EUROPE:  INTERNATIONAL AGRICULTURE AND TRADE                January 7, 1998
December 1997, WRS-97-5.  
              Approved by the World Agricultural Outlook Board
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INTERNATIONAL AGRICULTURE AND TRADE is published four times a year by the
Economic Research Service, U.S. Department of Agriculture, Washington, DC
20036-5831.  Summary released December 19, 1997.

Please note that this release contains only the text of REGION/TITLE:
INTERNATIONAL AGRICULTURE AND TRADE -- tables and graphics are not included.

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NOTICE:  This release revises the December 30, 1997, release of the full text of the report.
In the report's second article entitled "EU Export Subsidy Commitments Not Yet Binding, But 
Future Uncertain," the two paragraphs under the subheading, "EU Has Implemented Component 
Subsidies," have been revised.

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Economics Editor
Todd Morath (202) 694-5161

Contributors
Nancy J. Cochrane
Susan Leetmaa
Mary Lisa Madell
Todd Morath
Sharon Sheffield

Technical Editor
Diane Decker

Production/Design
Wynnice Pointer-Napper
Victor Phillips, Jr.

Contents

Foreword
TRQs Have Little Impact on EU Market Access, While CEEs May Benefit
EU Export Subsidy Commitments Not Yet Binding, But Future Uncertain
EU Looks to Boost Competitiveness of Grain Sector, Prepare for Next WTO Round
CEE State Trading: Questions Lurk Behind Notifications


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Foreword

The Uruguay Round of negotiations, concluded in April 1994, brought
agricultural trade more fully under GATT/WTO disciplines.  Under the Uruguay
Round Agreement on Agriculture (URAA), countries agreed to improve access to
their domestic markets by improving transparency in the application of border
measures and providing minimum import opportunities.  They also agreed to cap
subsidies on domestic production and exports, and to reduce these amounts over
the implementation period--1995-2000 for developed and 1995-2004 for developing
countries.  Other important milestones of the Uruguay Round related to
agriculture included agreements on Sanitary and Phytosanitary Measures (SPS)
and Technical Barriers to Trade (TBT), as well as a definition of state trading
activities (Understanding of Article XVII of GATT 1994).  The SPS and TBT
agreements provide objective frameworks of "sound science" and "equivalency"
that all import measures related to public health or national standards should
observe.  The WTO also requires members to notify state trading enterprises
(STEs), a first step towards clearer rules that ensure STEs are not used to
circumvent a country's URAA commitments.  Each year, countries provide
information on commitments, changes in policies, and related information on
their STEs.

The European Union (EU) and countries of Central and Eastern Europe (CEE) now
find themselves in the third year of Uruguay Round implementation.  Three of
the articles contained in this year's Europe report examine possible short- and
long-term impacts resulting from the EU's commitments under the URAA.  The
first article examines how the EU's market access commitments--particularly its
tariff-rate quotas (TRQs)--affect the level and country distribution of EU
imports.  Under the system of TRQs, EU agricultural imports are estimated to
expand only 2 percent over total current levels for a limited number of meat
and dairy products.  Countries of Central and Eastern Europe stand to gain the
most from these new import opportunities.

The second article examines whether the EU's export subsidy reduction
commitments under the Uruguay Round will affect its ability to export surpluses
of grain and other commodities requiring subsidies.  Based on data available so
far, it appears the EU could have difficulty meeting 2000/01 export subsidy
commitment levels for cheese, beef, olive oil, and other milk products.  High
world prices in recent years have made EU export subsidy reductions for grains
easy to meet, but this could change by 2000/01.

The third article examines the implications of proposed changes to the CAP for
grain production and the EU's ability to meet challenges posed by URAA
commitments as well as EU enlargement to the East.  Under CAP modifications as
currently proposed by the Commission, the elimination of set-aside will
increase EU production of grains, resulting in rising grain surpluses.  A
reduced intervention price for grains should allow the EU to export its wheat
without subsidy.  However, because all grains will be subject to a unified
intervention price, the internal EU barley price is expected to remain above
the world price.  Therefore, the EU will need to continue subsidizing its
barley exports.  It remains unclear whether rising barley surpluses under the
proposed CAP changes would push the EU above its 2000/01 export subsidy volume
ceiling for coarse grains.  1995/96 volume of subsidized exports was only 60
percent of the 2000/01 ceiling.

The proposed CAP changes also aim to decrease the budgetary cost of enlargement
to Eastern Europe as well as help an enlarged EU keep within its URAA
commitments.  These issues could be resolved by lowering CAP intervention
prices and not extending compensatory payments to the CEEs.

A special article examines the role of state trading in Central and Eastern
Europe.  Four of the CEEs--Poland, Slovenia, Slovakia and the Czech
Republic--have notified the WTO of the existence of state trading enterprises
(STEs).  The STEs notified by these countries are regulatory agencies that
carry out intervention purchasing and administer export subsidies.  But
ambiguities persist despite these notifications.  There are state-owned
enterprises in other CEEs which meet the WTO definition of an STE but which
have not been notified.  Among those STEs which have been notified, a lack of
good data makes it difficult to evaluate the full impact of state trading.

This year's Europe report also raises a number of issues the EU must face in
the coming round of WTO negotiations on agricultural trade, scheduled to begin
at the end of 1999.  After 2000/01, EU market access opportunities are expected
to remain limited for some products, particularly for pork and butter, but also
eggs and poultry.  Other WTO members may demand further increases in EU market
access for such products.   While proposed CAP changes may increase the EU's
willingness to agree to further reductions in export subsidies and market price
supports, they are also likely to increase its reluctance to eliminate the Blue
Box, which exempts from reduction programs that are production-limiting and
meet specific criteria.  The Blue Box includes EU compensatory payments for
arable crops and livestock.  However, some WTO members will probably insist not
only on further reductions in export subsidies and market price support, but
also on eliminating the Blue Box exemptions.

On the surface, it would appear that CEE state trading institutions are not
used to circumvent the commitments made to the WTO on import tariffs and export
subsidies.  Yet, state trading will also be an issue for the next round, not
only for CEEs but other countries.  For one thing, the definition of state
trading is vague, allowing some governments to notify the WTO that they have no
state trading, when in fact they do have institutions which meet those
criteria.  Another major problem is that these institutions in many cases
affect levels of imports and exports in ways that are not easily measured. 
Published tariff rates and PSE calculations based on price gaps do not tell the
whole story.

Acknowledgments

The authors would like to thank interns Mara Dublin and Adnan Kifayat for their
efforts in locating and compiling data.  Sincere thanks also go to Karen
Ackerman, Mary Bohman, John Dunmore, Elizabeth Jones, David Kelch, Mary Anne
Normile, Dennis Shields, David Skully, Frederic Surls, and Edwin Young of the
Economic Research Service; Gerald Bange and Gerry Rector of the World Board;
and Abraham Avidor, Merritt Chesley, Ralph Dutrow, Aileen Mannix, Alan Riffkin,
Paul Spencer, Frank Tarrant, Craig Thorn, and Randy Zeitner of the Foreign
Agricultural Service for their valuable review comments; and to Diane Decker,
Wynnice Pointer-Napper, and Victor Phillips for editorial and design
assistance.

TRQs Have Little Impact on EU Market Access, While CEEs May Benefit

Along with reducing domestic support and export subsidies, the Uruguay Round
Agreement on Agriculture (URAA) aimed at improving market access.  This article
estimates the potential impact of the European Union's (EU) new market access
commitments under the Uruguay Round on the overall level and the source of its
agricultural imports.  The EU's system of TRQs that are notified under the
Uruguay Round will have only a limited impact on the level of EU imports. In
terms of their effects on EU import source, countries of Central and Eastern
Europe that concluded Europe Agreements with the EU stand to gain a large share
of the new imports created under the TRQs.  [Todd Morath]

Introduction

The EU's system of tariff-rate quotas (TRQs) 1/ that are notified under the
Uruguay Round will have only a limited impact on the level of EU imports.  EU
agricultural imports under its Uruguay Round TRQs are estimated to increase
almost $1 billion by 2000/01, the final year of URAA implementation,
representing about 2 percent of current agricultural imports.  From this
standpoint, new EU market access opportunities under the Uruguay Round are
limited.  In terms of their effects on EU import source, countries of Central
and Eastern Europe that concluded Europe Agreements with the EU  (CEE-10) stand
to gain a large share of the new imports created under the TRQs.  The CEE-10
benefit from lower tariffs for most products, while the EU counts imports under
the Europe Agreements against the utilization of its Uruguay Round TRQs.  The
CEE-10 are expected to take greatest advantage of new EU market access for pork
and butter, whereas the benefits of new EU market access will likely be spread
among a greater number of exporting countries for poultry, cheese, egg
products, and skimmed milk powder.  U.S. exporters are most likely to be
competitive in the EU's TRQs for eggs, egg products, some pork loins, and some
cheeses.

1/ Readers who are unfamiliar with tariff-rate quotas should refer to the box
defining key terms related to TRQs.

2/ The CEE-10 are: Bulgaria, Czech Republic, Estonia, Hungary, Latvia,
Lithuania, Poland, Romania, Slovakia, and Slovenia.

This article does not address the impact of Uruguay Round tariff reductions or
the "margin of preference" arrangement for grains on EU imports.  Additionally,
it does not consider the impact of non-tariff measures that restrict imports
such as technical barriers to trade (TBTs) or sanitary and phytosanitary (SPS)
measures.

Why Market Access Under the Uruguay Round Agreement on Agriculture: A Brief
Overview

Market access, in short, is the extent that a country allows the importation of
foreign products.  Prior to the Uruguay Round, countries used both tariffs and
non-tariff measures--such as quotas and variable levies--to regulate imports of
agricultural goods.  The Uruguay Round Agreement on Agriculture (URAA) brought
many non-tariff measures in agriculture under WTO disciplines, so that since
July 1, 1995, all import protection takes the form of ad-valorem tariffs (equal
to a percentage of the product's value) or specific tariffs (per unit weight,
volume, by the piece, etc.).  Countries bound their tariffs at maximum levels
and are reducing them over the implementation period (36 percent on average
between 1995/96 and 2000/01 for developed countries).  Tariff-rate quotas
(TRQs) are now used to import a fixed quantity of product at a tariff below the
out-of-quota most-favored-nation (MFN) tariff.  For the EU, in many cases MFN
tariffs were determined under the process of tariffication.

Why did the Uruguay Round replace quotas and similar measures (such as
voluntary restraint agreements) with TRQs, which also distort trade?  The
process of tariffication involved converting non-tariff barriers (NTBs) into
tariffs.   For many countries like the EU, protectionist NTBs were thereby
converted into equally protectionist tariffs.  Although it was not supposed to,
protection potentially increased for some products through "dirty
tariffication," where countries used the lowest available import price and the
highest internal market price to overstate the base tariff.  Therefore,
countries were required to establish TRQs (1) to preserve market access by
ensuring that historical quantities continued to be imported ("current access"
TRQs), and (2) as a means of providing for additional imports under minimum
access, a guarantee that at least some new quantities would be provided import
opportunities under non-prohibitive tariffs.  Countries established "minimum
access" TRQs for quantities of imports needed to reach a negotiated amount,
often 5 percent of base-period (1986-88) domestic consumption, by the end of
the implementation period.  It is important to note that neither the current
nor the minimum access TRQs constitute a minimum purchase agreement.  They
provide only the "opportunity" to import under the advantage of a preferential
or suspended tariff. 

From a political standpoint, TRQs also served to meet the concerns of
traditional exporters.  Beneficiaries of the old country-specific quotas,
voluntary restraint agreements, and similar schemes were intent on preserving
their previous access.  Though continuing the practice of country allocations
(which occurred in some but not all cases) meant that competition among
exporting countries would remain restricted, it would have been very difficult
as a matter of policy to disrupt historical trade patterns under existing
bilateral, regional, and preferential trade agreements.

From an economic perspective, TRQs are preferable to quotas because under
certain conditions they cause less distortion to trade flows.  A quota
seriously distorts trade by banning imports above a fixed quantity.  Once the
quota ceiling is reached, market forces of supply and demand can play no role. 
A TRQ may cause less trade distortion as it allows for imports--albeit at a
higher out-of-quota tariff--above the fixed quantity ceiling.  However, a TRQ
distorts trade less than a quota only if its out-of-quota tariff is not
prohibitively high.

Additional benefits of the tariffication process include more transparency in
the application of border measures.  The bound tariffs and TRQs resulting from
this process now provide a sound basis in future rounds from which to negotiate
further tariff reductions or increased TRQ import opportunities.

In sum, current access TRQs ensure that imports will be provided access no
worse than historical levels while minimum access TRQs create the opportunity
for new imports.

Uruguay Round TRQs Expand EU Imports 2 Percent By 2000/01

An analysis of two types of URAA arrangements--current access TRQs and minimum
access TRQs--reveals that their combined impact on the level of EU imports will
be minimal.  None of the EU's current access TRQs under the Uruguay Round will
have an impact on the level or country source of EU imports, other than by
putting access opportunities on a firmer footing.  By their very definition and
design, the current access TRQs have no net effect on imports as these
arrangements under the URAA serve only to maintain historical import levels. 
In addition, the EU's minimum access TRQs that are compensation for the
enlargements to Austria, Finland, and Sweden (1995), as well as from the 1992
GATT dispute on oilseeds, should be excluded from the analysis.  These include
the minimum access TRQs for 20,000 tons of beef, 15,500 tons of poultry meat,
500,000 tons of corn, and 300,000 tons of high quality wheat for the GATT
oilseeds panel dispute, as well as 700 tons of poultry meat, 63,000 tons of
semi-milled or wholly milled rice, 20,000 tons of husked (brown) rice, 50,000
tons of durum wheat, 21,000 tons of oats, and 10,000 tons of worked oats for
the 1995 enlargement.

Therefore, only EU minimum access commitments that were not awarded as
compensation will potentially increase imports.  These are the EU's minimum
access TRQs for pork meats and products, some poultry meats, butter, cheese,
skimmed milk powder, eggs and yolks, and egg albumin.

These minimum access TRQs will have only a limited impact on EU imports (table
1).  Assuming that all TRQs are fully utilized, EU imports are expected to
increase about 780 million ECU ($950 million) by 2000/01, roughly 2 percent of
current EU agricultural imports (around $50 billion in 1996).  The import
estimate involves the simplified assumption that average import prices will
remain the same as those calculated during 1995/96, the first year of URAA
implementation.  It ignores any changes in quality, exchange rates, or
inflation; average import prices within each product group are not trade-weighted.

Europe Agreements Likely to Affect EU Import Source For Most Minimum Access
TRQs

Under the Uruguay Round, EU imports under the Europe Agreements may count
towards utilization of its minimum access TRQs for most pork products, poultry,
cheese, skimmed milk powder, and egg products (the arrangement is identical for
U.S. imports of some products from Mexico and Canada under NAFTA).  The CEE-10
benefit from a tariff preference for most of the minimum access TRQs that is
lower than the in-quota MFN tariff, and the CEE-10 are significant, low-cost
suppliers of most of the products concerned.  For these reasons, the CEE-10
stand to gain most from the new imports created by the EU's minimum access
TRQs.  The geographic proximity of the CEE-10 provides an additional export
advantage.

Although under the Europe Agreements the CEE-10 benefit from tariff preferences
that are often lower than in-quota MFN levels, they do so only within limited
quantities that vary considerably by product category.  When comparing TRQ
quantities under the Uruguay Round and the Europe Agreements, it becomes
clearer what share of the EU's Uruguay Round TRQs might be captured by the CEE-10.

Pork meats and products

The CEE-10, in particular Hungary, have historically dominated EU imports of
pork meats and products under the minimum access tariff lines, with a share
exceeding 90 percent.  With preferential tariffs marginally lower than the 
in-quota MFN tariff, and with current TRQ quantities under the Europe Agreements
(92,700 tons) already exceeding the EU's URAA commitments in 2000/01 (75,600
tons), much of this pork is likely to be imported under the Europe Agreements
and count against the EU's Uruguay Round TRQs.  However, U.S. exporters might
be competitive in certain cuts such as loins.  One minimum access TRQ provides
for zero-tariff imports of 7,000 tons of fresh/chilled pork loins and frozen
bellies.  According to the EU's URAA schedule, imports under the Europe
Agreements may not count against utilization of this particular TRQ.

Poultry meats

Traditional exporters of poultry to the EU include Argentina, Brazil, the CEE-10, 
China, and countries of Southeast Asia.  Europe Agreement TRQs for poultry
meats also covered under the EU's minimum access TRQs currently total about
55,000 tons, almost four times the EU's final minimum access TRQ quantities
under the Uruguay Round that were not awarded as a result of the 1992 oilseeds
panel dispute or the EFTA enlargement (13,700 tons in 2000/01).  For
fresh/chilled poultry meats--11,200 tons of the Uruguay Round total--the CEE-10
benefit from preferential tariffs that are marginally lower than the in-quota
MFN tariff.  These quantities include products for which the CEE-10 are the
EU's main supplier.  Therefore, we can expect most of the fresh/chilled
quantities to be imported under the Europe Agreements and count against the
Uruguay Round TRQs.  For the remaining 2,500 tons of frozen turkey, the CEE-10
do not have a tariff advantage vis-a-vis the zero percent in-quota MFN tariff. 
Therefore, all third countries have the same opportunity to benefit from the
minimum access TRQs for frozen turkey.  Even if the United States can resolve
sanitary issues that continue to block its poultry meat exports to the EU, U.S.
exporters may be able to gain only a small portion of the EU frozen poultry
meat TRQs.

Cheese

Europe Agreement TRQs for cheeses also covered under the EU's minimum access
TRQs are currently fixed at 11,700 tons, about one-third of the 1996/97 minimum
access TRQs.  However, because preferential tariffs under the Europe Agreements
are roughly equal to the corresponding in-quota MFN tariffs, all third
countries have the same potential to benefit from the EU's minimum access TRQs
for cheese.  Among these TRQs, U.S. producers of processed cheese appear to be
benefiting most.  However, in value terms U.S. cheese exports under the minimum
access TRQs were small at under $3 million in 1996.

Butter

Europe Agreement TRQs for butter are currently fixed at 7,000 tons, or more
than three times the EU's 1996/97 minimum access TRQ under the Uruguay Round. 
Although the EU's minimum access TRQ for butter will increase to 10,000 tons by
2000/01, Europe Agreement TRQs are also likely to expand over time.  As the
Europe Agreements grant a tariff preference that is substantially greater than
the in-quota MFN tariff, nearly all of the minimum access TRQ for butter stands
to be imported from the CEE-10.

Skimmed milk powder

Europe Agreement TRQs for skimmed milk powder (SMP) are currently equal to
17,000 tons, roughly one-third of the EU's minimum access TRQ in 1996/97
(45,900 tons).  As the Europe Agreements grant a tariff preference that is
considerably lower than the in-quota MFN tariff, a sizable share will probably
be imported from the CEE-10 and count against the Uruguay Round TRQs.  Eurostat
data reveal that while the EU's SMP imports have increased more than 50 million
ECU from 1992 to 1996, the CEE share of total SMP import value rose from 8
percent to 75 percent.  In 1996, EU imports from the CEE-10 totaled nearly
three times the quantities under the Europe Agreements, so that CEE imports are
also entering the EU under the larger minimum access TRQ.  The high CEE-10
share of EU skimmed milk powder imports is due not only to lower tariffs, but
also to CEE export subsidies which fall within the scope of their URAA
commitments.

Eggs and egg products

Europe Agreement TRQs for eggs and egg products also covered under the EU's
minimum access TRQs are currently equal to 14,500 tons, only 15 percent of the
minimum access TRQs in 1996/97 (98,800 tons).  The Europe Agreements grant
tariff preferences for eggs and yolks that are marginally better than the 
in-quota MFN tariff, but grant no tariff preference for egg albumin.  The United
States and the CEE-10 are presently the main suppliers in these relatively
small import markets.  All countries should be on an equal footing (from an
import tariff perspective) to compete for the lion's share, excluding the
aforementioned quantities under the Europe Agreements.  However, thus far the
EU has imported only a small fraction of its minimum access TRQ for poultry
eggs.  In the 1995/96 marketing year, only 77 tons were imported out of more
than 70,000 tons eligible for the lower tariff of 152 Ecu per ton (17 percent
ad-valorem based on average import prices that year).

In terms of market share, the minimum access TRQs for egg products and egg
albumin are creating opportunities for U.S. exports to the EU.  However, while
the United States was the leading exporter under these TRQs in 1996, its
exports of eggs, yolks, and egg albumin to the EU accounted for a combined
total of less than $10 million.  These are very small numbers relative to total
U.S. agricultural exports to the EU of more than $9 billion in 1996.

Summary

The EU's TRQs are projected to have a limited impact on the level of EU imports
for a narrow range of products--pork, poultry, skimmed milk powder, butter,
cheese, and eggs.  EU imports under its TRQs are projected to increase less
than $1 billion by 2000/01.  In terms of the country source of EU imports,
preferential tariffs under the Europe Agreements probably mean that the CEE-10
will gain the largest share of the EU's minimum access TRQs for pork and butter
and a substantial share of the minimum access TRQs for skimmed milk powder and
fresh/chilled poultry meats.  Based on recent trends, the CEE-10 may also gain
EU import share for skimmed milk powder outside the framework of the Europe
Agreements.  Finally, all third countries have an equal opportunity (from a
tariff perspective) to export egg products and cheese under the EU's minimum
access TRQs.  U.S. exporters are most likely to gain a share of the EU's
minimum access TRQs for eggs, egg products, some pork loins, and some cheeses.

Uruguay Round TRQs Will Help EU Reach 5 Percent Market Access For Some Products

What impact will the EU's minimum access TRQs have on its imports measured as a
share of domestic consumption?  Under the Uruguay Round, all countries agreed
to open new market access that would rise to a negotiated level--usually 5
percent of base period domestic consumption--by 2000/01.  However, an important
caveat was made during the Uruguay Round negotiations: the 5 percent target was
rejected as a legally binding commitment.  This means that under the WTO/URAA,
the EU has to grant "market access opportunities" only for those quantities
contained in its URAA schedule.  Here, the 5 percent import target is simply a
useful rod against which to measure EU market access for different products.

The EU's minimum access TRQs should be sufficient to reach import opportunities
of roughly 5 percent of base period consumption for skimmed milk powder and
cheese (see chart 2).  On the other hand, the minimum access TRQs for pork,
poultry, butter, and eggs do not increase import opportunities up to the 5-percent level.  
EU market access is estimated to reach only 0.9 percent of base
period domestic consumption for pork, 3.5 percent for butter, 3.9 percent for
eggs, and 4.1 percent for poultry.  Using 5 percent of base period consumption
as a measuring rod and EU imports between 1993 and 1994, EU import
opportunities would need to increase another 580,000 tons for pork, 50,000 tons
for poultry, 35,000 tons for butter, and 50,000 tons for eggs.  EU reductions
in out-of-quota tariffs under the Uruguay Round may also increase imports of
these products by 2000/01, but further analysis needs to be done on this
subject.

Conclusions

On the eve of Uruguay Round implementation, EU market access varied
considerably across products.  The Uruguay Round Agreement on Agriculture began
the process of liberalizing agricultural trade and improving market access for
a range of products.  While the EU's current access TRQs under the Uruguay
Round will have no net effect on imports, its minimum access TRQs will
potentially increase imports of a limited number of products.  Using the import
target of 5 percent of base period consumption as a measuring rod, the EU's
minimum access commitments should be roughly sufficient for skimmed milk powder
and cheese, but will not reach 5 percent for pork, poultry, butter, or eggs.

Countries of Central and Eastern Europe that have concluded Europe Agreements
with the EU are projected to gain a sizable share of the trade under the
minimum access TRQs, although the share varies considerably by product.  While
the CEE-10 are likely to take greatest advantage of the TRQs for pork and
butter, the benefits of the TRQs for poultry, cheese, egg products, and skimmed
milk powder will likely be spread among a greater number of exporting
countries.  

Further analysis is needed on the effects of tariffication to gain a more
complete estimate of the Uruguay Round's effect on EU market access.  Reduced
tariffs over the implementation period may also have a positive effect on EU
imports.

Sources

CAP Monitor.
EU Uruguay Round Agreement on Agriculture schedules CXL and LXXX.
EU notifications to the WTO concerning the utilization of TRQs (G/AG/N/EEC/4
for 1995/96, G/AG/N/EEC/7 for 1996).
EU notification concerning the use of special safeguard provisions
(G/AG/N/EEC/6).
EU Common Customs Tariff Schedule (Taric) 1996, 1997.
Europe Agreements.
Eurostat trade data, 1993-96.
Official Journal of the European Communities.
USDA PS&D database.

BEGIN BOX 1
Box 1
Key Terms Related to Tariff-Rate Quotas (TRQs)

o   Current access TRQs are those that maintain historical imports.
o   Minimum access TRQs create additional import opportunities for products
previously covered by a non-tariff barrier (e.g., import ban or high variable
levy) whose imports did not equal at least 5 percent of domestic consumption in
the 1986-88 base period.
o   Out-of-quota tariffs are the higher tariffs applying to imports outside a
TRQ quantity (once a TRQ has been fully utilized).
o   In-quota (TRQ) tariffs are the lower tariffs applying to imports within the
limited TRQ quantity.

There are two country-origin types of both out-of-quota and in-quota tariffs:
Most-favored-nation (MFN) and preferential:

o   MFN tariffs are those applied to all countries that are signatories to the
Uruguay Round.  The in-quota MFN tariff is that for which all countries are
eligible within a fixed TRQ quantity.  The out-of-quota MFN tariff is the
higher tariff applicable to all countries above the fixed TRQ quantity. 

o   Preferential tariffs are those tariffs from which one or more, but not all,
countries benefit within the scope of the bilateral, regional, or preferential
trade agreements (e.g., the Europe Agreements, the European Economic Area, the
Lome Convention, the Generalized System of Preferences).  These tariff
preferences have created numerous departures from the MFN principle, namely
that WTO members should apply the same tariff to imports from other WTO
members.  The in-quota preferential tariff is that which the EU grants to
specific countries for a limited quantity.  Additionally, under some trade
agreements (including the Europe Agreements) specific countries benefit from
tariff preferences outside their allocated TRQ quantities or from tariff
preferences with no quantitative restriction: These are out-of-quota
preferential tariffs.

Whereas an out-of-quota preferential tariff is always lower than the
corresponding out-of-quota MFN tariff, an in-quota preferential tariff is not
necessarily lower than the corresponding in-quota MFN tariff.  This is because
the EU bases its calculations for in-quota preferential tariffs on a percentage
of the out-of-quota MFN tariff, not the in-quota MFN tariff.  For most
countries under the Europe Agreements, in-quota preferential tariffs are
currently equal to one-fifth of the corresponding out-of-quota MFN tariff.  The
CEE-10 do not benefit from lower tariffs under the Europe Agreements for some
TRQ products.  Nevertheless, in-quota preferential tariffs for imports into the
EU are usually lower than their corresponding in-quota MFN tariffs. 
END BOX 1

BEGIN BOX 2
Box 2
Uruguay Round TRQs Determine Only 10 Percent of EU Agricultural Imports

Based on quantities notified by the EU to the WTO and using average import
prices, 1996 EU imports under its Uruguay Round TRQs (current access and
minimum access combined) made up only 11 percent of its total agricultural
imports, while imports under the minimum access TRQs alone accounted for just 1
percent of the total.  The EU continues to import most of its agricultural
goods under TRQs and other preferential tariff arrangements that were not
included in its URAA market access schedule, or under relatively low MFN import
tariffs (most of which were low prior to the Uruguay Round).

Over the years, the EU has granted numerous import concessions under bilateral,
regional, and preferential trade agreements, many of which were not included in
the EU's Uruguay Round commitments.  Some of these EU import concessions
involve preferential TRQs, while others involve tariff preferences not subject
to quantitative restriction.  Some of the more important arrangements are
listed in Appendix 1.  They include preferential-tariff imports into the EU for
tropical oils, cocoa, coffee, tea, spices, cheese, fresh tomatoes, citrus
fruits, fruit juices, prepared or preserved fruits and nuts, olive oil,
prepared or preserved meats, and pet food.

Also, the EU applies relatively low import tariffs on an MFN basis for certain
products that are used as inputs into animal feeding or for processed foods. 
Important examples include soybeans, oil cakes, dried peas and beans, honey,
tobacco leaf, and nuts--in 1995, imports of these 7 products alone made up
about one-quarter of total EU agricultural imports.  Finally, EU imports
include specialty products such as alcoholic beverages that, although subject
to high tariffs, have established important niche markets among well-to-do EU
consumers.
END BOX 2

BEGIN BOX 3
Box 3
Uruguay Round Requires Changes in EU Import Regime

The tariffication process required the EU to substantially modify its import
policies.  Most important was the elimination of the EU's system of variable
levies.  Tariffication under the Uruguay Round Agreement on Agriculture
resulted in two different EU import regimes for grains and non-grain products.

For grains, the old EU system depended on a system of target (desired internal
market) and threshold (minimum import) prices.  To protect domestic producers,
the threshold price was set considerably higher that the EU target price.  As
world prices fluctuated, the EU used variable import levies to bring the price
of imports up to the threshold price.  Under the Uruguay Round, the EU agreed
to maintain a margin of preference for grains, so that imports of wheat,
barley, rye, corn, and sorghum are subject to tariffs that maintain the duty-paid 
import price at 155 percent of the EU intervention price.  (The price
relationship for rice is fixed at 180 percent to 267 percent, depending on
variety. Oats are not subject to the EU's intervention system and therefore
have a bound tariff.)  Since the Uruguay Round, the EU has replaced its
threshold and target prices with a system of world (mainly U.S. market) and
domestic (EU) reference prices for each of the above grains.  Because the EU
Commission adjusts its grain import tariffs every 2 weeks against changes in
U.S. market prices, the mechanism works almost identically to a variable levy. 
However, an important difference is that grains are no longer subject to a
minimum but rather a maximum import price.  Since this is a fixed price and
there can no longer be quantitative restrictions on imports, the effect of the
"margin of preference" on grain imports is more similar to a bound tariff than
a variable levy.

For products other than grains, including animal products, oilseeds, and
horticultural products, bound tariffs now apply to EU imports.  However,
tariffication only partly succeeded in making EU import duties more
transparent.  While all tariffs are now bound, the new EU regime applies
tariffs on many processed products that depend on the content of certain
ingredients, and tariffs on horticultural products that depend on their import
price and the season.  A formula increases the tariff for processed products
depending on their content of added sugar, flour, starch, or milk.  The EU
argues that its processors are disadvantaged by higher input costs due to
domestic price support for these basic ingredients, and therefore require
protection that depends on the content of these ingredients in imported goods.

In addition, the EU is permitted under the Uruguay Round to apply higher
tariffs on imports of some horticultural products that enter below a fixed
target price ("Entry Price System").  By controlling the duty-paid import price
at a target level, the EU can insulate its domestic markets to a large extent
from world price fluctuations.  The Entry Price System also allows the EU to
discriminate against cheaper imports.  In April 1996, for example, sweet
oranges with a price above 372 Ecu per ton were subject to a 13 percent ad-
valorem tariff, while those below 372 Ecu per ton were subject to the same
tariff plus a specific tariff of a maximum 89 Ecu per ton.  Finally, the EU
continues to subject certain dried fruits (raisins, currants, and sultanas) to
a minimum import price.  This mechanism must be replaced by 2000 to comply with
the GATT.

For all products, the special agricultural safeguard clause (URAA Article 5)
provides a notable derogation from the rule of bound tariffs.  Under this
clause, countries may temporarily apply extra duties for products specified in
their schedules of concessions if import prices should fall more than 10
percent below a "trigger price" or if the quantity of imports rises too quickly
in relation to an average over the previous three years.  Each year, the EU
Commission calculates the trigger price for a commodity based on a
representative world market price and the cif import price.  In the first year
of Uruguay Round implementation (1995/96), the EU notified the WTO that it
invoked the safeguard clause to increase import duties only for frozen boneless
chicken, sugar, and molasses.
END BOX 3

BEGIN BOX 4
Box 4
EU Allocates TRQs Like Old Quotas

The EU allocates its new tariff-rate quotas to importers like the old quotas,
under import licenses.  Three principal methods exist for import license
allocation: on a "first come, first served" basis, based on traditional trade
flows, and based on proportion to the quantities requested.  These methods
apply both for current and minimum access TRQs.  Only companies established in
the EU may apply for a license to import. 

The EU allocates some of its TRQs to specific countries and others on an MFN
basis to all third countries.  To take advantage of a TRQ tariff preference
applying to a specific country, the importer must furnish a certificate proving
its origin.  Certificates of origin are issued by the government of the source
country.  One difference between the allocation of current access and minimum
access TRQs relates to which third countries are eligible as the import source. 
Because the EU's current access TRQs cover imports under the old quota system,
they are allocated mostly to specific countries.  On the other hand, most of
the EU's minimum access TRQs are allocated on a non-country specific basis, as
they are not based on historical trade.  

One topic of considerable interest is the "quota rents" that are associated
with the license to import or export.  The value of the rent equals the
imported quantity multiplied by the difference between the domestic and the
duty-paid import price.  Because the EU allocates its TRQs under import
licenses and only companies established in the EU may apply for a license to
import, normally the quota rents accrue largely to EU importers.  However, for
some products such as rice, milk products, and bananas, a special export
certificate from the source country is required in order to import.  This
states that the importer has secured a quantity of the source country's
product.  Because the export certificate is issued by the exporting country,
part of the quota rent is captured by the country of origin.  The issue of TRQ
rents has become a point of contention between the EU and some countries of
Central and Eastern Europe that are parties to the Europe Agreements, because
under these agreements most of the quota rents accrue to EU importers and not
CEE exporters.
Source: Tariff-Rate Quotas in EC and GATT Law, O'Connor and Co. (Brussels:
1997), pp.35-38, pp.53-54.
END BOX 4

EU Export Subsidy Commitments Not Yet Binding, But Future Uncertain

Historically the European Union has relied on subsidies to export many of their
agricultural commodities.  The World Trade Organization (WTO) has forced member
countries to reduce the volume and value of their subsidies annually until
2000/01.  So far, the annual subsidy reductions have not been a binding
constraint due to high world prices,  which have reduced the need for
subsidies.  However,  the EU may have difficulty meeting 2000/01 subsidy
commitment levels for cheese, beef, olive oil, and other milk products
(commodities where 1995/96 subsidies were over the 2000/01 commitment levels),
unless they change current policies. [Susan Leetmaa]

The Uruguay Round Agreement on Agriculture (URAA) imposed stringent limits on
member countries' export subsidies.  The mandatory reductions have been of
great concern to the European Union (EU), because it depends on export
subsidies to export many of its agricultural commodities under their Common
Agricultural Policy (CAP).  Whether the EU meets its commitments, and how it
meets them, is of interest because the United States, which competes in many of
the same markets as the EU.  Only data for the first year of the implementation
period is available.  However, these data can provide some insight as to where
the EU is having a difficult time meeting the commitments, and where the
reductions have not been a problem.

Over the past 2 years, world prices have been high for many commodities that
the EU has typically relied on subsidies to export.  As a result, subsidies
have declined, and in certain cases, the EU has even imposed export taxes. 
These events were completely unforseen at the time the URAA was being
negotiated.  If world prices fall, meeting commitments for these goods may
become more difficult in the future.

Uruguay Round Agreement on Agriculture

The URAA includes limits on export subsidies.  Export subsidies allow countries
to export goods on the world market at a price lower than in their domestic
markets.  This lowers world prices and distorts markets by altering trade
patterns and competitiveness between producers.  Other exporters face more
competition, because export subsidies drive down the prices of their goods. 
Countries that can afford to subsidize exports can take markets away from
efficient, low cost producers.  However, importing countries benefit from
export subsidies by being able to purchase more of a good at a lower price.

Historically the EU has relied on subsidies to export grain.  Grain prices in
the EU were maintained above world levels primarily through government
intervention purchases and protection from imports.  This typically generated
more grain than demanded in the EU.  To make EU grain competitive on world
markets, and hence reduce surplus domestic supplies, the EU offered export
subsidies.  Most grain exports were subsidized, and government expenditures on
export subsidies were often quite large (as can be seen looking at the URAA
base period values).

Prior to the URAA, the United States and the EU were the two largest users of
export subsidies.  The EU needed export subsidies to export its commodities due
to high internal price support.  The United States chose to employ export
subsidies in response to high export subsidies granted by other countries to
their producers, mainly the European Union. During the late 1980's the United
States and EU were actually engaged in a "subsidy war" where both countries
would target subsidized wheat exports to the same markets, partially offsetting
each other and driving each other's subsidies higher and higher.

The URAA forced developed countries, such as the United States and the European
Union, to reduce the level of budgetary expenditure on export subsidies by 36
percent and to reduce the volume of subsidized exports by 21 percent.  These
reductions are to be made from the 1986-1990 base period level over the
1995/96-2000/01 marketing year implementation period, on a product specific
basis.  Developing countries are also required to reduce their export
subsidies, but they have a longer implementation period and lower reductions. 
Member countries' WTO export subsidy schedules specify how many tons of each
commodity can be exported with subsidy, and permitted subsidy expenditures for
each commodity.

The text of the URAA provides some flexibility between years in terms of
subsidy reductions.  If a country exceeds its commitments in any of the years
two through five, it must reduce subsidy levels in the next year and assure
that the total cumulative value of export subsidies and volume of subsidized
exports over the entire implementation period is no greater than the totals
that would have resulted from full compliance with its subsidy schedules. 
Member countries must meet their commitments in the last year of the
implementation period (2000/01).

In 1992 the EU introduced a reform of its Common Agricultural Policy (CAP). 
One objective was to lower some of the internal support prices and compensate
producers with direct payments.  In return, farmers had to reduce their planted
area by a government-established set-aside rate.  Internal EU grain prices were
supposed to decline 30 percent, for which farmers received direct payments from
the government as compensation.  CAP reform therefore reduced EU expenditures
on export subsidies for certain commodities.  However, even the European
Commission has acknowledged that internal grain prices did not fall as much as
planned, so that farmers were overcompensated.  At the same time, the
Commission continued to rely on subsidies to export grains, though budgetary
expenditures were not as large as prior to CAP reform.

EU Notifications to the WTO on Export Subsidies

WTO members are required to notify the WTO Committee on Agriculture concerning
their volume of subsidized exports, their expenditures on export subsidies, and
the volume of unsubsidized exports, by commodity, as specified in the country
schedules.  To date, the EU has submitted notification for the 1995/96
marketing year, the first year members were required to reduce subsidies. 
Provisional notification was received in mid-March and final notification in
late July 1997.  Thus, notification for the 1996/97 marketing year is not
expected until sometime in 1998.

According to European Commission data on budgetary expenditures, EU total
expenditures on export subsidies have been declining since 1991.  However,
expenditures on export subsidies for dairy, beef, and fruits and vegetables
have increased over the same period.  The EU's official export subsidy
notification to the WTO shows that the EU continued to reduce its overall
expenditures on export subsidies in 1995/96.

EU Close to Volume Limits for Some Commodities

Although WTO members must reduce the volume of subsidized exports 21 percent
over 1995/96-2000/01 period from 1986-90 levels, the 1995/96 volume commitments
are roughly 20-30 percent higher than the final 2000/01 commitment levels. 
Based on the WTO notification for the 1995/96 marketing year, the EU was just
under its 1995/96 limit on subsidized export volume for cheese, fresh fruits
and vegetables, other milk products, olive oil, poultry meat, and beef (figure
1).  However, the EU was over the 2000/01 limit for those goods (figure 2).  Of
these commodities, those that applied export subsidies to the bulk of their
exports (greater than 80 percent) were olive oil, beef meat, other milk
products, and cheese (figure 3).  Only 50 percent of the EU's poultry and fresh
fruit and vegetable exports were subsidized.

The commodities that used the least of their subsidized volume commitments
(less than 50% of their volume commitment)for 1995/96 were rapeseed (no
subsidized exports were reported to the WTO), wheat, butter, and coarse grains. 
Typically the EU would have subsidized up to their  bound volume for wheat and
coarse grains.  However, global and EU grain markets were tight and prices were
high during the 1995/96 marketing year and the EU used less than 50 percent of
its value commitment for wheat and coarse grain.  The EU did not need to
subsidize as much as it had in the past, and in fact world prices were high
enough that the EU taxed exports of wheat and barley for much of the marketing
year in order to drive down EU prices.

Value Limits Were Not Exceeded in 1995/96 

In terms of expenditures on export subsidies, the EU was closest to its 1995/96
limit for processed and fresh fruits and vegetables, wine, poultry meat, and
beef.  Of these, the ECU/ton export subsidy for processed fruits and vegetables
was above the average allowable  ECU/ton level if the total allowed expenditure
was divided by the total allowed volume (table 1).  The export subsidies were
high partially due to low processed pineapple prices in third countries and to
a small black currant harvest that increased EU producer prices.  The average
per ton expenditure for most commodities was less than the average permitted
for the year if  the permitted values were divided by permitted volumes.

In 1995/96 EU export subsidy expenditures for certain commodities were very
low.  Less than 20 percent of the value allotted for  export subsidies was used
for rapeseed (no exports were subsidized), wheat, butter and butter oil, and
coarse grains.  Subsidy expenditures were unusually low due to high world grain
and butter prices.

Though average subsidies were lower (in value terms) than they could have been,
many commodities still required subsidies on the bulk of their exports.  The
commodities where more than 90 percent of exports received some subsidy were
skim milk powder, coarse grains, beef, olive oil and butter and butter oil
(figure 3).  The EU has always relied on export subsidies for these products
because their internal prices are usually maintained at higher levels than
world prices.

EU Wants to Carry Over Unused Subsidies

The EU has typically had to rely on export subsidies to export grain due to
high price supports.  However, during the 1995/96 marketing year world grain
prices reached near record highs due to tight global supplies and rising world
demand.  World grain prices were even higher than internal EU prices, prompting
the EU to impose export taxes on wheat and barley to non-EU countries for the
first time since 1974.  Unlike previous years, only 25 percent of wheat exports
were subsidized, whereas 92 percent of coarse grain exports were subsidized. 
By the end of the 1995/96 marketing year, the EU had used less than 14 percent
of its subsidized wheat export volume and 48 percent of its coarse grain export
volume.  In value terms, the EU had only used 5 and 19 percent of its
expenditure commitment to subsidize wheat and coarse grains, respectively.

Because the EU was far below its commitments in 1995/96, some in Europe have
argued that the EU has the ability to apply the additional amount not used in
1995/96 to any of the years up to 1999/00.  In terms of subsidized export
volume, this would mean that the EU could carry over 17.6 million tons of wheat
and 7 million tons of subsidized coarse grain exports at 2.2 million ECU and
1.3 million ECU respectively.    Others, including the U.S.,  argue that
flexibility provisions in the agreement are meant only to deal with situations
where a country exceeds its limits and has to pay back--not as an opportunity
for countries to "bank" unused subsidies.

Second Year of Implementation, 1996/97

Though we do not have any official data for the 1996/97 marketing year, which
has ended for most commodities subject to export subsidy reductions, ONIC, the
French grain office, estimates that EU subsidized wheat exports were roughly
13.6 million tons, still well below the 1996/97 commitment level of 19.2
(before carryover).  ONIC estimates for subsidized coarse grain exports were
less than 13 million tons, also less than the EU's 13.1 million ton 1996
subsidized export volume commitment.  Thus, if the subsidy carryover is
permissible, the EU still could subsidize roughly an additional 23.2 million
tons of wheat exports and 7 million tons of coarse grain exports above its URAA
commitment levels between now and June 30, 2000.

Two major questions arise: Would the EU have the capability to export that much
additional grain, and could world markets absorb it?  The 1997/98 world wheat
crop are forecast to be of record size, and trade is expected to increase for
the second year in a row.  The EU reintroduced wheat export taxes in July due
to appreciation of the dollar relative to European currencies, which makes EU
grains more competitive in terms of dollars per ton.  However, the increase in
grain production has already driven down world prices, and led the EU to
reintroduce small export subsidies.  If the dollar remains strong, the EU is
unlikely to exceed its 1997/98 subsidy allocation.  However, if prices continue
to fall and the dollar depreciates, the EU will need to increase its export
subsidies.  This may actually limit the volume that can be subsidized, since
the EU has appropriated a fixed amount of its budget toward export subsidies. 
Additionally, the United States has only allocated $150 million to the Export
Enhancement Program for export subsidies in fiscal 1997/98 and has not used
export subsidies for grains for over 1 year.

EU Has Implemented Component Subsidies

Clearly, some of the export subsidy limits have been binding.  For example, the
EU has started to export some processed cheese under the URAA export subsidy
commitments for skim milk powder and butter.  The EU claims that this is
possible through a modified version of the "Inward Processing Relief" (IPR)
system.  Traditionally under the IPR, third country products were imported
tariff-free, processed in the EU, and then re-exported without subsidy. 
Neither finished product nor components of the finished product benefited from
an export subsidy.  However, beginning in February 1997, new rules implemented
by the EU recast traditional inward processing to allow the use of export
subsidies for components of processed cheese.  

The Commission argues that "Inward Processing" increases third country exports
to the EU.  Non-subsidized components from third countries (such as New Zealand
powdered milk) may in some instances also be used.  Nevertheless, cheese
manufacturers such as New Zealand and the United States fear that the EU will
be able to undercut their prices by allocating its export subsidies this way. 
Additionally, there is the fear that an EU policy of transferring subsidies
from one product category to another could spread to other agricultural
products, such as using grain export subsidies to produce low cost poultry. 
This would weaken the WTO's export subsidy commitments, which depend on
specific commodity definitions.  

Future Prospects and Conclusions

The EU will have to meet the URAA limits on export subsidies by 2000/01.  The
Commission has discussed some policy revisions that would help it meet these
goals.  There has been talk of further reducing some of the internally
supported prices and providing some direct payments to producers to compensate
them for roughly half of the price difference.  This type of reform, provided
that internal prices actually fall, should reduce export subsidy expenditures.

It is difficult to assess whether the EU will be able to meet its commitments
in 2000/01 based on only one year of data, especially a year such as 1995/96
where world prices of many commodities were very high.  Based upon the 1995/96
notifications, projected world price levels and exchange rates, the EU will
have difficulty meeting 2000/01 subsidy commitment levels for cheese, beef,
olive oil, and other milk products (commodities where 1995/96 subsidies were
over the 2000/01 commitment levels), unless it changes current policies. 
According to the official USDA baseline projections, the EU will be able to
export wheat without subsidy by 2000/01.  Because the EU is a major U.S.
competitor in many markets, whether it meets the commitments, and how it does
so bears watching.

EU Looks To Boost Competitiveness of Grain Sector, Prepare for Next WTO Round

Projected grain surpluses, WTO-imposed constraints on domestic support and
export subsidies, and the looming costs of EU enlargement are causing EU policy
makers to consider modifications to the Common Agricultural Policy (CAP). 
Recent proposals indicate moving away from market price support to increased
income support, and putting the mandatory set-aside at zero percent.  If these
changes are implemented, grain production, exports, and compensatory payments
are projected to rise relative to an unchanged CAP scenario.  Agenda 2000 may
indicate the EU's willingness to make further cuts in trade-distorting support
in the next WTO round on agriculture, scheduled to begin in 1999. [Sharon
Sheffield, Susan Leetmaa, Mary Lisa Madell]

EU Considers Possible Reform of the CAP Crop Regime

Recent proposals to modify the Common Agricultural Policy (CAP) arable crops
program are focusing on shifting support to producers from market price support
to greater use of direct payments.  Reasons for these proposals to reform the
CAP include projected grain surpluses, WTO-imposed constraints on export
subsidies and domestic support, and the future membership of Central and
Eastern European (CEE) countries.

The proposed changes to the arable crops regime, which covers grains, oilseeds,
and protein crops (legumes, etc.), include 1) lowering the intervention price
for all grains (wheat and coarse grains) to a level closer to the world wheat
price, while protein crops would still receive a higher payment, 2) equalizing
the compensatory payment rate for all grains and oilseeds, which would entail
an increase in the payment for grains and a reduction in the oilseeds payment,
and 3) putting the compulsory set-aside, which requires producers to idle a set
percentage of land in order to receive compensatory payments, at zero percent. 

Two questions can be asked concerning these possible changes to the arable
crops regime as it pertains to grains.  First, what effect will these proposals
have on grain production and trade, and second, what will be the corresponding
effect on domestic support and export subsidy outlays for grains?  A related
issue is whether these changes will actually resolve any of the issues
identified above (grain surpluses, subsidy constraints, cost of enlargement).

ERS' European Economic Simulation Model (ESIM) was used to make a preliminary
analysis of the impact on the EU-15 grain sector (wheat, barley, corn, and
other coarse grains) if these changes are made to the arable crops regime,
focusing on the period 2000/01-2005/06.  The baseline scenario forecasts are
based on continuation of the CAP in its current form. (It should be noted that
the model used to produce baseline results was modified for the purposes of
this analysis, and these results are not the same as those contained in the
official USDA publication, International Agricultural Baseline Projections to
2005).  

The model was then adjusted to include the proposed changes outlined above: 1)
the grain intervention price was lowered by 20 percent, 2) the compensatory
payment was increased to 66 ECU/ton, and 3) the set-aside was put at zero, all
beginning in marketing year (MY) 2000/01.  All other variables were held
constant, and it is assumed that restrictions on oilseed area, which were
negotiated during the Uruguay Round (UR), remain in place.  Since the ESIM
model does not cover protein crops, the effect of the proposed changes on these
commodities is not included in the results.  It should be noted that the share
of protein crops in total arable crop area is small relative to grains and
oilseeds, and omitting them from the model shouldn't have much effect on the
results.

Proposed Changes to CAP Lead to Increased Grain Output and Exports

The removal of the compulsory set-aside has a significant effect on area sown
to grain.  Compared to the baseline scenario (which assumes a constant 12
percent set-aside), the zero set-aside results in a nearly 10-percent increase
in sown area to grain in 2000/01, with most of this growth occurring in wheat
area (figure 1).  The increase offsets the effects of a projected decline in
the rate of growth in yields, which slows slightly due to lower prices and
input use, so that grain production rises relative to the baseline scenario.

While some of the increase in production is absorbed by higher feed use (due to
the lower prices) and seed use (due to increased sown area), a projected 33
million tons (60 percent higher than the baseline scenario) of exportable grain
surplus remains, which rises to 43 million tons in 2005/06 (up 40 percent from
baseline) (figure 2).  It should be noted that some of this surplus could go
into intervention stocks and some reports indicate that the Commission wants to
hold higher stocks relative to current levels.

In the reform scenario, wheat comprises nearly 80 percent of this exportable
surplus in 2005/06, compared to around 70 percent in the baseline.  Given that
the intervention price for all grains under the modified CAP scenario is
supposed to be roughly equal to the world price of wheat, much of this surplus
may not require export subsidies, therefore reducing the effect of WTO-imposed
constraints on exports.  (The EU might still use export subsidies to increase
competitiveness in a given market).  However, the increase in exportable
surplus could also affect other exporters (including the United States),
because EU exporters will have to find markets for their surplus grain, thus
leading to highly competitive market conditions and possibly lower world
prices. (This analysis did not gauge the effect of the modified CAP on world
markets, because the ESIM results were not put into ERS' LINKER program, which
balances world supply and demand and produces equilibrium world prices).

The situation for barley is different because it receives the same intervention
price as wheat, which is higher than the world price for barley, so that
exportable barley surpluses will continue to require export subsidies (figure
3).  In order to remain within WTO export subsidy limits, the EU internal
market price for barley falls relative to the baseline scenario.  The lower
price encourages increased feed use inside the EU, and therefore exports would
be lower than under the baseline.    

Effect of Changes to CAP on Subsidy Commitments--Implications for the Next
Round?

As illustrated above, the proposed changes to the arable crops regime do not
appear to resolve the problem of grain surpluses, as both grain production and
exports increase relative to the baseline scenario.  While wheat exportable
surpluses wouldn't be constrained by WTO disciplines on export subsidies (as
long as the intervention price is roughly equal to the world price after MY
2000/01), barley surpluses would require export subsidies.  This is because EU
internal barley prices remain higher than world prices (especially as noted
above, the world prices used in the model do not reflect the increase in EU
output, which would push world prices down further).

In addition to export subsidies, the EU is required as a member of the WTO to
reduce the support provided to its producers.  It is interesting to examine how
proposed changes to the arable crops regime could affect the level of support
to grain producers by looking at the domestic support levels agreed during the
Uruguay Round.  Identifying reductions in support to producers of certain
commodities may also provide some insight into the EU's willingness to make
further cuts in domestic support in the next round of WTO negotiations on
agriculture.

Under the Uruguay Round Agreement on Agriculture (URAA), the reduction
commitment pertains to the total value of domestic support, aggregated across
all commodities, rather than on individual commodities or commodity groups. 
Reductions are measured against the total value of support in the base period
(1986 to 1988).  The total value of domestic support is the sum of the support
levels calculated for all products, including, for the EU, common wheat, durum
wheat, and barley.  The two primary components of domestic support to EU grain
producers are market price support (calculated as the difference between the
intervention price and a fixed reference price, times the quantity eligible for
support), and direct income support (compensatory payments).  

A number of elements will influence how the EU's level of domestic support
changes: The difference between EU prices and the fixed reference price, the
quantity of EU production eligible for support, and the value of the
compensatory payments.  The 1992 CAP reform reduced the gap between the EU and
the external reference price significantly, and it would fall further still
under the proposed changes, although a small positive price gap (relative to
the reference price) would still remain.  Production would be considerably
higher in MY 2000 than in the base period, but market price support would be
much lower because of the significantly smaller price gap.  However, the direct
income support component would be significantly higher, because of the higher
compensatory payments.  Compared with the current payment system, compensatory
payments for all grains are forecast to increase 50 percent from the baseline
scenario, because the payment rate for grains is increased in the modified CAP
scenario and area harvested rises due to the zero set-aside (figure 4).

Under currently proposed CAP modifications, the expected decrease in market
price support for grains could indicate that the EU may be more willing to make
further cuts in the aggregate level of support in the next WTO round.  However,
this will depend on how the EU's compensatory payments, which are now exempt
from reduction under the Aggregate Measurement of Support (AMS) (see box), are
treated.  An additional consideration would be the levels of support for
commodities for which no real reductions have been proposed or adopted (for
example, dairy products).

If compensatory payments are not considered exempt, for reasons discussed in
the box, the EU may be less willing to commit to further reductions in domestic
support.  Results of the ESIM analysis were used to arrive at a rough estimate
of EU levels of support for common wheat, durum wheat, and barley in the year
2000.  Because of differences in product aggregation and country coverage, the
model results are not precisely the same as the information in the base period
calculation.  For common wheat, the reduction in market price support is quite
sizeable, and the reduction in support, even if the compensatory payments are
included, is greater than 20 percent.  By contrast, under both the baseline and
CAP-reform scenarios, the estimates for barley and durum wheat indicate that
the level of support including the compensatory payments may not decline by the
full 20 percent.  In the case of barley, part of the explanation is that the
intervention price remains significantly higher than the external reference
price, so that the reduction in market price support is not as great as for
common wheat.

Proposed Modifications to CAP Also Reflect Cost of Enlargement

The cost of expanding the EU to include Central and East European countries has
been mentioned as a reason to make changes to the CAP.  If no changes are made
to the CAP, and assuming that compensatory payments are extended to acceding
CEE countries (which may not happen for reasons discussed below), ERS has
estimated that accession of the Visegrad Four (Poland, Hungary, Czech Republic,
and Slovakia) could cost an estimated $3 billion (around 5-6 percent of the
annual CAP budget) annually just to cover the costs of intervention purchases,
compensatory payments, and export subsidies within WTO limits (See "Enlargement
to Transform European Agriculture," Europe International Agriculture and Trade
Report, January 1997).  

In addition, extension of the CAP in its current form to CEE countries is
forecast to result in higher production of most commodities, which will be
difficult to absorb internally (within even an expanded EU).  The increase in
output will put pressure on EU internal prices, the budget, and the EU's
ability to meet domestic and export subsidy reduction commitments.  These
issues could be resolved if changes to the CAP are made, such as the ones
currently under discussion, and compensatory payments are not extended to the
CEEs (on the basis that since EU prices are higher, not lower, than CEE prices,
CEE producers are not expected to incur any loss in income).

Sources

Agenda 2000.
Josling, Tangermann, and Warley. Agriculture in the GATT, 1997.
USDA.  Economic Research Service.  Europe International Agriculture and Trade
Report, January 1997.
"The European Union's Proposed  Agenda 2000' CAP Reforms: A First Look," FAPRI
Policy Working Paper 03-97, October 28, 1997.
Unpublished ERS staff analysis of Agenda 2000 provisions.

BEGIN BOX 5
Box 5
WTO Agricultural Support Disciplines and the Next Round

Under the Uruguay Round (UR), developed member countries agreed to discipline
trade-distorting domestic support to agriculture by capping it at 1986-88
average levels, and reducing it 20 percent over 6 years (1995-2000).  The
aggregate measurement of support (AMS) was developed to quantify trade-distorting 
support, such as market price support, input subsidies, and direct payments.  
During each year of the implementation period, members must submit a
current year AMS, as well as notify the WTO of any new policies that are
introduced.

Policies considered to have little or no trade-distorting effect are exempt
from a WTO member's reduction commitment.  These are often called "green box"
measures, and include general services that benefit producers and the rural
community (such as research, extension, inspection, pest/disease control, etc.)
and direct payments to producers that meet specific policy criteria (generally,
all direct payments cannot be related to production type, volume, prices, or
factors of production in any year after the base period).  All green box
programs must be publicly funded and cannot provide price support.

However, Article 6:5 of the URAA exempts from reduction programs that are
production-limiting and meet specific criteria.  Referred to as "blue box," the
criteria for these programs are: 1) payments based on fixed area or yields; or
2) payments made on 85 percent or less of the base level of production; or 3)
livestock payments made on a fixed number of head.  Examples of blue box
policies are U.S. deficiency payments (pre-FAIR Act, see below) and the EU's
acreage and headage payments.

The blue box provision was primarily developed to accommodate the EU's 1992 
CAP reform, which lowered intervention prices and introduced a system of
compensatory payments based on fixed area and yields for eligible crops
(grains, oilseeds, protein crops) and on a fixed number of head for cattle and
sheep/goats.  Without the blue box provision, these payments would have been
included in the total AMS and subject to reduction.  The EU was unwilling to
modify its recently adopted CAP reform, which did not provide for reductions in
the compensatory payments. 

Many observers believe that CAP reform was a key factor in determining the
terms (or limits) of agricultural liberalization during the Uruguay Round. 
Since CAP reform resulted in lower support prices, it was easier for the EU to
make changes to border measures, such as converting variable levies to tariffs,
and to discipline export subsidies.  However, other countries participating in
the Uruguay Round had to make compromises to gain the EU's support for the
entire package, and in the end, disciplines on domestic support were diluted.

For example, initial proposals included reductions to commodity-specific
support, not an aggregated level of support, as was agreed to in the final
version of the Agreement.  Reducing commodity-specific support would have been
much more difficult for the EU and other countries with high levels of support
(such as Japan, Korea, and Norway).  Second, the blue box provision enabled the
EU (and the United States) to exempt direct payments, which are trade-distorting, 
from its overall reduction commitment.  Another area of compromise
to gain EU support was the inclusion of the "peace clause" (Article 13 of the
Agreement), which shields domestic support (and export subsidies) provided in
conformity with the Agreement from countervailing duties and other WTO actions.

While it is not clear if the proposed changes to the CAP will be adopted, they
may indicate the degree to which the EU is prepared to make further progress in
liberalization in the next round of agricultural negotiations, which are
scheduled to begin in 1999.  Strengthening internal support disciplines will
probably be a key component of the next round, since many countries (especially
those in the Cairns Group) feel that insufficient progress was made in this
area during the UR.  If these proposals reflect the EU's limits on reducing
domestic support, there will likely be many WTO members who feel that these
changes do not go far enough in terms of achieving greater liberalization.  As
a result, these countries may be less willing to make compromises, as was done
during the last round.  

Moreover, if the EU is one of the few members still using the blue box
provision, there could be increased pressure from other WTO members to
discipline this support as trade-distorting.  The United States, which notified
its deficiency payment system as blue box in its 1995 notification, has
replaced these payments with decoupled production flexibility contract
payments, which are consistent with green box criteria.  Under the proposed
changes the EU has outlined, its compensatory payments would still be tied to
production (because they are based on the actual area planted) and therefore
would not fall into the green box.
END BOX 5


CEE State Trading: Questions Lurk Behind Notifications

Four of the CEEs--Poland, Slovenia, Slovakia and the Czech Republic--have
notified the WTO of the existence of state trading enterprises (STEs). 
However, questions persist despite these notifications.  There are state-owned
enterprises in other CEEs that meet the WTO definition of an STE but that have
not been notified.  For STEs that have been notified, a lack of good data makes
it difficult to evaluate the full impact of state trading. [Nancy Cochrane]


Since the conclusion of the Uruguay Round, there has been a growing interest in
the issue of state trading.  Regarded as one piece of unfinished business,
state trading is expected to be an issue for the next round.  There are several
reasons for the interest in this issue.  First, the definition set forth in the
Uruguay Round is vague--there is considerable ongoing debate, for example, as
to whether certain countries fit the definition of a state trader.  Second,
there is some concern that state trading may be used to circumvent the strict
limits on import tariffs and export subsidies laid out in the WTO Agreement. 
Third, since the signing of the WTO Agreement, several countries have set up
new state trading enterprises (STEs) to implement the tariff rate quotas. 
Finally, Russia and China are now negotiating the terms of their accession, and
both countries make extensive use of STEs to regulate their foreign trade.

Most of the U.S. interest in state trading focuses on the larger players in
international markets, such as the Canadian and Australian Wheat Boards and the
Japan Food Agency.  But the Central and Eastern European (CEE) countries are
also of interest.  Since the beginning of the transition, many of them have
established regulatory agencies that carry out intervention purchasing and
administer export subsidies. In most cases these agencies have been notified as
state trading enterprises to the WTO.  In other CEEs the state-owned foreign
trade organizations (FTOs), which had a monopoly before the transition, have
retained much of their influence over imports and exports.  While no one of the
CEEs has a great influence on world markets, taken together, they represent a
large potential market for some commodities and significant potential
competition in others.  And because of still underdeveloped markets and
information systems, the STEs in the CEEs have considerable influence on
domestic and foreign markets that is still difficult to measure.

What is State Trading?

STEs first were recognized as legal entities under the 1947 General Agreement
on Tariffs and Trade (GATT).  The 1947 GATT required that STEs adhere to the
general principles of non-discriminatory treatment and, recognizing that the
operations of STEs might impede trade, allowed for negotiation between GATT
members to reduce such impediments.  To clarify the types of enterprises that
can be defined as STEs, an official definition of state trading enterprises was
adopted in the Uruguay Round:

(NOTE: Indent this quote.)
"Governmental and nongovernmental enterprises, including marketing boards,
which have been granted exclusive or special rights or privileges, including
statutory or constitutional powers, in the exercise of which they influence
through their purchases or sales the level or direction of imports or exports".

Why Are STEs of Interest?

The exclusive or special privileges conferred on an STE give it the power to
greatly influence the quantity and price of exports and imports.  Its
activities can result in significant import barriers or de facto export
subsidies.   The actions of an STE cannot create non-tariff barriers to
imports, and they cannot result in export subsidies that exceed the WTO limit. 
A lack of transparency in many STEs' pricing practices often makes it difficult
to determine if they are within GATT limits

Several types of STEs have been identified.  The most common in agriculture are
statutory marketing boards, which are government-sanctioned monopolies with
exclusive control over functions such as purchasing domestic production,
conducting foreign trade, or setting producer or consumer prices.  Similar to
those are regulatory marketing boards, which, while maintaining control over
imports and exports, do not directly engage in foreign trade but contract with
private trading companies to carry out the actual operations.  Another type is
the foreign trade organization, which used to be typical of the centrally
planned economies.  The most commonly stated objectives of STEs are price
stabilization, export promotion, income support for producers, and food
security.  The products most commonly regulated by these organizations are
grains (particularly wheat) and dairy products.

Previous work done at ERS developed a classification scheme that is helpful in
understanding the impact of STEs on imports or exports, as well as their
potential for circumventing WTO commitments. 3/  The key distinguishing
characteristics that have been defined are:

o   Trade balance: Is the STE an import or export-oriented STE?
o   Market regime: To what extent does the STE exert control over a) exports or
imports, (b) domestic marketing, c) commodity procurement and d) processing?
o   Policy regime: Which policy tools (export subsidies, tariff rate quotas,
supply controls, price support, marketing of imported goods, etc.)  are
available to the STE.
o   Ownership: Government, producer group, or otherwise;
o   Products regulated.

3/ Ackerman, Karen, Praveen Dixit and Mark Simone, "State Trading Enterprises:
Their Role in World Markets," Agricultural Outlook, June 1997/AO-241, Economic
Research Service, United States Department of Agriculture. 

Export-oriented STEs can subvert WTO limits on export subsidies through price
pooling and excessively discriminatory pricing.  An STE that engages in price
pooling typically pays producers a percentage (perhaps 80 percent) of the
expected final price on delivery.  The final price paid to producers is a
blended price based on net revenue from all sales in domestic and international
markets.  Price pooling can make it easier for an STE to engage in price
discrimination, charging high prices in domestic markets while subsidizing
exports.

STEs also have the advantage of lower costs in the form of government-backed
credit and less risk.  Depending on the extent of its monopoly on purchasing,
an export STE has an assured supply of raw product.  Even if it is not a true
monopsony, the availability of low cost-credit may give it an advantage over
other purchasers.  It can make forward sales at set prices without worrying
about supply availability at time of delivery.  It thus faces a lower credit
risk than private organizations. It also has greater freedom to make export
sales commitments and has an advantage in reaching long term agreements with
importing countries.

Import STEs influence domestic production and pricing as well as imports.  Some
import STEs are the sole importers of certain products; others influence
imports through contracting arrangements or licensing.  Some establish markups
for commodities imported under TRQs, control processing and distribution of
imported goods, and conduct quality and safety inspections.  Importing STEs can
use their power to block imports even when a market exists in the country,
raise the price of imported products by limiting distribution (keeping imported
products out of certain markets) or discriminate among suppliers for political
reasons.  If a country allows an STEs operations to provide import protection
at levels above the bound tariff rate, it can be considered to be in violation
of its GATT commitments.

It is by no means the case that all STEs are violating WTO rules in these ways. 
The problem is that without good information on prices paid for imports,
markups for sales in domestic markets, and average producer prices compared to
average export prices, it is impossible to judge whether the rules are being
circumvented.

Do the CEEs Engage in State Trading?

According to the above definition of state trading, the two criteria on which
to assess the existence of state trading are:

1) The organization has a special right or privilege.
2) In the exercise of these rights, the organization influences the level or
direction of trade through its trading activities.

There is hardly any question that during the Communist period all the CEEs
engaged in state trading.  Virtually all foreign trade was carried out by
state-owned foreign trade organizations (FTO), which generally had a monopoly
over trade in given commodities.  Imports and exports were controlled by the
central government through extensive use of non-tariff barriers that were often
non-transparent.

After 1989, the monopoly status of the FTOs was abolished, as were most
quantitative restrictions on trade.  All firms, private and state were given
the right to engage in foreign trade, and private companies now conduct an
increasing share of imports and exports.  Many of the old FTOs still exist, but
most no longer have a monopoly and many are in various stages of privatization.

While none of the CEE governments control foreign trade to the extent they did
before 1989, state trading by the above definition does exist in most of the
CEEs.  In some cases the old FTOs and other state-owned enterprises retain much
of their former influence, even though they are no longer monopolies.  Often
these state enterprises receive benefits from the state that are not available
to other firms.  In other cases CEE governments have created regulatory
agencies responsible for administering the government intervention programs. 
These agencies in most cases meet the WTO criteria for state trading and have
been notified (identified to the WTO) as state trading enterprises.  While
there is no evidence that they have been used to circumvent WTO commitments,
these agencies have significantly affected domestic and international trade in
the CEEs and could be used in this way.  The problem is that inadequate data
and market information make it difficult to determine the full impact of these
state trading activities on imports and exports.

The Regulatory Agencies Notified to WTO 

By the two criteria, the various state intervention agencies that have been
established in Poland, the Czech Republic, Slovakia, and Slovenia since the
early 1990s qualify as STEs.  These agencies include the Agricultural Market
Agency (AMA) in Poland, the State Funds for Market Regulation in the Czech and
Slovak Republics, and the Agency for Commodity Reserves in Slovenia (table 1). 
These were created in response to the drastic decline in producer income that
occurred immediately following the beginning of the transition.  Their
principal role is to establish and support minimum prices for key commodities
and stabilize prices of other commodities through intervention purchasing.  
However, to support minimum prices and avoid buildup of excessive stocks, they
are also involved in subsidized exports.  They are also responsible for
allocation of domestic quotas to commercial firms for intervention purchases
and export subsidies.  
These agencies are involved in both imports and exports, except for Slovenia's
Agency for Commodity Reserves, which only deals with imports.  All are
government owned.  Through their activities they can influence all four market
activities identified in Ackerman et al. (imports and exports, domestic
marketing, procurement, and processing).  But they do not have 100 percent
control over any of these activities.  The instruments used are guaranteed
minimum prices, intervention purchasing, and export subsidies.

These agencies do not engage directly in foreign trade but contract with
commercial trading companies to undertake imports or exports on their behalf. 
None of them can be said to have an absolute monopoly on foreign trade, and
none of them engage in price pooling.  But through their intervention
purchasing, they are heavily involved in domestic procurement.  The Polish AMA
is also involved in processing.  All these agencies by their very nature enjoy
privileges not granted to other trading entities and to that extent conform to
the definition of state trading.  The privileges are for the most part in the
form of direct government funding and government backed credit.  Because of
these special privileges, the governments of Poland, Slovakia, and the Czech
Republic have notified the WTO of the existence of state trading in their
countries.

Hungary maintains it has no state trading.   Decisions on agricultural market
support are made and implemented by the Agricultural Market Regime, which is an
inter-Ministerial committee with representatives from the Agricultural, Foreign
Trade, and Finance Ministries.  This committee makes decision on levels of
producer support and subsidized exports.  The actual operations are carried out
by commercial companies selected through tenders.  The Hungarians maintain that
this office is not a state trading enterprise because it is a government
committee that does not engage in commercial activities.

Poland's AMA was first established in 1991.  Its primary function at that time
was to stabilize commodity markets through intervention purchasing--buying up
stocks when prices were falling and releasing them back onto the market when
supplies were tight.  Its role expanded in 1992 when it was given authority to
set guaranteed minimum prices for wheat, rye, and dairy products, which it
supported through intervention purchasing.  Since 1992 its role has expanded
still further, and it is now involved in the management of the strategic
reserve and in providing preferential credit to grain producers and warehouses.

Currently, the AMA intervenes in grain markets in the following ways:

o   Direct intervention purchasing, using funds provided by the state budget. 
This accounted for 31 percent of all intervention purchases in 1995/96.

o   Procurement through a network of authorized warehouses.  The warehouse
agrees to purchase wheat at the intervention price and in return AMA provides
guarantees for preferential credit to the warehouses.  After 3 months, period
the AMA will purchase the grain at the intervention price plus storage,
interest and handling. This accounted for 51 percent of all intervention
purchases in 1995/96.

o   Advance payment to selected producers.  Wheat producers who are willing to
store at least 100 kilograms of wheat can receive an advance payment of 45
percent of the intervention price.  The producer is obliged to leave the grain
in storage for 3 months.  At the end of that period, the producer can either
repay the advance plus interest in cash, or forfeit 45 percent of the grain to
the Agency and take back the remaining 55 percent, which can either be used on
farm or sold on the open market.  This accounted for 18 percent of all
intervention purchases in 1995/96.

The AMA also sets and administers minimum prices for dairy products and carries
out intervention purchasing of pork and sugar.  It also periodically engages in
the import and export of these commodities; some of the exports have been
subsidized.  It does not directly engage in trade, but contracts with
commercial companies to carry out the transactions on its behalf.  In the early
years of its existence, the AMA had a substantial share in the foreign trade of
certain commodities.  In recent years its share in foreign trade has been
lower, but it still has the authority to carry out foreign trade directly.

The AMA also maintains the strategic reserves and periodically buys into or
sells from that reserve.  Not only is the size of the reserve kept secret, but
the AMA also does not divulge the size of purchases or sales from the reserve.

The Czech and Slovak State Funds for Market Regulation (SFMR) were created on
similar objectives as the AMA--to stabilize prices and maintain producer
income.  Both operate on similar principles.  They regulate the market for key
commodities through intervention purchasing or subsidized exports.  Neither
engages directly in either domestic purchasing or foreign trade, but contract
with commercial companies to act on its behalf.  These companies are selected
through tenders.  Import licenses, with the exception of imports under TRQs,
are granted automatically.  However, the Funds have restricted export licenses
(particularly for wheat) in the interest of keeping sufficient supplies within
the country.  Licenses for imports under TRQs are issued by the Czech customs
authority on a first-come, first-served basis.  The Import Licensing Division
of the Slovak Ministry of Economy on behalf of the Ministry of Agriculture
allocates imports under the TRQs.

The main difference between the two countries is the number of commodities
regulated and the extent of intervention. The Czech Republic only regulates
food wheat and dairy products: wheat through intervention purchasing and dairy
products through subsidized exports.  Slovakia intervenes in a broader range of
products, including grain, live cattle and beef, pork, dairy products, poultry
and eggs, sugar, potatoes, and starch.

Slovenia. The Slovenian Agency for Commodity Reserves is a particularly
interesting case, since it appears to have a far more pervasive influence on
trade of wheat and sugar than any of the agencies described above.  The agency
is the only authorized purchaser of wheat, which it buys at a very high minimum
price set by the government.  It also contracts with commercial firms for the
import of a duty free quota of wheat. The Agency then sells the wheat to the
flour mills at a price that is between the high internal price and the import
price.  Other firms are free to import, but must pay the published tariff rate. 
Intervention in the sugar market is quite similar, except that purchasing is
carried out by a commercial company that has a monopoly on the Slovenian
market.  
State Trading in Romania and Bulgaria.  State trading takes a different form in
Romania and Bulgaria.  Neither has an agency analogous to the AMA in Poland,
and both governments have notified the WTO that they have no state trading
enterprises.  However, the purchasing and foreign trade of bulk commodities in
both countries continues to be heavily dominated by state-owned companies, and
the governments have played a major role in manipulating domestic prices and
levels of foreign trade.  But these activities have not generated much concern
among exporting countries because their primary impact has been to restrict
exports rather than to undercut export markets or impose hidden import
barriers.  Moreover, both countries are in a state of accelerated transition. 
They are under pressure from international lending institutions to speed up the
privatization process, allow greater competition, and to allow the non-viable
state enterprises to be shut down.

In Romania the former Romcereal had a virtual monopsony on the procurement of
wheat.  Almost all marketed wheat was purchased by Romcereal at prices that
were barely half the world level.  Romcereal did not engage directly in foreign
trade, but controlled most storage and the supply and prices charged to
potential exporters.  In June 1995, Romcereal was dismantled.  Part of it was
reorganized as the National Agency for Agricultural Products (ANPA); the
remainder was split into several commercial companies, called Comcereal.  These
companies are eventually to be privatized, but at the moment most are majority
state-owned.  Furthermore, the functions of ANPA are rather broadly defined, to
include purchasing, storage, and reserve management.  In the year since the
reorganization, virtually all the Comcereal companies remain majority state
owned, and there does not appear to have been any increase in competition among
purchasers of wheat.  

More seriously, all the grain silos at Romania's largest port of Constanta are
owned by a majority state owned company, Agroexport.  The director of this
company has considerable power to control the flow of exports out of the
country, thus affecting the domestic market price.  

This situation could have led to low-priced exports that undercut the world
market, especially in 1995/96, when Romania had a wheat surplus of close to 2
million tons.  But because of government policies intended to maintain stable
supplies of low-priced bread, combined with bottlenecks in the local
infrastructure, the Romanians were unable to take advantage of their surplus.
The capacity of the port of Constanta was too low, and transportation was
inadequate to move the grain to the port.  In 1996/97 there was no exportable
surplus, the result of a drastic decline in area planted and a very harsh
winter.

There is no single agency in Bulgaria that can clearly be identified as a state
trader.  But much of the purchasing, processing, and foreign trade,
particularly of grains, continues to be carried out by companies that are still
majority state-owned.  These companies receive benefits from the state that are
not available to private companies. For example, after the 1997 harvest, the
Agricultural Minister made available about 260 billion leva (US$146 million)
for low interest loans to a select group of mills to enable them to purchase
the 1.1 million tons of wheat that officials estimated was necessary for the
nation's food supply.  Ministry of Agriculture officials have stated that both
state and private mills could apply for this credit.  However, it has happened
that all the credit was granted to enterprises in which state ownership was
over 50 percent.  These included 27 state mills. The largest, Zarneni Chrani,
obtained the highest purchasing quota, 843,000 tons, which makes it nearly a
monopoly on the grain market. Bulgaria has notified the WTO that it has no
state trading enterprises, but these state mills, particularly Zarneni Chrani,
appear to enjoy some of the benefits of state traders.

But both countries are on the brink of major changes.  Romania elected its
first non-Communist government last year, and the Bulgarian elections held last
spring brought an opposition victory.  Both governments are now committed to
speeding up the market reform process, moving much more rapidly to privatize
ailing state-owned firms and to get the government out of the business of
controlling domestic prices.  The Romanians have pledged to privatize all the
Comcereal companies, and the Bulgarians intend to split up Zarneni Chrani and
privatize the new companies.  

Issues for the Next Round

The key question for the next round of trade negotiations is not so much the
existence of state trading in Central and Eastern Europe, but whether state
trading is used by these governments to circumvent the commitments made to the
WTO on import tariffs and export subsidies.  On the surface it would appear
that these state trading institutions are not used in this way.  While high,
tariffs imposed by the CEEs do not exceed the bound levels.  As for export
subsidies, only Hungary has exceeded its commitment, and this cannot be said to
be due to state trading.  Calculations by OECD indicate that aggregate Producer
Subsidy Equivalents (PSEs) throughout the CEEs are quite low relative to
Western Europe.  4/

4/ The producer subsidy equivalent, or PSE, is an aggregate measure of the
value of all transfers to producers of a given commodity.  It has been defined
by ERS as "the level of subsidy that would be necessary to compensate producers
(in terms of income) for the removal of government programs affecting that
commodity" (Government Intervention in Agriculture, Measurement, Evaluation,
and Implications for Trade Negotiations, FAER-229, U.S. Dept. Agr., Econ. Res.
Serv., 1987).

Yet, there are a number of reasons why this will be an issue for the next
round.  For one thing, the definition of state trading is vague, allowing some
governments to notify the WTO that they have no state trading, when in fact
they do have institutions that meet those criteria.  Another major problem is
that these institutions in many cases affect levels of imports and exports in
ways that are not easily measured.  Published tariff rates and PSE calculations
based on price gaps do not tell the whole story.

The definition problem.  Hungary, Romania, and Bulgaria have all notified the
WTO that they do not have state trading enterprises.  The Hungarians maintain
that the Market Regime Office is a government agency of representatives from
three different Ministries and is not an enterprise.  But it performs the same
functions as the SFMR in Slovakia and the Czech Republic.  At the same time the
Hungarian Holstein Breeders Association has been granted the exclusive right to
import bull semen and there are charges that it regulates the flow of imports
by charging a higher price for imported product than for domestic.  But the
Hungarians argue that this can't be a state trader because it is not a state-owned 
organization.  The Romanians and Bulgarians maintain that enterprises such as 
Zarneni Chrani or Agroexport are commercial companies that enjoy exactly the 
same rights as any other commercial company.  Yet these are state-owned 
companies that receive special privileges (such as low interest credit), which are 
not equally available to all.  

Impact on trade levels.  The intervention agencies in the CEEs have
considerable influence over the domestic market for key commodities,
particularly grains.  These STEs do not have a monopoly on either domestic or
foreign trade of the commodities they regulate.  However, the funds available
to them through the state budget and other special privileges they receive
gives them a significant advantage over private traders.  This market power
gives them the potential to violate the principles of WTO, but it is not clear
that they have done so.  The main problem is a lack of transparency in their
operations that makes it difficult to assess the extent to which this may have
happened.

One problem is a lack of reliable data.  Official Slovenian tariff rates, for
example, are right at the bound levels, but it is clear that the Agency for
Commodity Reserves has considerable power to regulate imports.  But the price
data needed to calculate the true tariff equivalent of its activities are not
available, and Slovenian economists complain that the activities of the Agency
are not at all transparent.  Likewise, charges that the Hungarian Holstein
Breeders Association engages in price discrimination are only hearsay.  The
data needed to support or refute such charges are not available.

According to OECD calculations of PSEs, the impact of the Czech and Slovak
Funds on wheat prices has been minimal (PSEs are negative), even though the
volume of wheat exports subsidized by the Funds has been substantial in some
years (table 2). The Funds' influence on dairy markets is much more evident,
however.  In most years, for example, the Slovak Fund has accounted for two-thirds 
or more of that country's exports of cheese, skim milk powder, and butter, and PSEs 
calculated by OECD for these commodities are relatively high (39 percent for the 
Czech Republic, 49 percent in Slovakia).

In general, the SFMRs have a considerable role in determining the quantities
that are imported or exported.  They have been the agencies that imposed export
bans (especially of grains) when there were shortfalls.  However, export bans,
while they distort the domestic market, are not of much concern to major
exporting nations, since if anything they create more opportunities for export. 
The agencies' influence on import levels is less direct, since WTO prohibits
quantitative restrictions on imports.  But their regulation of the domestic
market does affect the level of imports.

The Polish AMA engages in foreign trade to a lesser extent than the SFMRs. 
However, it is authorized to engage in foreign trade and will export stocks
that cannot be sold on the domestic market, often at a loss.  But it is not
clear whether these exports are included in Poland's official reports of export
subsidies.  For example, early in 1997 the AMA purchased 109,000 tons of pork. 
Of that, 69,000 tons were released onto the domestic market later in the year
and an undisclosed amount was exported, primarily to the Former Soviet Union. 
The AMA did not export directly, but contracted with a number of firms to act
on its behalf.  An official of the AMA said that most of this pork was exported
at a loss, but maintained that this did not constitute an export subsidy
because no payment was made to the exporting companies.  It is difficult to
determine the extent to which these AMA pork exports were subsidized.  The
volume of AMA exports is known, but it is more difficult to determine the
prices at which the pork was exported.

The full impact of the AMA on Poland's domestic and international trade is
further obscured by the fact that the AMA is responsible for both intervention
purchasing and buying and selling for the strategic reserve.  This dual
responsibility creates considerable potential for conflict of interest.  These
are two separate functions, and both activities can affect the market, but the
transactions on behalf of the strategic reserve are a state secret.   

Finally, the fact that levels of market price support calculated by OECD are
generally low can be misleading.  OECD calculates market price support based on
the gap between domestic prices and a world reference price.  One obvious
problem is the choice of a reference price.  But leaving that issue aside,
there is a more fundamental problem with this method.  In a transition economy
there are two basic factors that contribute to a price gap.  One is the active
intervention measures taken by governments--price supports, export subsidies,
tariffs, etc.  But another factor is that most of the countries still suffer
from serious bottlenecks in the processing and distribution sector, and the
effect of these bottlenecks is to depress producer prices.  Without any overt
government support, these institutional rigidities would result in prices well
below the world level.  Thus it can easily be the case that the impact of very
high overt government support can be hidden in a calculation of market price
support based on a price gap.

The influence of the STEs could wane as private markets become better
developed, although arguably, their very existence is slowing down the
development of those markets.  But ultimately, the life of these agencies in
their current form is constrained by these countries' impending accession to
the European Union.  With EU membership, these agencies will not be able to
operate in the way they now do, but will likely become purchasing agents for
the European Commission.

END_OF_FILE