Table Of ContentG.c. Rausser GAIT Negotiations and the Political Economy of Policy Reform
Gordon C. Rausser
GATT Negotiations
and the Political EconolllY
of Policy Refo
fIll
Associates
P.G. Ardeni, H. De Gorter, W.E. Foster, R. Gray,
R.E. Just, B.S. Labson, D.J. Nielson, A. Schmitz,
1. Vercammen, D. Zilberman
With 39 Figures
Springer
Professor Dr. GORDON C. RAUSSER
University of California
Department of Agricultural and
Resource Economics
207 Giannini Hall
Berkeley, CA 94720, USA
ISBN-13: 978-3-642-79286-1 e-ISBN-13: 978-3-642-79284-7
DOl: 10.1007/978-3-642-79284-7
Library of Congress Cataloging-in-Puplication Data. Rausser, Gordon C. Gatt negotiations and the political
economy of policy reform / Gordon C. Rausser; associates, P. G. Ardeni ... ret al.] p. cm. Includes bibliog
raphical references and index. (Berlin). -- (New York) 1. Uru
guay Round (1987-) 2. General Agreement on Tariffs and Trade (Organization) 3. International trade. 4.
Produce trade-Goverment policy. 5. Agricultural subsidies. I. Arseni, Pier Giorgio. II. Title. HFI72.R38 1994
382'.92-dc20 94-33513
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Contents
1 The Uruguay Round and the GAIT Negotiations
G. C. Rausser ........................................................................................... 1
2 Efficiency of Farm Programs and Their Trade-Distorting Effects
A. Schmitz and J. Vercarnmen ................................................................ 35
3 Compensation and Political Feasibility:
Facilitating Welfare Improving Policies
R. E. Just, G. C. Rausser, and D. Zilberman 65
4 The Political Economy of Redistributive Policies
and the Provision of Public Goods in Agriculture
H. de Gorter, D. J. Nielson, and G. C. Rausser ....................................... 85
5 Coalition Breaking and Policy Reform
W. E. Foster and G. C. Rausser ............................................................... 107
6 Public Goods and Welfare Transfer Tradeoffs
W. E. Foster and G. C. Rausser ............................................................... 125
7 Mobility, Diversification, and Sustainability of Trade Reform
W. E. Foster, R. Gray, and G. C. Rausser ............................................... 145
8 Modeling Policy Reform in the US Wheat and Feed Grain Sectors
R. E. Just, G. C. Rausser, and D. Zilberman ........................................... 175
9 The Determination of Technology and Commodity Policy
in the US Dairy Industry
H. de Gorter, D. J. Nielson, and G. C. Rausser ....................................... 253
10 Modeling Phased Reduction of Distortionary Policies
in the US Wheat Market
under Alternative Macroeconomic Environments
B. S. Labson and G. C. Rausser .............................................................. 275
11 Alternative Subsidy Reduction Paths: The Role of Fiscal
and Monetary Policy Linkages
P. G. Ardeni and G. C. Rausser ............................................................... 315
List of Authors
Pier Giorgio Ardeni
Professor, Department of Economic Sciences, University of Bologna, Bologna,
Italy
Harry De Gorter
Professor, Department of Agricultural Economics, Cornell University, Ithaca,
New York, USA
William E. Foster
Professor, Department of Economics and Business,
North Carolina State University, Raleigh, North Carolina, USA
Richard Gray
Professor, Department of Agricultural Economics,
University of Saskatchewan, Saskatoon, Saskatchewan, Canada
Richard E. Just
Professor, Department of Agricultural and Resource Economics,
University of Maryland, College Park, Maryland, USA
B. Stephen Labson
Economist, Australian Bureau of Agricultural and Resource Economics,
Canberra, Australia
David J. Nielson
Economist, World Bank, Washington, DC, USA
Gordon C. Rausser
Robert Gordon Sproul Distinguished Professor,
Department of Agricultural and Resource Economics,
University of California, Berkeley, California, USA
Andrew Schmitz
George W. and Elsie M. Chair Professor,
Department of Agricultural and Resource Economics,
University of California, Berkeley, California, USA
VIII
James Vercammen
Professor, Department of Agricultural Economics,
University of British Columbia., Vancouver, British Columbia, Canada
David Zilbennan
Professor, Department of Agricultural and Resource Economics,
University of California, Berkeley, California, USA
Chapter 1
The Uruguay Round and the GATT Negotiations
Gordon C. Rausser
1.1 Introduction
In 1986, the Uruguay Round began in Punta del Este with much promise. In
contrast to prior negotiation rounds, the US government made agricultural reform
its top priority. What set this round apart from previous negotiating rounds was
the explicit recognition that trade reform in agriculture requires reform of the un
derlying domestic agricultural policies. These special features of the Uruguay
Round - namely, its focus on agriculture and on the reforms of each country's in
ternal subsidization policies - were also largely responsible for the stalemate that
plagued the Uruguay Round. Even though agriculture was 1 of 15 separate nego
tiation groups in the Uruguay Round, it nevertheless was a block to trade liberal
ization in a number of important areas such as intellectual property, services, gov
ernment procurement and investment, tropical products, textiles, market access,
custom evaluation, and dispute settlement.
In 1985-86, the Reagan administration, recovering from being soundly defeat
ed in its second attempt (the first attempt occurred in 1981) to reform US agri
cultural policy unilaterally, turned to international negotiations as the vehicle to
implement its strategy of domestic policy reform. As noted by Rob Paarlberg
(1992), "what couldn't be obtained directly from congress could perhaps be achie
ved indirectly, through GATT." Initially, Reagan administration officials were
delighted with the framework adopted in Punta del Este for the Uruguay Round
negotiations. Agriculture became the fundamental core issue, a position it main
tained over the seven long years of unsuccessful negotiations. Essentially, Reagan
administration officials seized upon an opportunity to sidestep the domestic politi
cal-economic forces, specifically the commodity interest groups and well-estab
lished supporting institutions, that have always dominated the design of US agri
cultural policy. These same officials were even more delighted with the adoption
of the so-called congressional "fast track" ratification procedures that require that
the US Congress either accept or reject the entire GATT agreement without revi
sion. This means that the battle lines would be drawn differently than if only agri
cultural issues were under examination. A coalition of interest groups that would
determine whether a GATT agreement was accepted or rejected would be domi
nated by interests quite different from those that have prevailed in past debates
over pure agricultural legislation. This all presumes that the Uruguay Round could
be successfully completed and that an external agricultural code would necessarily
be imposed as a constraint on future domestic US farm legislation.
2 Gordon C. Rausser
Unfortunately, the Reagan administration, foIlowing 1986, largely withdrew
from pursuing an active strategy of significant unilateral reforms, placing almost
all their eggs in the GAIT basket. This position has been largely maintained by
both the Bush and the Clinton administrations. Although these officials recog
nized the importance of multiple issues, expanding the policy space, trading off
policies, and changing the interest group landscape in the congressional forum,
they seem to have dismissed the importance of these same factors in the GAIT
forum where agriculture has been treated as a separable negotiating issue.! More
over, these same officials paid insufficient heed to the possible influence and
power that could be exercised by domestic commodity interest groups on the ac
tual GAIT negotiation process and thus on the potential formation of an external
agricultural code for all contracting countries.
Given this perspective, this chapter focuses on four major themes. First,
contrary to the hopes and dreams of both the Reagan and Bush administrations,
and more recently the Clinton administration, an external GAIT code cannot be
designed independently of internal political-economic forces. Second, the differ
ences that arise between industrial and agricultural sector outcomes in the GAIT
are sourced largely in the relative complexity and institutional structures of inter
nal domestic support policy for each sector. Third, sustainable reform can be
achieved only by simultaneously pursuing both unilateral policy adjustments and
multilateral external codes that can be imposed as constraints on the future dyna
mics of internal political economic forces. Under a unanimity negotiation rule,
external codes cannot be formed unless countries that suffer significant conse
quences have found a politicaIly robust "way out" of their internal subsidization
programs. Nowhere is this more apparent than in France. Fourth, any reform
package must recognize that both productive, political-economic resource trans
actions (PERT), and predatory, political-economic seeking transfers (PEST) poli
cies are jointly determined and thus both unilateral and multilateral proposals
must formally integrate the inherent complementarity and/or substitutability of
these two types of policies. These basic themes are used to examine the historical
performance of the United States in agricultural policy reform over the 7 years
that have unfolded during the Uruguay Round and to examine a generic political
economic model that should prove useful in examining agricultural policy reform
and trade liberalization in the current environment.
1.2 Empirical Foundation
for Multilateral Trade Negotiations (MTN)
Over the last decade, numerous empirical studies on agricultural policy reform
provided incentives for the Reagan, Bush, and Clinton administrations to forge
ahead. The empirical foundation for a global perspective was sourced in the posi-
1 Rausser and Simon (1991, 1993) show, in the context of a generic multilateral bargaining
model, what disastrous consequences can arise from such a negotiating rule.
The Uruguay Round and the GAIT Negotiations 3
tive spillover effects that could be generated from agricultural trade liberalization.
Basically, these studies simply provided formal justification for what the leaders
of these administrations already knew was the right answer.
On the domestic macroeconomic front it was demonstrated that the macroeco
nomic economy had disastrous effects on the US agricultural sector in the early
1980s (Rausser et al. 1986) and that agriculture can cause disequilibriums in the
macroeconomic economy. The latter influences emerge through (a) the general in
flation rate, (b) government deficits or surpluses, and (c) the balance of trade.
Each of these influences can have and have had, in turn, dramatic effects on em
plvyment, real interest rates, investment, and economic growth. A number of gen
eral eqUilibrium analyses have also been conducted to estimate the intersectoral
effects of agricultural policies on the balance of the US economy. One study
concluded that the misallocation of resources and capital to agriculture depressed
the productivity of other sectors of the US economy and reduced American ma
nufacturing exports by $7.5 billion and service exports by $3.4 billion (Hertel et
al. 1989). Another study estimated that the removal of all programs which distort
agricultural production or constrain input use would increase the 1991 GNP by
$9.6 billion (Robinson et al. 1989).
Since the United States is a large producer of some commodities on the world
market, its price supports and its accumulation of stocks can conceivably result in
short-run favorable consequences for all exporters of the commodity in question.
Specifically, if the internal price supports are so high as to effectively eliminate
the export market as a relevant alternative, in the short run all the benefits accrue
to other exporting countries. Over much of the post-World War II period, the
United States has behaved as a residual supplier on world markets of many major
commodities, especially cotton and food and feed grains.
To the extent that the price support programs and coupled subsidy transfers, as
well as protection against import competition (such as quotas in the United States
and variable levies in Europe) all induce greater production, world prices will be
depressed. This is particularly evident when the US government sells unwanted
stocks on the world market at less than the domestic price (through the Export En
hancement Program), makes concessional sales, or simply donates the food as aid
(through PL480). These potential effects have been examined in a number of em
pirical analyses (Tyers and Anderson 1986; Zietz and Valdez 1986; Roningen and
Dixit 1989). For example, Roningen and Dixit estimate that eliminating US agri
cultural policies would increase world dairy product prices by 23.5%, sugar by
22.8%, coarse grain by 11.6%, wheat by 10.6%, rice by 2.9%, ruminant meats by
3.8%, and nonruminant meats by 3%. This would lead to corresponding costs for
consumers and benefits for producers in the rest of the world.
Anderson and Tyers (1990) estimate that multilateral agricultural policy liber
alization by all Organization for Economic Cooperation and Development
(OECD) countries would increase the world prices of dairy products by 90%, sug
ar by 22%, coarse gain by 3%, wheat by 25%, rice by 18%, ruminant meats by
43%, and nonruminant meats by 10%. While these price changes would result in
costs for consumers and benefits for producers in the developing world, Anderson
4 Gordon C. Rausser
and Tyers estimate that the net welfare of developing countries would increase by
1% . Simultaneous policy liberalization by developing countries, however, would
result in a net increase in developing country welfare of up to 64%.
One justification often expressed in support of price floors and public storage
programs in the United States and other industrialized countries is that they stabi
lize what would otherwise be an unacceptable domestic volatility in basic com
modity prices, at least over the very short run.2 Ironically, these same policies
amplify rather than dampen commodity price fluctuations on international mar
kets. One glaring example of this phenomenon is the world sugar market. The Eu
ropean Community (EC) and the United States both protect their domestic sugar
producers - for example, in the United States through price supports, tariffs, and
import quotas. These policies have been estimated to have increased price insta
bility in the residual world market for sugar by approximately 25% (World Bank
1986 World Development Report). Moreover, because the United States have
been dominant in the world sugar trade, the imposition of import quotas has
lowered world sugar prices.
Not surprisingly, European and US sugar policies have also placed significant
burdens of adjustment on many developing countries. The World Bank 1986
World Development Report has estimated that sugar policies of industrialized
countries cost developing countries about $7.4 billion in lost export revenues dur
ing 1983 and reduced their real incomes by about $2.1 billion. Given the domestic
supply response to sugar and other substitutable products, and the zero treasury
provision of the US sugar program, even those developing countries who currently
benefit, can expect their quota levels, and thus values, to slowly vanish. In the
case of world wheat prices, Schiff (1985) has estimated that the variability could
be reduced by 48% if all countries were to end their subsidization of wheat. Tyers
and Anderson (1986), using a model simulating policy reform in more than a half
dozen commodity markets, calculated that liberalization of agricultural policies of
industrialized countries would substantially reduce the international price
variability of major temperate-zone commodities: wheat by 33%, coarse grains by
10%, rice by 19%, sugar by 15%, and dairy products by 56%.
Along with the spillover costs that emerge both domestically and internation
ally from current agricultural policies, we must include the deadweight losses that
emerge in redistributing wealth from consumers and taxpayers to agricultural
producers. At the height of the subsidization of agricultural sectors in the western
world (1986-87), the OECD estimated that the total consumer and taxpayer cost
ran in the neighborhood of $200 billion, with the amount received by producers in
the vicinity of $100 billion. Hence, the deadweight loss was estimated in these
studies to be as large as $100 billion on an annualized basis (G.E. Rossmiller
1988, National Center for Food and Agricultural Policy, Washington, DC, pers.
comm). These losses exclude the adverse consequences on the macroeconomies,
other related sectors of an economy, and general economic growth.
2 Stabilizing prices are, of course, not equivalent to stabilizing incomes. As noted by New
bery and Stiglitz (1981), stabilizing prices may actually increase income variability.
