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Trade liberalisation in world dairy markets: address to the ABARE Outlook Conference.



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Department of Foreign Affairs and Trade Speech

Australian Minister for Trade, Mark Vaile

Canberra, 27 February 2001 Address to the ABARE Outlook Conference

Trade Liberalisation in World Dairy Markets

I’m pleased to be able to launch this innovative analysis by ABARE, produced with the support of the Dairy Research and Development Corporation, on the impact of trade liberalisation on world trade in dairy products.

Among the extensive discussion that has taken place recently about the impact of domestic deregulation of dairy production in Australia, it has been almost forgotten that dairy is one of Australia’s most successful agricultural exports.

In 1999-2000, Australian dairy exports were $2.4 billion, placing it in the top ten Australian exports by product category.  Moreover, dairy exports have shown impressive growth in recent years - the value of dairy exports now is 35% higher than four years ago.  And ABARE’s forecasts released today project export values for dairy to increase by another 46% in the next two years.

Despite these impressive statistics, dairy trade has long been plagued by some of the most severe market access restrictions in international trade. 

The world market for dairy is also corrupted by an insidious combination of export and domestic subsidies that encourage overproduction behind high tariff walls with the surplus being dumped on world markets, reducing the price for efficient producers and limiting access to markets.

The Uruguay Round achieved only limited success in increasing market access and reducing export subsidies in dairy.

For example, even after all Uruguay Round commitments have been implemented:

Canada only allows imports of 3,274 tonnes of butter from the whole world; ● The EC imposes tariffs on cheese of over $2000/tonne, as well as restricting Australia to 3,250 tonnes of quota access; and ●

Korea’s tariffs on milk powders are 176%. ●

Perhaps unsurprisingly, given the protectionist pressures involved, some international analysts have suggested the gains from trade liberalisation in dairy would be small.

I’m very pleased to announce that the results of the ABARE modelling show conclusively that further reform of world dairy trade would produce substantial gains. 

In our trade policy we have a choice of two options:

give up on trying to get reform and put up with the system as it is; or ● hang in there, keep fighting for change and try to build as much support for our position as we can.  ●

The Australian Government has decisively opted to keep fighting.

The ABARE study used a structural model of the world dairy industry based on the OECD’s AGLINK model.  The study modelled two specific reforms, closely aligned with reform proposals submitted by the Cairns Group in the WTO agriculture negotiations in Geneva:

a doubling of tariff-rate quota volumes coupled with a halving of tariff rates; ● and a 50% reduction in the volume of subsidised exports. ●

Let me elaborate on some of the results obtained from the research to demonstrate the value of further reform for Australian producers.

Under the study, when the volume of subsidised dairy exports declined by 50%:

world prices of cheese, butter, and milk powders rose by between 17 and 35 per cent in the first year of reform; ●

while the world total volume of dairy trade fell, this was more than offset by the rise in prices, so that the total value of world trade in dairy products would increase by 10 to 18 per cent;

●

most importantly for Australia, the gross value of Australian production increased by 7 - 13 per cent in the first year of this reform. ●

Interestingly, the declines in subsidised exports would not be highly disruptive to the dairy industries in highly protected markets in North America and Europe, as the main market for such producers would continue to be domestic.  So this analysis undermines the standard protectionist arguments against reform.

Turning to the second result of the study, modelling the impact of a doubling of market access volumes and reductions in tariffs, the study showed:

world prices of cheese, butter, and milk powders rose by between 20 and 35 per cent in the first year of reform; ●

the overall volume of world dairy trade increased in the first year of reform; and ● the gross value of production in Australia increased by between 7 and 13 per cent in the first year. ●

Again, doubling market access volumes would have only a small effect on farm gate prices in the protected markets, with an average decline in the US and EU of 1.5 per cent. 

Liberalisation would deliver substantial advantages to competitive exporters like Australia, without imposing excessive adjustment costs on the protected economies.

The current study models the separate effects of reforming export subsidies and market access.  However, in the current WTO negotiations and in the broader round we hope will be launched this year, reform of agricultural subsidies and protection will be negotiated simultaneously.  So by looking at the results of individual reforms, you can

obtain some indication of the scale of gain from reform of all dairy market distortions.

Importantly, this study is based on the negotiating proposals that Australia and the Cairns Group have submitted to the WTO agriculture negotiations.  The results of the study show that our trade negotiating stance is directed to maximising the commercial outcomes of trade liberalisation for Australian producers.

The Cairns Group has made ambitious proposals for fundamental reform across the “three pillars” of agricultural protection:

we have proposed the complete elimination of export subsidies, with a 50 per cent “down payment” reduction in the first year of implementing any new agricultural agreement;

●

we have proposed substantial progressive reductions of price support and other trade distorting domestic subsidies; and ●

we have sought across the board reductions in tariffs that prevent tariff peaks and eliminate escalating tariffs on processed agricultural products, as well as expanded in-quota access under tariff quotas.

●

Taken together, the Cairns Group proposals are setting the framework for a market-based international trading system for agriculture.  Once these subsidy and tariff reductions are implemented, they are permanent.  There is no going back on them.

Negotiating fundamental reform of support and protection will be tricky, and we have no illusions about the magnitude of the task.  We have a mandate to negotiate on agriculture in the WTO, under Article 20 of the Agriculture Agreement.  The Cairns Group is out in front, creating momentum in the negotiations and building support for our positions. 

In the lead-up to the WTO Ministerial in Qatar in November, Australia will be pushing forcefully to launch a new round, as a new round would only enhance the prospects for agriculture reform.

Overall, the ABARE analysis demonstrates the positive effect of achieving real and meaningful progress in reducing barriers to trade and export subsidies in the world dairy market in the current WTO negotiations on agriculture.  The negotiations will be extremely difficult, but we are not fazed by this prospect, and we are preparing for a major push this year.

I commend this report as a valuable contribution to the analytical effort on the agricultural trade reform debate and as a confidence builder for Australian dairy exporters.

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