Sharing valuable insights
FARE Share
What’s
Inside?
This issue of FARE Share
encourages everyone to
raise a toast to farmers the
next time you sit down to
enjoy a meal. More than
likely you don’t know the
person who grew what is on
your plate, but you benefit
from an agrifood system that
enables you to appreciate an
abundant and diverse food
supply produced by strangers.
Inside you’ll find a
comprehensive backgrounder
on the Trans-Pacific
Partnership (TPP) and an
analysis of the issues that
drove the recent negotiations.
On the back page, we pick up
where we left off in a previous
issue with some lessons from
the Farm Financial Crisis of
the 1980s.
Contact:
Getu Hailu
Editor, FARE Share
[email protected]
The FARE Share Newsletter
features research and analysis
from faculty and students in the
Institute for the Advanced Study of
Food and Agricultural Policy in the
Department of Food, Agricultural
and Resource Economics (FARE).
Issue #12
January 2016
Raise Your Glass
to the Farmer
You Don’t Know
By: Brady Deaton, The McCain Family Chair in
Food Security and Professor, FARE
When North Americans sit down for dinner,
most of them do not know the farmer who
produced their food. This is one of the greatest
triumphs of our agrifood system, even if it is
underappreciated.
From 1993 to 1995, I lived in a remote village
in the Mokhotlong district of Lesotho. If I was
able to find someone who would sell eggs in
the village, I not only knew the individual but I
most likely could point to the chicken coop that
produced the eggs. But personally knowing the
farmer or the farm location does not contribute to
food abundance or food security.
Conversely, residents of developed countries such
as Canada and the United States don’t generally
know the farmer who produced their food or
the location of the farm. Markets effectively
link producers to consumers. From a global and
historical perspective, this anonymity is part of
the reason you spend a smaller percentage of your
income on food than your grandparents.
Coupled with international trade and technological innovation, the capacity to exchange with
strangers is part of the reason most North
Americans live in urban areas and have jobs
outside the agricultural sector. Many of us enjoy
growing our own gardens without feeling that
our children depend on it. My backyard garden
is not the kind of garden my father planted with
my grandmother. Too much was at stake then —
planting the garden was necessary.
Broad networks of trade between strangers
promote food security and food diversity.
Droughts in one country (or even in our own) are
not likely to lead to widespread hunger here.
Coffee drinkers, for example, should be thankful
that we import from many countries — the
sudden inability to import coffee from one
country is offset by increases in trade from
another. Similarly, other countries benefit from
our exports. These trade networks diversify our
food choice.
So for most North Americans, on most days,
eating is a global experience that includes food
from our own countries. Canada is the fifth
largest exporter of agriculture and agrifood
products and the sixth largest importer.
Continued on page 4
The Trans-Pacific Partnership
Background and Implications
By: Karl Meilke, Professor Emeritus, FARE
The Trans-Pacific Partnership (TPP) Trade Agreement started as a
small negotiation among four countries, i.e., Brunei-Darussalam,
Chile, Singapore, and New Zealand. Initially, these negotiations
were of modest economic importance. But later Canada, Australia,
Columbia, Malaysia, Mexico, Japan, Peru, United States and
Vietnam joined the TPP. With these countries in the mix, particularly
the United States and Japan, the economic importance of the TPP
is obvious. Table 1 provides an overview of the 12 TPP countries
whose economies contain about 800 million people and have a GDP
of US$28 trillion, 40 percent of global GDP. At the outset, additional
trade with high-income Japan was particularity enticing: Japanese
tariffs tend to be high; Japan is Canada’s third largest trading
partner; and Canadian agricultural products have a good reputation
in Japan. Several of the other countries involved are middle-income
countries with a rapidly growing demand for agricultural products as
identified in FARE research.1
On October 5, 2015, the TPP negotiators reached agreement and
the draft text was made available in mid-November 2015. The
Agreement is complex and contains 30 chapters on various trade
topics and thousands of pages of detailed tariff schedules. These
schedules are of most importance for Canadian agriculture, although
agreements in other areas will also influence agricultural trade, e.g.,
sanitary and phytosanitary measures, trade remedies and dispute
settlement, technical barriers to trade, and state-owned enterprises
and designated monopolies.
A detailed assessment of the TPP has not yet been completed;
however, there are four overarching issues that drove the
negotiations: 1) the gains from trade; 2) Canada’s competitiveness;
3) rule making; and 4) the China factor.
Gains from Trade
The gains from trade are the traditional reasons for trade
negotiations. As tariffs and other trade barriers are lowered,
consumers gain from a wider variety of lower-cost goods; industries
using imported inputs also gain, as do exporting industries by selling
more at higher prices. Of course, producers in those industries
whose border protection is lowered face additional competition
and must either adapt and/or contract. The fact that lower levels
of protection leads to overall gains and rapid economic growth is
what led to several rounds of multilateral trade negotiations over
the 50 years following WWII and the gradual decline in nonagricultural tariffs. In fact, the reduction in non-agricultural tariffs
in the developed world is essentially complete. Table 2 provides an
illustrative example. For the six developed countries in the TPP, the
average non-agricultural tariff is 2.2% and 65.1% of their tariffs are
zero. Non-agricultural tariffs above 15% are rare. Average nonagricultural tariffs in the developing countries (5.8%) are higher
than in the developed countries but still quite low and only 10%
are greater than 15%. The situation is quite different in agriculture.
The simple average tariff in agriculture is 9% and 11.6% of tariffs
are greater than 15%. In some countries, tariffs over 50% are not
uncommon. The average tariffs provide a guide to where Canada is
likely to see its greatest export gains, namely Japan, Malaysia and
Vietnam. Canada has existing Free Trade Agreements (FTAs) with
high-tariff Mexico and the important United States market. With
a successful TPP, Canada will face additional competition in these
two countries as other countries will be granted some of the tariff
preferences that currently exist for Canada.
When the TPP negotiations began, there was a strong push for a
very aggressive liberalization effort, including agricultural trade.
As a result, Burfisher, et. al.2 modeled the economic outcome of a
hypothetical TPP where all tariffs and tariff rate quotas are removed
among TPP members, taking into account current Preferential Trade
Agreements (PTAs) among the members.3 The analysis shows total
agricultural trade among the TPP members increasing by US$8.5
billion with 43% of this increase in meat trade. Canada’s exports
are projected to rise by US$1.0 billion with 49% of the increase in
meat and 25% in processed food. Canada’s imports are projected
to increase by US$871 million consisting mostly of meat and dairy
products. Burfisher, et. al. project Canada’s meat and dairy product
production to increase by 9.0% and 7.8% respectively as a result of
normal growth by 2025. The additional impact of the TPP would be
to further expand meat production by 0.5% and lower dairy product
production by 2.5%, relative to the baseline. It is clear from the
actual negotiated tariff schedules that liberalization in agriculture
falls short of the complete elimination of trade barriers modeled by
Burfisher, et. al. Unfortunately, the analysis required to calculate
new average applied tariff levels and to model these effects has yet
to be done.
Table 1: Population, Income and Agricultural
Trade of TPP countries
Country Population GDP
(millions) (trillion
US$)
Australia
Brunei
Canada
Chile
Japan
Malaysia
Mexico
New Zealand
Peru
Singapore
United States
Vietnam
Total
24
0.4
35
18
128
29
121
4
30
5
314
89
796
1.5
0.2
1.8
0.3
6.0
0.3
1.2
0.2
0.2
0.3
16.2
155.8
28.1
GDP/
capita
(US$)
67,537
41,124
52,220
15,454
46,723
10,431
9,747
37,749
6,796
51,709
51,734
1,755
35,354
Agricultural exports
(2010-12 ave.)
To
To
To
world
TPP
TPP
(billion US$)
(%)
Agricultural imports
(2010-2012 ave.)
From From From
world TPP TPP
(billion US$) (%)
32.4
49.6
10.0
3.4
28.3
19.9
19.7
4.0
8.2
13.5
12.0
312.1
10.7
4.9
0.2
0.1
30.7 21.6
5.1
1.0
62.1 30.7
15.3
3.8
24.0 20.6
3.7
2.3
3.9
1.5
11.3
4.7
102.9 48.7
9.3
3.3
279.4 143.2
10.4
25.4
4.2
0.9
6.9
16.8
6.9
1.4
3.3
56.6
2.5
135.5
32
64
42
27
25
85
35
35
40
42
21
43
46
70
70
20
49
25
86
63
38
42
47
35
51
Source: Burfisher, et. al.
Comments from Graham Lloyd, Communications Director for
Dairy Farmers of Ontario are illustrative of the reaction from the
supply-managed sector: “We don’t like to give up any market
access but in the context of the demands and the pressures we
think the government did a good job effectively defending [dairy
farmers from] these significant threats.” 5
Canada’s Competitiveness
The gains from trade are the “offensive” reason to join the TPP but
there are “defensive” reasons as well. PTAs currently exist among
the members of the TPP. Canada, with five, has the fewest PTAs
among the members and Chile, with ten, has the most.4 In order to
remain competitive, Canada does not want any of its trading partners
to have better access to importers than it does. For example, it would
be very difficult for Canada to export to Vietnam over an average
tariff of 16.2%, if the United States and Australia can export to
Vietnam at zero duties.
Also from the “defensive” standpoint, Canada wanted to maintain
protection levels for its supply-managed commodities. It was
largely able to do this by allowing modest additional access (1.5%
to 3.25% over 5 years) in the dairy, egg and poultry markets while
maintaining both in-quota and over-quota tariffs. There are also
gainers in the supply-managed sector, those who are granted the
rights to import additional product at international prices and to sell
them into the higher-priced Canadian market.
Per unit production quota values in the dairy sector are more likely
to rise than to fall below the mandated ceiling prices in Ontario and
Quebec. The Conservative government (of the time) also offered a
compensation package to producers and processors in the supplymanaged industries. It remains to be seen how the new Liberal
government will handle the proposed compensation policy.
Rule Making
The TPP has been characterized as a “21st Century” trade agreement
by President Obama. By this he means the TPP will introduce
rules in a number of areas where the World Trade Organization
(WTO) is silent, or strengthen the existing WTO rules in areas like:
investment, government procurement, competition policy, patent
protection, intellectual property, currency manipulation, labour
standards and environmental standards. Middle economic powers,
like Canada, require strong trade rules and trade dispute settlement
mechanisms to discipline the super powers. As such, Canada needed
to be a part of the rule making process in the TPP.6
China
Looming over the TPP negotiations is China, the second largest
economy in the world. China has announced it will form an Asian
Infrastructure Investment Bank with US$100 billion available for
Table 1: Population, Income and Agricultural
Trade
of TPP
countries
lending in Asia
– clearly,
an alternative
to the World Bank and Asian
Development
Bank.GDP
ThereGDP/
is also Agricultural
a fear thatexports
withoutAgricultural
the TPP China
Country Population
imports
(millions)
(trillion in
capita
(2010-12
ave.) and (2010-2012
will extend
its influence
Asia through
bilateral
regional ave.)
trade
US$)
(US$)
To
To
To
From From From
agreements – while with the TPPworld
China TPP
and Korea
TPP may
worlddecide
TPP toTPP
(billion US$)
(%)
(billion US$) (%)
become members.
Australia
24
1.5
67,537
32.4
10.4
32
10.7
4.9
46
Brunei
0.4
0.2
41,124
0.2
0.1
70
Canada
35
1.8
52,220
49.6
25.4
64
30.7 21.6
70
The
completed
now it5.1is up1.0to the20
ChileTPP negotiators
18
0.3have15,454
10.0 their
4.2jobs,42
12
governments
to ratify3.4
the agreement.
Japan
128 involved
6.0
46,723
0.9
27 I am
62.1confident
30.7
49
that
after
a
respectable
delay
Canada
will
ratify
the
TPP.
Malaysia
29
0.3
10,431
28.3
6.9
25
15.3 Still,
3.8 Mr.25
Trudeau
face some
in his16.8
own Party.
Consumer
Mexico will 121
1.2 opposition
9,747
19.9
85
24.0 20.6
86
New Zealand
4among
0.2 the37,749
19.7
6.9
35
3.7
2.3 of 63
protectionism
elite, economic
nationalism
and fear
Peru
30
0.2 among
6,796 the4.0
1.4population
35
3.9
1.5
38
enhanced
globalization
general
will make
7 40
Singaporechallenging
5
0.3for a51,709
8.2 Minister.
3.3
42
passage
new Prime
I hope11.3
I am 4.7
wrong,
United
States
314 16.2 if the
51,734
13.5
56.6 implementation
42
102.9 48.7
but
don’t
be surprised
ratification
and
of the47
Vietnam
89 155.8
1,755
12.0
35
TPP
is delayed
for an extended
period
of2.5
time in21spite9.3of its3.3
benefits
Total
796 28.1
35,354
312.1 135.5
43
279.4 143.2 51
Conclusion
for Canadians and Canadian agriculture.
To read the full version of this article, please visit:
www.uoguelph.ca/fare/institute/newsletter.html
Source: Burfisher, et. al.
Table 2: TPP Members Applied Tariff Profiles
Country
Simple Average
Applied Tariffs %
Non-Agric Agric
Australia
Canada
Chile
Japan
Malaysia
Mexico
New Zealand
Peru
Singapore
United States
Vietnam
Simple Average
Simple Average
Developed Countries
Simple Average
Developing Countries
Duty Free
Applied Tariffs Applied Tariffs
>15%
>50%
percent of tariffs percent of tariffs percent of tariffs
Non-Agric Agric Non-Agric Agric Non-Agric Agric
3.0
2.3
6.0
2.6
5.5
5.9
2.2
3.3
0.0
3.1
8.3
3.8
2.2
1.2
15.9
6.0
19.0
8.9
19.7
1.4
4.0
1.4
5.3
16.2
9.0
7.4
45.9
75.6
0.3
55.7
64.1
55.2
62.5
56.8
100.0
50.6
40.6
55.2
65.1
77.0
59.3
0.0
35.9
75.0
18.8
72.4
37.6
99.8
30.8
15.6
47.5
62.5
0.0
6.3
0.0
0.7
16.5
11.2
0.0
0.0
0.0
2.2
22.1
5.4
1.5
0.5
9.5
0.0
21.8
6.5
42.5
0.0
0.0
0.2
5.7
40.8
11.6
6.3
0.0
0.0
0.0
0.1
0.0
0.0
0.0
0.0
0.0
0.0
0.4
0.0
0.0
0.0
6.2
0.0
5.4
2.7
6.2
0.0
0.0
0.0
1.2
1.0
2.1
2.1
5.8
11.0
43.4
29.4
10.0
18.0
0.1
2.0
Source: WTO. Country tariff profiles. www.wto.org
Countries in bold are developed countries. Brunei Darussalam is omitted because of a lack of comparable data.
The views in this paper are those of the author and should not be attributed to FARE or the University of Guelph.
1 A. P. Cairns and K. D. Meilke. The Next-11 and the BRICs: Are They the Future Markets for Agrifood Trade?CATPRN Working Paper 2012-3 and Canadian Agrifood Export Performance and the Growth Potential for the BRICs and Next-11.
CATPRN Working Paper 2012-5. www.catrade.org
2 Burfisher, M. E., et.al. 2014. Agriculture in the Trans-Pacific Partnership. Economic Research Report 176, USDA: Washington, D.C.
3 The trade effects are calculated for 2025 after allowing for “normal” growth from now until 2025. The gains reported are the gains above normal growth resulting from eliminating all tariffs and quotas in 2025. This hypothetical scenario may
overstate the gains from trade but it also ignores a number of other sources of trade gains, e.g. productivity enhancements, innovation and shorter and cheaper supply chains.
4 This simple fact suggests that Canada has more to gain that many of the other TPP countries.
5 Trans-Pacific Partnership reaction mostly positive http://farmersforum.com/trans-pacific-partnership-reaction-mostly-positive/
6 An example of rule making involved the rules of origin for automobiles and parts. A proposed agreement by the United States and Japan would have seriously harmed Canada and Mexico.
7 W. A. Kerr has discussed the implications of consumer protectionism in “What is New in Protectionism? Consumers, Cranks and Captives”, Canadian Journal of Agricultural Economics, March 2010, pp5-22.
Continued from page 1
Social
Technology
The development of
our present agrifood
system did not emerge
overnight. We benefit
from an advanced social
technology — rules,
standards, government
departments, inspection
procedures, etc. — that
enables us to generally
feel secure about food
produced by strangers
and transported across
long distances.
This advanced social
technology is costly to
maintain, so the markets
that enable food to be
exchanged between
strangers are not “free.”
This is even more
reason to appreciate the
extraordinary networks
they allow and the food
abundance they secure.
This social technology
needs to continue to
address food safety
and environmental
concerns. In addition, it
should look to enhance
opportunities to
exchange food across
increasing distances
with farmers and
consumers who don’t
know each other.
In an era that gives a
great deal of attention
to food labels like “local”
and “organic,” we
need to also celebrate
important attributes of
the conventional food
system that matter
most, to most people,
on most days.
The next time you
sit down for dinner,
raise your glass to the
farmers you don’t know
and the system that
brought their food to
your table!
Original article published by
Troy Media.
Policy Lessons
from the Farm
Financial Crisis
By: Alfons Weersink, Professor, FARE
As discussed in a previous issue of FARE
Share (Special Issue, September 2015), the
extreme optimism within the agricultural
sector during 1970s set the foundation for the
“Farm Financial Crisis” of the 1980s. Record
high crop prices led to high levels of debt
based on equity financing that made the sector
vulnerable to negative shocks. Those shocks
came in the early 1980s from a decline in crop
prices and the sudden doubling of interest rate
to levels above 20%. Farm bankruptcies in
Canada rose from 125 in 1979 to 551 in 1984
and equity dropped significantly.
I know full well the difficult circumstances
faced by many farmers during this period as I
was working as an agricultural credit manager
for the Bank of Montreal. Although it was
a good job and it would have allowed me to
eventually transition into farming full-time, it
was a difficult time to be in the position. There
were the noted foreclosures and many of the
loans were consolidations that were delaying
the inevitable. In contrast to the early 1970s,
when the prospects appeared unlimited, this
was a very gloomy period for farming and rural
communities. The social toll was significant.
In 1989, I co-wrote a reflective piece on
lessons from the Crisis. Given that piece and
my own subsequent observations, I think the
farm financial crisis changed the sector in
several ways.
One is the number of risk management tools
available to farmers to help cope with the
inevitable uncertainty in the sector. In addition,
farmers have greater capacity to use these tools.
Another change is the growing acceptance of
the distinction between the owner and operator.
Farmers used to feel it necessary to own all the
assets needed to run the farm. Purchasing rather
than leasing puts the farm at greater financial
risk. Indeed, one of the major discussion points
in the 1980s was how the sector could attract
outside equity. The farmland rental market is
an example of such investment and now the
concern, warranted or not, with the level of
foreign ownership.
Another way of dealing with the inherent
variability in the sector is to have off-farm
income, and/or focus on niche markets rather
than traditional commodity agriculture.
There are a number of reasons for this
growing heterogeneity, including consumer
demographics and technological advances, but
finding ways to deal with risk is another.
These structural changes to the farm sector
do not mean another financial downturn will
occur. The sector is inherently volatile due to
its reliance on nature and global markets, so
there will be inevitable swings in farm prices
and subsequently net farm returns.
One of the lessons from the events 30 years
ago is to recognize this uncertainty and be
cautious in assuming aberrational conditions
are the new norm. Real agriculture prices have
trended downwards for years with the only the
occasional blip up.
Second, it is important to distinguish between
social policy and farm policy. In the 1980s,
the two were inter-linked in some cases. For
example, interest rate reduction policies for
all did not really help the ones who needed
it most and slowed the adjustment within
the sector. Farm policy should help ensure a
competitive sector that is efficient and weather
the inevitable storms. In contrast, social policy
should help the disadvantaged.
University of Guelph
Department of Food, Agricultural and
Resource Economics (FARE)
J.D. MacLachlan Building
Guelph, Ontario, Canada N1G 2W1
Telephone: 519-824-4120 x53625
Facsimile: 519-767-1510
uoguelph.ca/fare