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as the US-Canada Memorandum of Understanding on Grains, joined a Canadian agreement to limit wheat exports with a US decision not to pur- sue the wheat dispute under GATT.55 But the memorandum of under- standing was short-lived: In September 1995, the agreement was dropped due to pressure from US wheat interests, which believed they could profit more from selling wheat at market prices. 56

One Unsuccessful Answer: The Export Enhancement Program

Canadian wheat exports to the United States increased significantly after the Canadian government eliminated freight subsidies for overseas sales in 1995. Taking into account higher transpacific freight charges, the net re- turns from shipping to the US market exceeded the net returns from ship- ping to Asian or Latin American markets. Just as freight subsidies ar- guably subsidized Canadian wheat exports, the US EEP, established in 1983, arguably subsidized US wheat exports. Designed to counter unfair foreign trading practices in world agricultural markets, the EEP provided cash bonuses to US wheat exporters.57 But the EEP boomeranged: It en- couraged Canada to maintain its own agricultural export subsidies for wheat, further depressing world wheat prices and making the net returns from Canadian wheat exports to the US market still more attractive. 58

The Current US-Canada Wheat Dispute

The US-Canada wheat dispute heated up in March 2003, when the United States filed formal charges against the CWB in the WTO.59 The United

55. The memorandum of understanding was instrumental in creating a one-year TRQ that limited access to wheat imports at the lower NAFTA tariff levels. When this “peace clause” ended in September 1995, the US government announced it would closely monitor Cana- dian grain exports to the United States. See USDA (2000).

56. US wheat interests believed that market prices would exceed US-Canada memorandum of understanding prices. See Alston, Gray, and Sumner (2000).

57. Since mid-1995, rising world prices and the Uruguay Round Agreement on Agriculture have prevented the United States from using the EEP to support wheat exports. In any event, according to Gardner (2000), the EEP was never large enough to achieve significant gains in US wheat exports. See also Hanrahan (2004).

58. Consequently, in 1998, August Schumacher, former undersecretary of agriculture for farm and foreign agricultural services, stated that reviving the EEP for wheat exports would not raise farmgate prices. Instead, the EEP could lead to outcomes that are “only marginally helpful or even detrimental to American farmers.” See “USDA Fends Off Pressure to Reac- tivate EEP Despite Falling Prices,” Inside US Trade, July 10, 1998.

59. On March 7, 2003, the United States initiated a request to establish a WTO panel re- garding Canadian wheat exports. Canada has so far not initiated a case against US wheat ex- ports under either NAFTA or WTO dispute settlement mechanisms. See “US Request For Wheat Board Panel Blocked, US Faces Panel on Cotton,” Inside US Trade, March 21, 2003.

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NAFTA REVISITED: ACHIEVEMENTS AND CHALLENGES

Institute for International Economics | www.iie.com

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