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GATT Liberalization and World Grain Markets: Potential and Constraints for Western Canada
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- Author(s) / Creator(s)
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This project evaluates the impacts of the Uruguay Round Agreement (URA) on the grains sector and on other major subsectors of Canadian agriculture in a single-country general equilibrium framework. For this purpose a computable general equilibrium model of the Canadian economy that consists of six agricultural and two non-agricultural sectors was constructed. Categorization of the agricultural sectors was based on the magnitudes of various commodities, the focus of the study and the availability of data. The sectors include: 1) wheat, 2) other grains (including barley, oats, rye, corn, mixed grains, mustard seed, soybeans, canola and other oilseeds), 3) fruits and vegetables, 4) livestock, 5) milk and poultry, 6) other agriculture, 7) food industries (including meats, other than poultry, and dairy and fish products, fruit and vegetable preparations and other processed foods) and 8) the rest of the economy. The model was calibrated on 1991 data and a series of simulation experiments were conducted to assess the impacts of the URA and various other policy interventions. For some of these, a recursive dynamic model structure was developed and applied, in order to better assess the staged adoption, over the six-year implementation period, of the URA commitments. In the dynamic simulations, provision was made for sectoral productivity growth and year-by-year adjustment in factor inputs. In the other simulations the usual CGE model procedure of a comparative static approach was followed. To assess whether Canadian agriculture benefits from the URA, two sets of anticipated changes in world prices, taken from global studies of multilateral trade liberalization, were simulated, together with the URA policy commitments by Canada. These simulation experiments show that the minimum increases in world prices projected by global studies of the URA are too small to offset the negative effects on Canadian agriculture of the reductions in tariffs, export subsidies and domestic support from the URA commitments, relative to the base period. However, if world prices were to change by the maximum level of projections of global URA effects, Canadian agricultural producers in aggregate gain from the URA. The sectors that benefit the most are wheat, other grains, and processed foods, for which production and exports increase appreciably. Imports of milk and poultry products increase substantially and livestock sector imports also increase. Labour and capital demand increase in agriculture, particularly in the wheat and other grains sectors. The highest increase in factor returns in agriculture is for agricultural land. Since the export prices applied above are exogeneously determined, a third experiment was conducted to determine the extent of the world price changes for agricultural exports that would just offset the negative effects on sectoral domestic production of the URA policy commitments. This would require world prices that are about eleven per cent higher than in the base period for wheat and about ten per cent higher for other grains. The greatest increase in prices--by nearly thirteen percent--would be required for the milk and poultry sector. More modest changes in world prices for the other agricultural sectors are needed to offset the impacts of the reductions in sectoral support necessitated by the URA. Most of these price changes lie within the ranges of world price projections from studies of the global effects of the URA. Other components of the project compared the relative importance of the three Canadian URA policy commitments (i.e. reductions in tariffs, export subsidies and domestic support). In terms of these URA commitments for Canada, the domestic support reductions were found to have the largest impact on domestic production, factor allocations and exports. Canada's tariff reduction commitments had the least negative impact on Canadian agriculture. Three further experiments involved i) attributing export subsidy reductions by Canada to other reasons than the URA, ii) introducing compensatory transfers to agricultural households in the amount of the domestic support reduction commitment, and iii) simulating the total withdrawal of the grain export subsidy that was previously delivered through grain transportation subsidies, with an accompanying $1.6 billion dollars compensation payment to prairie land owners. The latter experiment embodies major changes associated with the deletion of grain transportation subsidies in 1995 and the associated one-time compensatory payment to land owners that was introduced in that year. This experiment is conducted over a simulated 6-year period. The results of this experiment again point to the importance of the exogenously determined world prices, the results for the livestock sector from lower levels of feedgrain prices are marked and are seen in higher levels of production and exports; these increase, but to a lesser extent, with the maximum levels of world prices. If the world price increase form trade liberalization is to the maximum level of global projections, prairie farm household income quickly recovers from the effects of higher grain transportation costs and production and exports of wheat and other grains recover, although more slowly, from the subsidy removal. The final section of the study involved consideration of the various constraints that limit full achievement of the potential benefits to Western Canadian farmers of multilateral trade liberalization. The identified constraints include those associated with physical, regulatory and institutional features of Canadian grain production, handling and exportation. Other constraints arise from the limitations of the partial liberalization of world trade that was in fact achieved in the URA. The URA maintained the use of export subsidization by major trading countries, since this was subject to only partial roll-back; the URA provided only for partial roll-backs of domestic support. Both of these constraints adversely affect the world market for grains in particular.
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- Date created
- 1998
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- Type of Item
- Report