Canadian Agriculture and GATT: An Economic Analysis of Article XI

Abstract

The objectives of this study are threefold. The first is to document the origins and evolution of Article XI. The second objective is to assess the apparent economic implication of Article XI exemptions and GATT panel decisions regarding the Article for Canadian agriculture, specifically for poultry products. The third purpose of this study is to analyse the economic effects of selected tariffication proposals for change in Article XI provisions to the Canadian egg and poultry industries. Our documentation of the origins and evolution of Article XI shows that this article emerged from the initiatives of US policymakers who attempted to ban quantitative restrictions without violating existing US legislation pertaining to agriculture. However, Article XI was soon found to be inconsistent with the US Agricultural Adjustment Act. To satisfy Section 22 of the Act, the United States requested and obtained a waiver to the provisions of Article XI from the Contracting Parties of the GATT. The exemption clauses of Article XI also became a consideration in some domestic agricultural policies. This was the case for Canada in the development of national supply management programs for eggs and poultry in the 1970s. These programs provided a politically palatable solution to the interprovincial conflicts that had arisen from provincial• supply management programs. In effect Article XI justified the existence of supply management and legitimized domestic policies to control supplies and restrict imports. These provided for considerable transfers to producers, as demonstrated by OECD producer- and consumer-subsidy equivalent calculations. However, international concern regarding global distortions in agricultural trade, and the limitations of Article XI, led to this Article, and other agricultural trade issues, being a focal point of the Uruguay Round trade negotiations. While disagreements over export subsidies were the major stumbling block in the agricultural negotiations of the Uruguay Round of GAIT negotiations, greater access to markets also held a high profile at the negotiating table. Canada was not able to raise sufficient support for her negotiating strategy of pushing to maintain and strengthen the exemption provisions of Article XI and the outcome of the negotiation included agreement to tariff quantitative import restrictions and other non-tariff restrictions to agricultural trade. This study examines a number of empirical issues related to tariffication and provides some recommendations that relate to methodology of tariff equivalent calculations. These concern the appropriate methodology to calculate tariff equivalence, specifically the definition and level of reference prices, the variability of the measure, and the application of tariff equivalent estimates under imperfect competition in a manner that preserves the level of imports. We conclude that if the objective of tariff equivalence is to identify the magnitude of a non-tariff barrier, the appropriate tariff equivalance methodology will net out tariffs and account for costs of transportation and handling. Another methodological issue concerns the choice of market level of domestic and reference prices for tariffication calculations. If there are competitively determined marketing margins and assuming that the tariff and transportation and associated costs do not vary at the different levels of the marketing chain, the NTB tariff equivalent estimates should be equivalent at the wholesale and farmgate levels. However, statistical tests for Canadian eggs, chicken, and turkeyreveal that for these cases the wholesale-based estimates are significantly higher than the farmgate-based estimates. The feature that the implicit import protection is relatively higher at the wholesale level than at the farmgate level suggests that there is a relatively high cost processing and wholesaling sector. Alternatively, the sector may be exerting imperfect market power against consumers. Variability of NTB tariff equivalent estimates over time has been observed and is explored at a preliminary level in the study. The tariff equivalent estimates for eggs, chicken, and turkey vary considerably over time as do the individual domestic and external reference price series. The US annual average wholesale price series are not significantly more variable than the Canadian price series. Comparisons of annual average farmgate prices of eggs and turkey, however, indicate that the US price series are more variable than the Canadian price series. US-Canadian exchange rate variability would not have substantially influenced the variability of the tariff equivalent measures during the study period. A complication of tariffication under conditions of imperfect competition, as with the supply-management programs, concerns the non-equivalence of tariffs and quotas under these conditions. Following Moschini and Meilke, import-preserving tariff equivalent measures are calculated to assess :the tariffication schedules that would maintain imports rather than allowing dime to be squeezed out by prohibitive tariff levels. The value of the import-preserving tariff equivalent measures does pose certain difficulties however, since their calculation depends on assumed elasticities and the deviation from marginal cost pricing. The latter is difficult to estimate. In practice, the application of the tariff-rate quota as adopted in the fmal negotiations of the Uruguay Round of GATT will apply as a clear and reliable method of ensuring specified levels of imports are maintained. In the final section of the study, in order to analyse the effect on the Canadian poultry industries of the tariffication schedules to be applied by Canada from 1995 to 2000 under the recently-concluded GATT agreement, we assess the extent of protection that these schedules provide. For this analysis, we calculate the "limit price", that is, the maximum domestic price that could be charged to consumers, under the specified levels of tariffs and agreed access conditions. The specified tariffication schedules embody appreciable potential increases in the level of protection afforded these sectors. We conclude that the tariffication schedules for poultry products will have no appreciable impact on these supply-managed sectors during the period to be covered by the agreement.