Outlook Brightens for Liberalizing US-Canadian Agricultural Trade

On October 3, 1987, President Reagan informed the U.S. Congress that, as of January 2, 1988, he intended to enter into a free trade agreement with Canada. If approved by the Congress and by Canada's Parliament and provinces, this agreement will lead to the formation of the world's largest Free Trade Area (FTA). In an FTA there are no tariffs, non tariff barriers, or other trade-distorting restrictions on most trade between the participating nations.

For sixteen months beginning in May 1986, the negotiators from the United States and Canada hammered out the terms and scope of the proposed agreement. At times the prospects looked poor. In fact, less than two weeks before the successful conclusion of the negotiations, the Canadian delegation walked out, protesting American stubbornness and unwillingness to address Canada's primary goals in the negotiations. But after an eleventh-hour intervention by U.S. Treasury Secretary James A. Baker III and U.S. Trade Representative Clayton K. Yeutter, the two sides finally reached agreement on key points.

In addition to the specifically agricultural provisions discussed below, the proposed agreement would provide for the following. Beginning in January 1989, bilateral tariffs will be eliminated—some immediately, some being phased out in steps over ten years. Each country will afford the other nondiscriminatory access to its markets for most agricultural products, wine and spirits (but not beer), energy, and financial services. Access to each other's government procurement markets will be increased, and there will be a more open environment for investment and for trade in services. In the area of trade dispute settlement, one of Canada's main concerns, it was agreed that arbitration panels would be established to deal with disputes not resolved in consultations.

While the negotiations have been in the forefront of the news in Canada over the past year and a half, they have received relatively little attention in the United States. Nevertheless, in the eyes of many business people, policymakers, and economists on both sides of the forty-ninth parallel, major benefits would flow from the elimination of trade barriers between the United States and Canada.

Even with existing impediments, trade between the United States and Canada constitutes the largest volume of trade and investment of any two countries in the world. Bilateral merchandise trade in 1986 is estimated to have totaled U.S. $127 billion, some $13 billion in Canada's favor, with manufactured products and natural resources comprising the bulk of the goods traded.

Of the two nations, Canada is generally considered to have more at stake in the successful completion of a bilateral trade agreement. Exports are crucial to Canada's economy, accounting for almost 30 percent of its gross national product (GNP). Between 75 and 80 percent of Canada's total exports go to the United States. In contrast, exports contribute only 10 percent to the U.S. GNP, with about 25 percent of all U.S. exports going to Canada.

Because exports are a mainstay of its economy, Canada has viewed the growth of protectionist sentiment in the United States with concern. It was particularly this concern that prompted Canadian Prime Minister Brian Mulroney in September 1985 to propose broadly based, bilateral negotiations to reduce barriers to trade in goods and services.

Despite the two countries' close economic relationship, U.S. response to this proposal was mixed. The Reagan administration welcomed Canada's initiative on trade liberalization, but Congress showed somewhat less enthusiasm. The House Ways and Means Committee did not hold a hearing or vote on granting "fast track" authority (which limits the vote to acceptance or rejection of a bill as written, without amendments) for the proposed negotiations. The Senate Finance Committee's vote to disapprove fast-track authority resulted in a tie. (A majority was needed to make the disapproval effective.) It was with this rather lukewarm blessing from the United States that the negotiations began in Ottawa in May 1986.

Agricultural issues

Canada's major agricultural exports to the United States are livestock products, live animals, grains, and grain products, and those from the United States to Canada are primarily fruits, nuts, vegetables, oil-seeds and oilseed products, animals and animal products, and feeds. In 1986 the two countries traded an estimated U.S. $3.5 billion worth of agricultural products, which accounted for approximately 3 percent of the total trade between them that year.

As with total trade, the United States is more important to Canada's agricultural trade than vice versa. According to U.S.Free Trade Agreement: Issues and Impacts on Agriculture, a 1986 report from the Economic Research Service of the U.S. Department of Agriculture, about 20 percent of Canadian agricultural exports go to the United States, and almost 60 percent of its agricultural imports come from the United States. By contrast, a mere 5 percent of U.S. agricultural exports go to Canada, and just under 10 percent of U.S. agricultural imports are from Canada.

Canada's agricultural exports to the United States have increased steadily in recent years, while agricultural exports from the United States to Canada were relatively stable from 1980 to 1984 and dropped off noticeably in 1985 and 1986 (figure 1).

In 1985, according to data from the U.S. Bureau of the Census, the balance of agricultural trade shifted in Canada's favor, and since then Canada has had a small surplus in agricultural trade with the United States. (Official data from Statistics Canada, however, show that Canada still had an agricultural trade deficit with the United States in 1985; the discrepancy appears to arise from differences in the recording of shipments.)

The shift in the balance of agricultural trade in Canada's favor over the past few years has occurred as the U.S. dollar strengthened against the Canadian dollar. It is probably due more, although not exclusively, to macroeconomic events that affect the exchange rate than to events within the agricultural sector.

Agricultural trade barriers between the United States and Canada currently take several forms. There are relatively few quantitative barriers—that is, tariffs and quotas—and they are not considered to be major impediments to trade. Tariffs on most raw commodities are below 10 percent of the unit value, but as the degree of processing increases, so does the tariff. For example, soybeans may be imported into the United States free of any tariff, but a 22.5 percent tariff applies to soybean oil. For fruits and vegetables, both countries raise the tariffs during the harvest season, thus raising the annual average to between 10 and 15 percent.

Both the United States and Canada use quotas to limit imports of some products, such as beef. And the United States imposes quotas on sugar, cotton, and dairy products to protect domestic price support programs. Canada uses quotas for poultry, eggs, and cheese, also in support of its domestic supply-management programs.

Aside from these quantitative barriers, there are others on both sides of the border that function as major stumbling blocks to trade. Some of them stem from government practices and policies aimed at protecting domestic agriculture and reflect basic differences between the Canadian and U.S. approaches to supporting agriculture. Others arise from health, safety, and packaging concerns.

Agricultural support

Whereas almost all U.S. agricultural support is derived from the federal government, in Canada the individual provinces as well as the federal government play a part in supporting agriculture. Some provinces actively protect their agricultural sectors from imports from other provinces and from other countries and operate their own agricultural programs to augment those of the federal government.

Included among these provincial activities are commodity stabilization programs, support payments, and the operation of marketing agencies. Provincial liquor marketing agencies, for instance, have monopoly control over imports and retail sales of liquor in each province. These boards collectively limit imports of beer and wine to Canada, especially by applying large markups and handling charges on imported brands.

In general terms, the two countries have similar goals in supporting agriculture—to stabilize commodity prices, to support farm income, and to assure a safe and adequate food and fiber supply at reasonable prices. The nature of the intervention, however, differs. Canada relies more heavily on production and marketing control via marketing agencies, and its programs, once legislated, are usually of indefinite duration. The United States, on the other hand, tends to provide more direct support and exhibits a greater ideological commitment to letting the market forces of supply and demand set prices. It regularly reviews its national agricultural policies and reauthorizes legislation—every four or five years and sometimes more frequently—although usually with little change in their basic structure.

In the United States, domestic policies that are often cited as barriers to freer agricultural trade include price support loans, deficiency payments, storage payments for the major grains and cotton, government purchases to support milk prices, and input subsidies such as subsidized credit and low-priced water in the western states. In Canada, federal price and income stabilization programs, the operations of state trading agencies (particularly those of the Canadian Wheat Board), transportation subsidies, and various provincial programs are among the main offenders.

Other nontariff barriers such as health and sanitary regulations and commercial standards (e.g., meat grading) also prevent the unfettered flow of agricultural goods between the United States and Canada. One example is the Canadian requirement that live hogs imported from the United States be quarantined to prevent the spread of pseudorabies. Another is that for fruits and vegetables the United States uses state or regional standards for size, maturity, grade, and acceptable amount of bruising as the basis for imposing import restrictions. Both countries use a variety of package size and labeling requirements as barriers.

Figure 1

Agricultural provisions

If the Free Trade Area is formed according to the terms of the agreement, Canada and the United States will both eliminate tariffs on agricultural products within ten years. They will refrain from providing direct export subsidies on products shipped to each other and will take each other's export interests into account when using such subsidies for third countries.

Barring significant changes in grain support programs that would result in increased imports from the other country, neither country will impose or reimpose quantitative restrictions on grain or grain product imports from the other country. Both countries will work toward minimizing technical barriers for agricultural, food, and beverage products. Each country will exempt the other from restrictions under their meat import laws. The parties agreed that they will meet at least semiannually for consultations on agricultural issues.

If the agreement is ratified, the United States will exempt from import quotas Canadian sweetened products that contain 10 percent or less sweetener by dry weight, although sugar is not included under the agreement.

Canada will eliminate the import license requirement for wheat, barley, and oats, and their products, once the support levels in both countries are equivalent. It will also eliminate subsidies affected by the Western Grains Transportation Act for agricultural products shipped to the United States through western Canadian ports. And, Canada will allow increased U.S. access to its markets for horticultural products and will increase its global quotas on poultry, eggs, and poultry products.

To a certain extent, the recent negotiations serve to highlight what each country stands to gain and to lose from changed trading conditions. In the short term, one of Canada's three primary goals was to improve dispute mechanisms, possibly through the establishment of a joint tribunal with representatives from both countries that would oversee all U.S.-Canadian trade disputes. The tribunal could overcome the problems arising from the two countries' differing interpretations of trade law.

The second short-term Canadian goal was to gain improved access to the U.S. market through the lowering or removal of U.S. tariff and nontariff barriers. It was particularly interested in achieving greater access to U.S. procurement markets, i.e. selling goods to the federal and state governments. Third, Canada sought to obtain assured access to the U.S. market by no longer being subject to U.S. actions such as the imposition of countervailing and antidumping duties.

There are also longer-term gains for the Canadian economy that could result from freer trade with the United States. With access to a market approximately ten times the size of Canada's domestic market, many Canadian industries could make longer production runs and realize economies of size. These gains—plus the greater economic discipline that could be expected to come from increased competition from large, efficient U.S. industries and less regulation of economic activity—would likely lead to higher productivity for the Canadian economy.

For the United States, the potential gains from liberalizing trade with Canada are fewer, and consequently its goals were more nebulous. Specific issues of interest to the United States included the removal or lowering of high Canadian tariffs on oil products such as processed foods, textiles, and footwear; the removal of nontariff barriers at both the federal and provincial levels; and the elimination of obstacles to the U.S. investment in Canada and to the port of of U.S. services such as trucking, media broadcasting, and data processing.

Of at least equal importance, however, the U.S. administration has philosophical and strategic reasons for seeking to eliminate barriers to trade with Canada: it will signal to the rest of the world the seriousness of the United States in trade liberalization matters. It also gives the two countries a chance to work on agricultural and other contentious issues that are already on the agenda in the Uruguay Round of the multilateral trade negotiations now taking place under the General Agreement on Tariffs and Trade (GATT).

The United States and Canada agree that their primary goal in the area of agricultural trade is the eventual elimination of all subsidies that distort world agricultural trade, not just of those subsidies affecting trade between the two countries party to the recent bilateral negotiations. Although such monumental changes will only come slowly, the proposed agreement takes a few steps in that direction. Indeed, the benefits to be derived from overcoming present obstacles and liberalizing agricultural trade between the two nations could eventually extend far beyond their borders. Under GATT, agricultural export subsidies and import quotas thus far have been allowed to remain in place, since many countries support prices and incomes within their domestic agricultural sectors. In recent years, levels of protection and budgetary outlays for such support have escalated in many countries, and some types of support have played havoc with agricultural trade flows.

Trade distortion due to domestic agricultural programs is becoming widely recognized as an international dilemma. In a May 1987 ministerial communiqué from the Organisation for Economic Cooperation and Development in Paris, agriculture was specifically mentioned as a sector in which reform is sorely needed to eliminate interventions that cause trade distortions.

Agricultural problems were singled out once again in June 1987 at the economic summit in Venice. And in July 1987, the United States proposed to the agricultural negotiating group of GATT that all governments eliminate trade-distorting support for and protection of agricultural production by the year 2000. Within this international framework, the agricultural component of the recent U.S.-Canada Bilateral trade negotiations could well be a harbinger of things to come in the multilateral trade negotiations.