Compatibility of National Policies and Trade

Agreements:Concepts, Issues, and

Approaches

Julian M. Alston and Daniel A Sumner

Department of Agricultural and Resource EconomicsUniversity of California, Davis

Silverado Symposium on Agricultural Policy Reform

Napa, CaliforniaJanuary 19, 2004

 Key Points• Policy compatibility requires policy

reform• Political economy – influences on

– Current policies– Possibilities for reform

• Compensation as an element of reform– Feasibility– Efficiency and Equity

• Policy reform complements– Transparency institutions– Adjustment assistance

 Achieving Compatibility• EEC/EU Common Agricultural

Policy– Common external tariff– Harmonized national policies

• CUSTA and NAFTA– Some adjustments (e.g., ???)– Some exemptions (e.g., supply managed)– Some trade disputes (e.g., wheat)

 Explaining Policies:Efficient Redistribution

• Interest-group theory– Policy serves to redistribute income to

relatively powerful interest groups

• Efficient redistribution– Transfers involve net social costs– Policies chosen to minimize cost of given

transfer

• Implications for policy reform– Nature of feasible reforms– Prescriptive role for economists (and others)?

STC

CTSE

45o Line

EPSE

CTS

PS

0

Efficient Redistribution through Commodity Programs

PS

0ΔCTS

CTSA

PSA

ΔPSA

DWLA

 Extensions to the Model• More than two groups

• Other elements of costs– Introduction and implementation of policies– Administration and enforcement of policies– Costs of change

• Policy inertia– Dynamic version of efficient redistribution

IC

CTS

PS

0

Policy ChoicePS

0

STC

CTSE

EPSE

ΔCTS

CTSA

PSA

ΔPSA

A

A’F

  Implications of Free Trade

• Change in STC– Feasible instruments – Economy-wide, general-equilibrium

effects– Dynamic efficiency gains

• Changes in political “preferences”

• Change in equilibrium

CTS

PS

0

Effects of Free Trade on STCs and Policy Equilibrium

PS

0

F

E

STC

F’

E’

STC’

Economics of Compensation

• Actual versus potential compensation

• Least-cost compensation – Quotas– R = [r + p + g(p)]V– R/V = 20-30 % (V = 3-5 times R, say)– p + g(p) = 15-20 %?

• Other issues– Capitalization more generally– Efficiency and fairness– Implementation problems (compensation

seeking)– Source and form of compensation

Other Policies

• Transparency institutions– Australia’s Industries Assistance Commission– IAC versus other factors in Australia– ABARE

• Adjustment assistance– Australia’s Rural Adjustment Scheme– RAS as a foil for ad hoc assistance

Conclusion

• Redistributive commodity policies involve net social costs– Compensation should be feasible– Partial compensation may be sufficient

• Policy reform may be facilitated by institutional innovations– Transparency institutions– Adjustment assistance