Publication: C.D. Howe Institute Commentary
Publication Date: 16-DEC-05
Delivery: Immediate Online Access
Author: Barichello, Richard ; Josling, Timothy ; Sumner, Daniel A.

Article Excerpt
Agricultural trade between the United States and Canada has been an important feature of the bilateral relationship between the two countries for over 200 years, although trade disputes have also been common over that period. The conflicted nature of this relationship is illustrated by a sustained series of bilateral trade disputes, co-existing with falling trade barriers, growing trade volumes and a generally cooperative approach to multilateral agricultural trade issues. Highly publicized disputes in agricultural trade, such as those over wheat and beef, however, may give the sense that the situation is getting worse and that trade in this sector is more prone to disputes than in other sectors.

In fact, such a conclusion would be inaccurate. The number of agricultural disputes per dollar of trade has declined by at least half since 1989. Relative to the overall value of trade, agricultural disputes have become substantially less numerous during the past decade. This is similar to findings for overall CanadaU.S. trade, for which disputes relative to volumes have fallen over the same period (Macrory 2002). As well, most agricultural disagreements arise from competitive frictions rather than from major policy or institutional differences between the two countries.

This Commentary attempts to explain the nature of agricultural trade disputes between the U.S. and Canada. We identify the causes of these frictions and place them in the context of growing agricultural trade. We also note how trade rules at these levels can improve bilateral trade relations, and suggest ways in which the trade relationship might be improved.

The History

Canada and the U.S. share one of the longest and most commercially active borders in the world. Each country is the largest trade partner of the other, and flows of investment and people take place with minimal restrictions. There also is a long history of measures to facilitate trade between the two countries (Hart 2000) and this has been enhanced in recent decades with the implementation of the Canada-U.S. Free Trade Agreement (FTA) in 1989 and subsequently of the North American Free Trade Agreement (NAFTA) in 1993. Canada has been a willing partner these agreements, though not at the expense of traditional Canadian support for the multilateral trade regime; Canada has pushed actively in the World Trade Organization (WTO) for further trade liberalization (except on supply management and state trading enterprises).

As the first two rows of Table I show, annual Canada-U.S. trade in agricultural products adds up to about $45 billion. (1) This represents about 9 percent of all Canada-U.S. trade, so agricultural trade is a significant part of both countries' commerce. As the third and fourth rows show, total Canadian agricultural trade (exports and imports with all countries) was $72 billion, and for the U.S. it was $215 billion. Canada-U.S. agricultural trade therefore represents 63 percent of Canada's global agricultural trade, and 21 percent of the U.S.'s global total.

Trade policy in agriculture, in common with trade in manufactured goods, is subject to two competing pressures. There is pressure to reduce costs of movement of goods between nations, as well as pressure to protect identifiable and politically important domestic investment and jobs. The potential conflict between these two pressures is not just domestic in nature. Internationally, trade disputes can arise from friction due to an increase in trade or the existence of impediments to such an increase. Disagreements we term frictional, following a situation of rapid increases in trade in sensitive products, show up primarily as anti-dumping and countervailing duty cases brought by importers. Impediment cases, or those where there is a policy-induced absence of trade, or where additional costs are imposed on exporters, tend to relate to tariffs, quotas and import standards such as Sanitary and Phytosanitary (SPS) and Technical Barriers to Trade (TBT) measures and are brought by exporters. (2) Though trade disputes involving market access are brought by the exporter, these might be in response to actions by the importer seeking to slow or impede the growth of trade. Thus, trade disputes in this sector can be driven both by the expansion and the repression of trade. (3)

To put agricultural trade relations between the United States and Canada in perspective, this Commentary compares the incidence of bilateral trade disputes with the magnitude of bilateral trade flows. Table 2 shows the profile of antidumping and countervailing duty complaints heard by the U.S. International Trade Commission (USITC), and by the Canadian International Trade Tribunal (CITT) since 1988. The incidence of bilateral trade remedy cases was equally distributed: of 104 cases, the CITT considered 51 and the USITC considered 53. Almost all of the Canadian cases involved anti-dumping as did the majority of the U.S. cases. Of the Canadian cases, 15 involved agricultural commodities (29 percent), while 12 of the U.S. cases (23 percent) were agricultural, though only 9 percent of Canada-U.S. trade is agricultural (Table 1). Thus, there is little doubt that Canada-U.S. trade conflicts, as measured by complaints to the domestic authorities, are disproportionately high in agriculture. (4)

Within the agricultural sector, however, there appears to be no particular evidence of greater bilateral tensions relative to trade disputes with third countries. Fifty percent of the Canadian agricultural cases involved the United States and 26 percent of the U.S. cases involved trade with Canada. These proportions mirror the significance of bilateral agricultural trade flows, with 63 percent of Canadian agricultural trade being bilateral and 21 percent of U.S. agricultural trade crossing the northern border. So, while agriculture is a fertile source of trade disputes relative to other types of trade, Canada-U.S. trade is no more contentious than trade with third countries.

Trends in Disputes

Have these bilateral agricultural trade conflicts between the two countries increased in number over time? To answer this question we can count the number of disputes initiated or those that are active (Table 3). The dates of initiation of the disputes show how often trade conflicts are occurring. The table shows the number of cases being initiated over each five-year period, from 1980 to date. Using this measure, the number of cases initiated after 1985 appears to be stable over five-year periods. Prior to 1985, there were two cases initiated; in the four time periods after, seven or eight cases arose in each.

We can also measure the trend in trade disputes by looking at how many are active each year, when active is defined as those years between the initiation of the dispute and the year it ended. An indication of the longevity of the conflicts can be obtained by counting those cases initiated, though but not yet resolved, including where trade remedy measures, such as anti-dumping duties, are still being applied. Looking at the number of disputes remaining active, we find a relatively small number of such disputes in the early 1980s. However, this number then grows substantially in the early 1990s, only to decline significantly since 2000. Over the period 2000-to-2002, the number of active disputes declined to 7.7 per year. (5)

The data in Table 3 do not indicate the severity or impact of a dispute on an industry or on agricultural trade. One indication of impact could be obtained by relating the number of cases initiated or active to the value of trade affected, but that does not show the cost to the domestic industry. The difficulty of assessing this cost across all conflicts, especially those that occurred historically, leads us to limit our comments to the frequency of disputes. (6)

However, an important aspect of this frequency is the reference point it provides for the amount of trade that is occurring. During this whole period, from the 1980s to date, there has been a substantial increase in the volume and value of agricultural trade. Its real value increased by 2.4 times from 1988 to 2003. By measuring disputes either by the number of cases initiated or by the number of active cases, the number of disputes per dollar of trade has declined by at least half. Of course, the recently ended Bovine Spongiform Encephalopathy (BSE)-induced decimation of the beef trade was costly and damaging to the Canadian industry. Still, aside from that unique trade breakdown, there is no indication that disputes have become more numerous over time; indeed, relative to the value of agricultural trade, disputes have become substantially less common over the past decade.

One aspect of the improved global framework for agricultural trade has been the strengthened dispute settlement process flowing from the Dispute Settlement Understanding (DSU) of the WTO. Canada and the United States have each made full use of the DSU and have been involved in 17 cases in the WTO on agricultural issues. (7) In a number of other cases, the United States or Canada has joined the requests for consultation and the setting up of a panel: Canada has joined in 11 requests and the United States in four. However, this does not always reflect bilateral trade tensions.

On nine of the 17 cases, the United States and Canada have found themselves to be on the same side. Canada has been the respondent to only one case where the United States has been the requesting country, and one case where the United States joined the request; the United States had to respond to three requests from Canada directly and another three where Canada joined the request. As a result, while both countries have been active litigants and frequent targets of challenges within the WTO there is no evidence of undue use of the WTO mechanism for the settlement of bilateral agricultural trade conflicts. (8)

Agricultural Policies and Trade Relations

Trade relations in agriculture are inevitably linked with domestic farm policies, without which relations would be less contentious. The search for domestic policies that intrude less on trade objectives has been underway for two decades, primarily at the Organisation for Economic Co-operation and Development (OECD) and the WTO, as governments have realised the corrosive impact of shifting the burdens of agricultural adjustment onto trading partners through high border protection and trade-distorting subsidies.

Despite a tendency for policies to become both less obtrusive and more tradeneutral, significant domestic policy impediments remain. Moreover, the use of agricultural policy instruments between Canada and the U.S. has diverged in recent years. The U.S. policy framework relies on various government subsidies that provide some farmers with insulation from price volatility. Canadian farm programs have largely abandoned this approach in favour of subsidies to individual farms based on changes in net returns, and several sectors continue to rely on supply management.

Canada's Agricultural Policies and Their Trade Implications

The 1990s marked a significant shift in agricultural policies in Canada. The sector moved to a substantially less subsidized position and a somewhat more open trade environment. The OECD monitors government support to farmers with the Producer Subsidy Equivalent (PSE), an estimate of the value of all financial support and border protection from policies that support agriculture, or the transfers farmers receive from taxpayers and consumers because of those policies. (9) By this measure, most countries have reduced their support to agriculture between the 1986-to-1988 and 1999-to-2001 periods. However, few countries have reduced their support as significantly as Canada has.

For Canada, the PSE as a percentage of total farm receipts has fallen from about 34 percent to 18 percent over this 13-year period, a decline of almost one-half (Dewbre and Short 2002). Most of this decline was a result of cuts in government subsidy support. The major component of border protection, higher domestic prices caused by quota and tariff protection in the dairy and poultry sectors, has not changed significantly. Other elements of border protection, primarily tariffs outside dairy and poultry products, have declined and in most cases have been removed altogether.

The policy changes since the mid-to-late 1980s have created a dichotomous policy framework. Eighty percent of agriculture by sales receives modest government budget support and little border protection. The result is that the bulk of agricultural producers get world prices for their products, with a moderate level of income-safety-net support to protect farmers when world prices fall. By contrast, the dairy and poultry industries remain heavily protected through provincial commodity marketing boards that have the power to control aggregate supply through domestic and import quotas. Domestic quotas are held by individual farmers, limiting how much production each can sell into the domestic market at regulated prices. Quotas on imports are known as tariff-rate...



NOTE: All illustrations and photos have been removed from this article.



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