Agricultural Economics 855

Minor Project #1

Prepared by Ruslan Kakenov

Submitted to William A.Kerr

 Introduction

Price support enables farmers to sell their output at higher prices, than

otherwise would be. Higher prices meant increasing output resulting in surpluses

of agricultural commodities. And, because EU is a large exporter country it has

great impact on the world markets, resulting in lower world prices and less exports

for small export countries such as Canada. While direct payments to farmers could

restrict output and maintain high enough income for them. However, this domestic

subsidy is trade-distorting as well. Because without that inefficient agricultural

firms would exit the market and more efficient importers would fill the remaining

domestic demand. Thus, domestic subsidies work as tariffs, and prevent the

domestic market from foreign entrance.

Trade implications from Ackrill article

Export subsidies are the most trade-distorting cause in the international

trade system. As the WTO commitment, EU had to decrease its export subsidies.

Instead, it has increased domestic subsidies to protect its agricultural producers.

Ackrill, in his paper, states that EU underwent reforms and changed its price

supportive policy to direct payments to their farmers. That is clearly seen from

figure 4, when CAP spending in the years from 1992 to 2006 on export refunds and

storage had decreased dramatically, while direct aid and rural development costs
had increased instead. However, total CAP spending has increased from ECU/€

35bln t o 50bln.

Furthermore, member states of EU agreed to replace the existing direct

payments with ‘Single Farm Payments’ which, by being further decoupled from

production should reduce trade-distorting effects of CAP.

Even though EU shares of the world agricultural exports has decreased

dramatically due to lessened export subsidies. From figure 2, it is clearly seen that

total milk exports, butter and milk powder world export shares has fallen

significantly. However, none of imports for selected agricultural products has

increased during these years, but cereals in a small amount. All that approves what

was mentioned before regarding EU’s market access, which has not been opened

enough due to domestic subsidies.

Implications for Canada

• All subsidies are trade-distortive.

• Canada enjoys higher world prices and larger exports for agricultural

commodities due to decrease in EU’s export subsidies spending.

• Access into agricultural market of EU has not opened enough due to

increasing domestic subsidies to EU’s farmers.

 Conclusion

Canada shall not lower its tariffs for its agricultural products and provide

greater access to its domestic market, because as we have seen, EU didn’t open

its markets, but comply with WTO rules to lessen its trade distortive practice of

export subsidies.

Canada is not warranted to change its negotiating position. If Canada lowers its

tariffs, imports will eventually rise, and to sustain higher domestic agricultural

production, it shall increase domestic subsidies to protect its farmers.