There were no specific disciplines imposed on export financing support in the AoA. It has been the subject of WTO disputes and found to be an export subsidy. Previous research shows the assistance is significant but smaller than export subsidy support. The support distorts trade in markets eligible for the assistance and there are concerns about its potential to circumvent a ban on export subsidies. The Doha WTO negotiations provide an opportunity to eliminate export subsidies and put disciplines on export finance support. Allowances to subsidise exports are an anomaly subsidies for industrial goods were outlawed in the 1950s. The treatment of export subsidies in the Agreement on Agriculture (AoA) was seen as an intermediate step on the way to elimination in future negotiations. An evaluation of the distortion effects of these export assistance measures is a worthwhile exercise to show why reform should be strongly pursued in the Doha negotiations. The current benign pressure for using export subsidies should not be a reason to allow the matter to drift. Commodity prices are notoriously volatile and economic conditions can change. It is important to have an appreciation of the distortion effects of these assistance measures. Numerous export suppliers are affected including small economies trading in regional areas. Commercial players target their use of export assistance to particular import markets. This can have industry development implications in developing economies and erode the potential for gains in food security. Project aim and objectives Reform of export assistance can play a constructive role in the three pillar approach to WTO trade negotiations. This approach involves concurrent discussions on export subsidy disciplines, market access and reduced domestic support. A reluctance to commit to improved market access may in part reflect concerns about the risk of a re-emergence of large subsidised exports. The adoption of an agreement on export competition would lessen concerns on liberalising market access. In recent times the use of export subsidies has been well below the allowances contained in the AoA. Changes in domestic support policies have contributed to this development. The EU is currently not providing export subsidies. Some other economies have gradually ended the availability of export support for particular products. The diminished use of export subsidies is a welcome development. But the fact remains the policy option remains in place and can be reactivated at any time. There are dormant or eliminated programs in many economies that could be resurrected if trading conditions change. There are also a number of subsidy programs that remain active today, some without a clear WTO entitlement.. Strong commodity prices have reduced the pressure for export assistance. But the volatility of traded product prices is well known. There are likely to be future periods when unfavourable global trading conditions re-emerge with related pressures for export subsidies and finance support. The risk associated with the continued availability of these measures is clearly illustrated by events in In 2007 and 2008 the world economy experienced a period of very high food price inflation. This was followed by the recessionary effects of the Global Financial Crisis (GFC) in 2009 which coincided with a weakening of traded product prices. One response was a re-activation of EU export subsidies for dairy products which triggered a corresponding re-activation of US dairy export subsidies. At the same time there was a substantial rise in the use of US export finance guarantees. 2

16 The aim of the study was to assess the trade distorting effects of export subsidies and export finance support to show why a WTO agreement on reform should be pursued. The analysis focused on how the measures distort trade and their implications for all types of trading economies. The specific objectives were: review the use of export support measures in the context of fluctuating commodity prices; examine the destination of trade supported by export assistance; assess the differentiated distortion effects that can arise and the extent of spill-over effects; a comparative evaluation of assistance from export subsidies and financing support; and summarise the findings to establish the key considerations for reform. It was beyond the scope of the project to review the distortion effects in all product markets. Selected examples of the use of export subsidies and export credit guarantees were used to assess developments since Meat and dairy products were used to evaluate the effect of export subsidies. Cereal and oilseed products were used for the assessment of export finance support. These products were the primary focus of the respective assistance measures in the sample period. What matters most for deliberations on a multilateral agreement on export support measures are the external consequences in global commodity markets. Accordingly the analysis was focused on the key elements of the external distortion effects and has not considered the internal outcomes for the users of export support measures. Using the product examples, attention was focused on: rates of assistance provided by the respective support measures; subsidy use by supported exporters and its distortion effects on market returns; the volume, instability and market/regional concentration of supported trade; unintended consequences for industry development in developing economies; exporting economies affected by the trade displacement effects; and importing economies affected by the domestic industry disruption effects. 3

17 2. Use of export subsidies A major outcome of the AoA from the Uruguay Round was a commitment to reduce the use of export subsidies. Caps were imposed on subsidy expenditures and the volume of subsidised trade. There was a lengthy transition period of progressive reductions to the final commitments. The caps were mostly product specific and the introduction of new export subsidies was prohibited. An exception was the exclusion of some forms of export subsidies used by developing economies. There were no volume or expenditure caps on the subsidies which could be applied at any time. Some economies continue to make use of this exception even though the legal entitlement has lapsed. Capacity for subsidised exports There are 18 WTO members with 428 commitments to cap the use of export subsidies (WTO 2013b). They mostly apply to specific product categories. Exceptions are two commitments applying to all products and five applying to incorporated products. The number of commitments is not a measure of the use of trade subsidies. Many export subsidy allowances have been dormant since the AoA was implemented. Others have been subsequently suspended or eliminated by unilateral policy changes. Dormant export subsidy programs can be reactivated or resurrected in a new form at any time. Apart from expenditure and volume caps the only constraint is product coverage. In many cases the export subsidy commitments specify the composition of a product category eligible for support. This may exclude some category items or forms of a product. Some economies were extensive users of export subsidies when the AoA was negotiated and have allowances for several product categories. Notable examples include: the EU has allowances for 20 product categories; the US has 14 product allowances; Canada and Norway have 11 product allowances each; and Switzerland has 5 product allowances. The total number of commitments can give a misleading perspective on the potential for disrupting trade. Some economies have aggregate product allowances and others have disaggregated allowances. For example, Turkey has 40 specific allowances including several for fruit and vegetable products. A primary product perspective would suggest Turkey had allowances for 30 product categories. The total global allowance for export subsidy expenditures is US$12.2 billion (table 1). It s a generous concession and underlines the potential for disrupting trade in agricultural products. Cereal products account for about a third of the available allowances. Dairy products account for another 30% and meat products account for 20%. The EU has by far the greatest capacity for subsidised trade with 80% of the available allowances for agricultural products US$9.7 billion. They have allowances for all the major product categories. The US and Canada also retain a significant capacity for subsidised exports. Their capacity is concentrated in cereal and oilseed products. An aggregated perspective shows: the EU, US and Canada have 93% of the export subsidy allowances for cereal products; they also have 89% of the allowances for subsidised dairy trade; and the EU and US have 98% of the capacity for subsidised trade in meat products. 4

18 1. WTO expenditure caps for export subsidies # EU US Canada Mexico Brazil Other Total US$ million Meat products % 2%.... 0% 2% Dairy products % 3% 2%.. 0% 11% Cereal products % 10% 6% 3% 0% 4% Oilseed products % 11% 33%.. 4% 5% Sugar % % 4% 2% Other products * %.. 0% 1% 3% 34% Total % 5% 3% 5% 1% 7% # WTO members with annual caps on subsidised export expenditures. Source: WTO notifications. Expenditure caps valued at average 2014 exchange rates, year ended December 31. * Includes fruit, vegetables, cotton & olive oil. WTO allowances on the volume of subsidised trade shows the commodity markets facing the higher risk. Wheat and coarse grains have the highest capacity for subsidised trade (table 2). There s 40.2 million tonnes of allowances for wheat and 20.3 million tonnes for coarse grains. Substantial capacity also exists for sugar, oilseeds, beef and dairy products. The EU retains most of capacity for subsidised trade in meat and dairy products with 80% of the available allowances for dairy products and 88% for beef. In cereal products the EU has 38% of the wheat capacity and 52% of the coarse grain capacity. The EU also has 27% of the allowances for sugar. Other capacity levels worth noting include: the US has more than a third of the allowances for wheat; Canada has 22% of the wheat allowances, 18% for coarse grain and 78% for oilseeds; Brazil has 30% of the sugar allowances and over half the capacity in vegetable oil; Mexico has 25% of the capacity for sugar. A small number of developed economies dominate the capacity for subsidised trade. The allowances are a generous concession that remain a threat to the global trading environment. The overall scale of the concessions reflects the base period in the AoA and the limited ambition of the reduction commitments capacity was cut by a third from a high starting point. 5