Tariffs, Embargoes, Otiier Trade Barriers

By G. Edward Schuh and Philip L Paartberg

mimM ^^^^ agriculture has been charac- society, some groups may be harmed. In UU terized as in disarray because of addition, policymakers may be able to M m policies established by national benefit certain groups in society by trade governments. This chapter briefly ex- interventions, even though the country amines the nature of trade policies in as a whole may be worse off. agricultural markets to determine their impact upon U.S. farm programs and the An important aspect of trade is that it is U.S. farmer. Purpose of these trade poli- a two-way street. For a country to be cies usually is to keep market forces able to export its goods and services and from coming into play so as to determine thereby gain from trade, it has to be will- where production will take place. Conse- ing to accept imports from other coun- quences of such interventions are that tries. Other countries must be able to much of the world's agricultural output is seU their own products in order to have produced inefficiently, and consumers the income to purchase products firom have to pay more for food and other the exporting country. Current attempts agricultural products they buy. to liberalize trade result from the experi- ence with protectionism during the Great Why do countries trade to begin with? Depression. The depression prompted Presumably because they are better off producer groups in many countries to ask wath trade than without it. This means governments to impose import tariffs to their national income is higher with trade. protect their dwindling domestic markets. For trade to take place, some countries Tariff protection curtailed world trade, must be able to produce certain commod- which reduced the gains from trade and ities at a lower relative cost than other worsened the depression as workers in countries. In turn, this implies that other trade-oriented sectors were laid off. commodities can be produced relatively cheaper elsewhere. If there are such Role Of G.A.T.T. — FoUowing World War gains from trade, why do individual coun- II, the experience with tariffs in the tries want to intervene in trade rather 1930's prompted creation of an interna- than to become more specialized in tional organization concerned with pro- producing what they do best? The reason moting freer trade, the General Agree- is that while trade may benefit the nation ment on Tariffs and Trade (G.A,T.T.). as a whole, or particular groups within G.A.T.T, has developed procedures to

G. Edward Schuh is Professor and Head, Department of Agricultural and Applied Economics, University of Minnesota, St Paul. Philip L. Paarlberg is an Agricultural Economist with the Economic Research Service, USDA, at Purdue University, West Lafayette, IN.

112 reduce tariffs and provide for settling on the use of countervailing duties, an trade disputes. It also has conducted a important means by which countries re- series of multilateral trade negotiations taliate against each other for trade designed to systematically lower trade interventions. Export subsidies on agri- barriers. Unfortunately, agriculture has cultural products are permitted if the not received a great deal of attention in subsidies do not displace other nations' the negotiations. This in part is because exports, or involve "material injury" in a most of the industrialized countries of the particular market. After determining in- West, including the United States, have jury to an industry, a country may im- trade barriers designed to protect pose a countervailing duty on the subsi- domestic commodity programs. dized export.

The latest round of multilateral trade The latest round of multilateral trade negotiations was completed in 1979. negotiations reduced tariff barriers in ag- Agriculture received more attention in ricultural markets. However, the pragma- this round, with the result that tariff tism of trade negotiations within the reductions on a number of agricultural G.A.T.T. framework has resulted in only commodities now are being implemented. limited gains in reducing nontariff barriers The new agreement also provides rules

Trade ¡s a two-way street. To be able to export its goods and services, a country must accept imports from ot/ier countries. Here, dates irom the Pers/an Gulf are beirtg un/oaded in Savanrtal), Ga.

113 and export subsidies. Thus, agricultural The variable import levy system also markets remain highly protectionist de- affects the variability in U.S. prices. spite existence of G.A.T.T. Since the levy adjusts daily to changing market conditions, domestic prices in the Variable Levy on Imports E.C. are completely insulated from the For grains and livestock products, Euro- effects of world markets. Consequently, pean countries — including the European E.C. producers and consumers do not Community (E.G.) — generally rely on adjust to world market price signals. This an import barrier known as a variable forces additional price adjustment onto levy to protect their domestic price sup- other nations, such as the United States, port programs from imports. A variable which do not insulate their domestic mar- levy is a tariff which adjusts daily to kets. maintain a constant import price. For commodities subject to this form of Many nations continue to use import protection, the European Commission tariffs and taxes to protect their domestic each year establishes a minimum import agriculture from world market competi- price for each commodity — the thres- tion. Japan, the United States, and the hold price. The daily difíerence between European Community, for example, im- the threshold price and the world market pose import tariffs on various types of price is the levy. vegetable oils. Several developing coun- tries which are currently major markets The variable levy has important conse- for U.S. exports impose import tariffs. quences for U.S. farmers. For example, They include Mexico and Taiwan. Effects it keeps agricultural prices within the of these trade restrictions are somewhat community considerably above world like those of variable levies. World trade market levels. Hence, production by of the protected commodity is reduced, E.C. farmers is stimulated and consump- as are prices for farmers in the exporting tion is dampened. The net effect is to re- nation. duce E.C. imports of the commodities subject to the levy, grains and livestock Past rounds of multilateral trade negotia- products, and to lower the price received tions have been successful in reducing by farmers in exporting countries. Thus, tariff barriers. Consequently, such bar- U.S. farm prices and production of grains riers are now less severe than in the and livestock products are lower because past. In 1961, the European Community of E.C. policies. In the markets for agreed to free entry of oilseeds and oil- grains, where the United States operates seed meals. Recently, Japan agreed to its own price support programs, U.S. duty-free imports of soybeans, while treasury outlays are larger because of Taiwan conceded to fix maximum duties the variable levy. On the other hand, on soybeans, com and cotton. Other na- since the E.C. does not subject some tions agreed to reduce tariff barriers on products — such as soybeans and meal, livestock, livestock products, tobacco, manioc, com gluten feed, and citrus pulp fioiits, vegetables, oilseed products, feed — to such levies, imports of these grain grains and rice. The United States substitutes have expanded to meet the agreed to gradually reduce its import needs of artificially stimulated E.C. live- duty on pakn oil. stock production.

114 Although tariff barriers have been re- considered a state trading agency. duced, nontariff barriers continue as obstacles to agricultural trade. Nontariff State trading in wheat is so frequent that barriers include import quotas, import it is said the bulk of worid trade has a licensing, government purchasing agen- state trader on at least one side of the cies (state trading), health sanitary transaction. State trading results in dif- regulations, and other import regulations. ferent degrees of restriction of trade, de- Virtually every countr>^ has one or more pending upon the price and import deci- of such barriers. Japan has quantitative sion of the agency. Finally, state trading restrictions on dairy products, livestock agencies which are large buyers, such as and meats, fruits and vegetables, and the Soviet Union or Japan, can potentially vegetable oils. Korea employs a combina- use their large volume to gain favorable tion quota-tariff to protect its farmers. purchase terms.

Restrictions by U.S. The United States Barriers in Export Markets also relies heavily upon quantitative im- Exporting nations also intervene fre- port restrictions. Section 22 of the Agri- quently in world trade, usually to prom- cultural Adjustment Act of 1933 restricts ote exports, but occasionally to limit imports through duties or quotas when trade and channel production to domestic imports interfere with the Commodity markets. Trade barriers adopted by Credit Corporation price support opera- exporting countries generally can be clas- tions. Four groups of commodities cur- sified as export subsidies, export taxes, rently are subject to import restrictions state trading, and export embargoes. under Section 22: cotton and products, Here we will discuss all but the last trade wheat and products, dairy products, and barrier, export embargoes, which are peanuts. Although not covered under considered a bit later on. Section 22 authority, meat imports into the United States are subject to quota Export subsidies and export taxes are in restrictions under 1964 legislation. principle the same type of barrier with opposite effects. The purpose of an ex- One of the most common forms of non- port subsidy is to lower the price of the tariff trade barriers currently in use is commodity to the purchaser, thereby en- state trading. This involves the import couraging larger exports and often gain- and export of commodities by govern- ing access to new markets or markets of ment agencies, such as marketing competitors. Export subsidies are usually boards. Typically, such agencies are adopted in one of three situations. An granted monopoly positions in markets, important circumstance is when domestic with the result that they can control mar- supplies are excessive. Current examples kets. Eastern European nations, the include Japanese rice exports and E.C. People's Republic of China, and the wheat exports. As a result of liigh Soviet Union (U.S.S.R.) rely exclusively domestic support prices, both entities upon state trading. It also is used fre- have excess stocks which they are trying quently by developing countries — India, to reduce by subsidizing exports. From Brazil, Chile, Mexico, and most African the middle 1950's until 1973, the United nations. Japan's Food Agency controls States subsidized wheat exports for simi- wheat import licenses and can also be lar reasons.

1Í5 The second situation is when a nation ceived considerable publicity is the ex- attempts to gain access to new markets, port embargo. An export embargo is the usually by undercutting traditional sup- prohibition of export sales generally or to pliers. E.C. export subsidies on wheat a particular nation. Imposition of a total and Brazilian pricing of soybean meal in embargo means the importing nations Europe can be viewed in this context. face reduced supplies, hence the world The policy is usually short term for it market price rises. Meanwhile, the tends to create the third situation, that of embargo causes excess supplies in the retaliatory export subsidies. In contrast exporting country and prices fall. Embar- to export subsidies, export taxes are often goes directed towards a specific country designed to restrict exports and increase tend to be ineffective since world trade world prices. For agricultural commod- flows adjust to circumvent the policy. ities whose demand is largely insensitive to price, the result can be to increase The U.S. Government has imposed four foreign exchange earnings and hence im- embargoes — either total or partial — prove the exporting country's balance of since 1973. This experience with export payments. Brazil, for example, once used embargoes tends to confirm what has export taxes to cause the prices of coffee just been said. In 1973, for example, the to be higher for importing nations. Ex- United States imposed the only total port taxes also can be used to keep embargo on exports of an agricultural domestic prices lower than world prices. commodity in its recent history by Such trade diversion benefits domestic embargoing the export of high protein consumers and producers in other coun- feedstufts. This embargo resulted from tries. It harms domestic producers. several developments in U.S. and world Many less developed countries use such agriculture which caused soybean and policies as a means of having cheap food product prices to rise rapidly. As interim policies. measures, the U.S. Department of Agriculture (USDA) adopted several poli- Just as many importing nations rely on cy changes, including relaxation of set- state trading, so do many exporters. aside restrictions and suspension of con- Grains exported by Canada, Australia, cessionary export sales of vegetable oils. and South Africa are under the control of Despite these policies, the combination of marketing boards. Centralized selling strong domestic and international demand agencies give these countries market continued to push prices upward at a power when dealing with state importing rapid rate. agencies. Further, some importers — notably Mexico — prefer to deal with On June 27, 1973, the U.S. Department governmental or quasi-governmental of Commerce released data showing sur- agencies rather than with private trading prisingly heavy exports. On that same firms. The degree to which export day, the Commerce Department imposed marketing boards interfere with trade a general export embargo on soybeans, varies greatly, depending upon the board cottonseed, and their products. On July involved. 2, the embargo was replaced with a sys- tem of validated export licenses. Ulti- Export Embargoes mately, 41 agricultural commodities re- A trade barrier which recently has re-

116 lated to the oilseed complex were placed Following the sales suspension the price under export control. The licensing sys- of wheat in Kansas City fell. In Rotter- tem remained in effect until August 1, dam, price effects of the U. S, embargo when the Commerce Department were insignificant as trade patterns ad- announced that licenses for shipment justed. As 1974-75 progressed, the during September would be issued for supply situation eased. In March 1975 the unfilled balance of orders prior to the purchase limit on wheat was elimin- June 13, 1973. ated and the limit on corn was in- creased. However, the Soviets did not Immediate impact of the export controls purchase any U.S. grain in excess of the on U.S. and world market prices was October limits. dramatic. Soybean prices in Chicago were nearly halved, while world market The second partial embargo occurred prices for soybean meal rose 25 percent the following fall. The 1975 Soviet grain in a single day. The high world prices crop was 75 million tons below the enabled Brazil to increase its exports to planned level. In the second half of July, fill the void left by the United States. the Soviet Union bought 9.8 million tons The embargo created concerns among of U.S. grain. With these purchases, importers about reliability of the United U.S. grain prices began to rise sharply States as a supplier of protein feed- in speculation. In late July, USDA re- stuffs. Japan, the E.C., Eastern Europe, quested notification by exporters prior and the Soviet Union continued to buy to sales to the Soviet Union. This failed large quantities in successive years, but to stop the runup in prices, so on Aug. did purchase more frequently from other 11 grain companies were asked to with- countries. hold future sales to the Soviets until U.S. crop prospects were more certain. Anti-Soviet — The other export embar- With prices continuing to rise, Poland goes imposed by the U.S. Government was included in the sales moratorium on were partial embargoes directed at the Sept. 7. Two days later, the President Soviet Union. The first was a suspen- proposed a U. S. -U. S. S. R. grains agree- sion of grain sales to the Soviets in the ment. With conclusion of this agreement fall of 1974. Due to poor crops in the on Oct. 20, 1975 the moratorium on fu- United States, Canada, Australia, Argen- ture sales to the U.S.S.R. and Poland tina, India, and especially in the Soviet was ended. Union, by the summer of 1974 world grain supplies were extremely tight, and As a result of these interventions, Con- prices were rising rapidly. The response gress included a provision in 1977 farm of USDA was to institute a sales report- legislation to reduce the possibility of fu- ing system in September 1974. With ture embargoes. This legislation re- prices continuing to rise, on Oct. 4 it quires that if commodities are embar- was announced that sales of com and goed due to short supplies, loan rates on wheat to the Soviet Union were sus- the affected commodities are to increase pended until discussion between the two to 90 percent of parity. countries could be held. An agreement was finally reached which limited Soviet The third partial export embargo oc- purchases.

117 curred in response to the Soviet inva- directed at the Soviet Union, U. S. - sion of Afghanistan. The President sus- Soviet grain trade has suffered. Follow- pended all grain shipments to the Soviet ing removal of the embargo the Soviets Union in excess of the quantities obli- have shown restraint in buying large gated under the 1975 U.S.-U,S.S.R. quantities of grain from the United grains agreement, cancelling 17 million States. Further, the Soviets signed a tons of grain sales. This action occurred grain supply agreement with Argentina. under authority of the Export Adminis- tration Act of 1977. Since the embargo From the discussion of trade barriers was not a consequence of short sup- and embargoes presented in this chap- plies, the provision of the 1977 farm leg- ter, several general conclusions can be islation did not apply. made. First, there is a wide variety of agricultural trade barriers, which sug- USDA adopted policies designed to off- gests that agricultural trade occurs in a set the decline in U. S. grain prices and rather protectionist environment. As a to protect exporting firms which would result, trade in agricultural products is have defaulted on contracts. These in- lower than what would occur with free cluded direct U.S. Government pur- trade. Farmers in exporting countries chases, placements in the Farmer- receive lower prices for their products, Owned Reserve, and assumption of con- and farm programs are more costly. tracts by USDA. Further, to prevent Although international organizations de- world trade patterns from shifting to off- signed to liberalize trade policies — such set the embargo's effects on the as G.A.T.T. — have made progress in U.S.S.R., the United States sought reducing tariffs, nontariff barriers which cooperation of the major exporting coun- have remained extensive and other trade tries. Canada, Australia, and the Euro- barriers have caused price fluctuations in pean Community agreed to support the world markets to be greater than they United States. Argentina and Brazil did otherwise would be. not. The embargo was ended by the Reagan Administration in 1981. Total export embargoes, such as im- posed by the United States against high U.S. Taxpayers Suffer protein feeds tuffs, result in lower Despite the agreements obtained from domestic prices to farmers and impose other major exporting countries, leakage costs on overseas customers. Embar- occurred and the Soviets obtained most goes also serve to undercut importing of the grain they needed. Successive nations' confidence in the exporter as a crop failures did cause the Soviets con- reliable supplier, thereby encouraging tinued supply problems. Although U.S. import diversification and domestic self- grain prices fell in the short run. Gov- sufficiency programs. Partial export ernment purchases and additional U.S. embargoes against a particular country sales to other markets helped return have proved ineffective because patterns prices to pre-ernbargo levels by sum- of world trade adjust to circumvent the mer. U.S. taxpayers suffered as a result embargo. Even with agreements among of the embargo as the Government major exporting countries to honor the purchased much of the embargoed grain. embargo, leakage is sufficient to erode It appears that after three embargoes most of the consequences.

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