Agricultural producers in California received $586 million in federal assistance in 2001; Of this about $242 million came as production flexibility contracts and loan deficiency payments.The remainder of government payments to farmers came in the form of marketing support and conservation payments, which we discuss later in this chapter. While these federal government support payments are low in total compared to those states where the major agricultural products are grains or oil seeds, this does not imply that some agricultural producers in California do not benefit greatly from subsidies and protectionist measures.Over 100 farms in California received more than $425,000 each in subsidies in 2001 . Dairy, sugar and cattle producers receive significant protection from import barriers, and many producers receive subsidized inputs, particularly irrigation water. Sumner and Hart estimated the Producer Subsidy Equivalent paid to California agriculture in 1995 , where the PSE is defined as all government transfers to the industry including but not limited to production subsidies. They calculate that the California agricultural sector receives annual PSE transfers of $2.3 billion per year or about 11 percent of total commodity receipts. This is about one-half of the percentage PSE for all U.S. agriculture at the time,fodder sprouting system mainly because fruits and vegetables receive fewer transfers than the average commodity.
However, California’s PSE is higher than the percentage PSE received by producers in liberalized markets like Australia and New Zealand where the 1995 PSE was about 3 percent. While the specific estimates of PSE vary over time, the general pattern identified by Sumner and Hart, that California producers have a lower PSE than the U.S. national average but higher than that for other agricultural exporters, holds today.The formation of the Canada-United States Free Trade Agreement in 1989 and the North American Free Trade Agreement in 1994, has led to greatly expanded agricultural trade between Canada, California’s top market, and the U.S. NAFTA was designed to integrate economic activity among three nations: Canada, the U.S. and Mexico. It serves as a free trade agreement rather than a customs union or common market. Since 1989, U.S. agricultural exports to Canada have expanded by about 3 and one-half times, from $2.24 billion to $7.65 billion. Over the same period, agricultural imports from Canada have risen almost three-fold, from $2.93 billion to $8.66 billion. Fruits and vegetables account for more than one-third of Canada’s agricultural imports from the U.S., so California plays an important role in this north south trade. However, in spite of the CUSTA and NAFTA, Canada continues to intervene in agricultural trade flows. The country uses non-tariff barriers such as licenses that restrict imports of bulk produce, fresh fruits, vegetables, and wine. For instance, Canadian regulations on fresh fruit and vegetable imports prohibit consignment sales of fresh fruit and vegetables without a prearranged buyer . Canada also severely limits imports of dairy products, eggs, and poultry.
According to the WTO Appellate Body, Canada’s supply management system for dairy provides implicit export subsidies for these products . Producer groups in the U.S. have called for the greater use of non-tariff barriers to limit agricultural imports from Canada. This has often been accomplished by the use of U.S. trade remedy laws. Trade remedy laws are intended to offset “unfair” trade that injures domestic producers as a result of either foreign sales that are “dumped” into the U.S. at less than fair value or influenced by foreign government subsidies. The regular use of trade remedy laws within NAFTA illustrates the fact that any transition to freer trade in agriculture, even between countries at relatively similar stages of development, may be politically difficult. An example of the agricultural trade tensions between Canada and the U.S. is the recent “tomato wars,” in which U.S. producers accused the Canadians of “dumping” tomatoes in the U.S. market. In October 2001, the United States government made a preliminary ruling that Canadian growers were dumping greenhouse tomatoes into the United States at prices below the Canadian cost of production. As a result of this finding, Canadian sales into the United States were assessed an average tariff of 32 percent. Several weeks later, the legal tables were turned as the Canadian government initiated an anti-dumping investigation against the U.S. fresh tomato industry . The Canadian counterclaim may not have been a coincidence. Rather, it may have been a tit-for-tat reaction to the steep U.S. duties imposed on Canadian greenhouse tomato sales to the United States. By July 2002, both cases were resolved with identical rulings of no material injury.
While U.S. exports of fresh tomatoes to Canada declined 10 percent over the previous year during the period of investigation, Canadian imports of greenhouse tomatoes to the United States actually increased 17 percent over that year .Despite the fact that Japanese agriculture receives high levels of government support and has limited market orientation , it is also the world’s largest net importer of agricultural products. The United States supplies roughly one-third of Japan’s agricultural imports, and in 2002, Japan’s agricultural imports from the U.S. were valued at $8.3 billion . About 20 percent of these U.S. exports to Japan originated in California. Japan is California’s third largest export market for agricultural products, with rice, cotton, almonds, beef, and oranges ranking as the top commodities . Japan’s weak economy has dampened its total agricultural imports in recent years . In the 1990s, the most significant import growth in Japan was in the area of fruits and vegetables, wine, and beef . More recently, grains and oil seeds have done better . Japan continues to restrict imports of horticultural products, livestock products, and processed foods, all of which are important exports for California. Recently, beef exports to Japan were halted in response to the BSE scare in Europe; and Japan continues to consider implementing a “beef import safeguard,” which could further lower imports even further. At the time of this writing, Japan had halted all imports of U.S. beef, due to the discovery of BSE in the U.S. . Citing phytosanitary concerns, Japan blocks imports of U.S. fresh fruit, vegetables, and other horticultural crops, keeping Japanese domestic prices of horticultural products artificially high. Government subsidies are also provided to farmers to encourage them to divert land out of rice production and into vegetables . Japan also has country-of-origin labeling requirements for agricultural products that principally affect fruits, vegetables and animal products . This acts as a non-tariff barrier to trade. Japan maintains high tariffs on beef, citrus, and processed foods. In addition, imported high quality California rice is strictly controlled and rarely reaches the consumer food table in Japan. The over quota rice tariff in Japan exceeds 400 percent. Until recently, Japan’s system of food imports used mainly non-tariff barriers such as quotas and licenses, instead of tariffs. Sazanami et al. found that Japan’s tariffs on food imports averaged only 8 percent, but the quantitative import barriers averaged 272 percent, with the rice tariff equivalent barrier at 737 percent. Despite the tariffication required by the Uruguay round of trade liberalization, of Japan’s agricultural imports remain highly protected . In addition, Japan continues to use health and safety regulations to serve as barriers to trade.3 In the case of fresh oranges and lemons, the U.S. is the largest supplier to Japan,microgreen fodder system accounting for over 80 percent of Japan’s imports. Other exporters of oranges and lemons of lesser importance in Japan are Australia, Chile, and South Africa. The Japanese Government continues to impose a high import tariff on fresh oranges. The tariff rate is 32 percent for imports during the December-May period, and 16 percent during June-November. .California’s second most important market, the EU, provides export subsidies for beef, cheese, other dairy products, and processed fruit, in competition with California. It also provides generous production subsidies on horticultural products such as tomatoes, grapes, peaches and lemons. The EU’s subsidized production of these products affects California’s competitiveness in third markets.
More generally, the EU’s Common Agricultural Policy significantly isolates European farmers from international competition. The CAP is a system of subsidies and market barriers that include mandatory land set-asides, commodity specific direct payments, and export subsidies . Support to agricultural producers as a share of total agriculture receipts is 40 percent higher in the EU than in the U.S. . Much of this support comes in the form of higher prices paid by domestic consumers. Recently, there has been increasing pressure to significantly reform the CAP; the program has been called by the popular press an “extravagant folly” and “demented” . These publications and others have argued that reform of the CAP will be a critical element of the next round of trade negotiations, if these talks are to be successful. Enlargement of the EU to include ten Central and Eastern European countries will also create pressure for further reform. Structural reforms of European agricultural policy will have important implications for California, both because the region competes in third markets with California, and because the region is an important customer, as discussed earlier. If the existing EU agricultural policy is applied to the 10 new member countries, the incentive will be to increase production and agricultural exports. Several of the new member countries have a comparative advantage in agriculture, especially in the area of wheat, coarse grains, and livestock. California agriculture will benefit if this expanded production results in budgetary pressure to reform the CAP. In addition, California agriculture may well benefit from projected income growth in Central and Eastern Europe that results from EU membership. Higher incomes in this region will lead to increased demand there for high-valued food, of the type exported from California. An ongoing trade dispute between the US and the EU concerns the use of geographical indicators . The EU wants to prohibit foreign producers of food and beverage products from labeling products with European regional names . The list of products that will receive this protection is an on-going subject of negotiation at the WTO. For California there is a trade-off associated with GI protection. On the one hand, California would have to stop using certain names if the EU is successful . On the other hand, California agriculture could use GI protection to develop niche markets for its food and beverage products, potentially capturing a price premium.China is a relatively new member of the WTO, and developments in China’s agricultural trade are being carefully watched by the California industry. China’s land area sown to fruits, nuts, and vegetables has grown rapidly in the past decade, and trade is expected to take on a greater importance for China in coming years now that it has joined the WTO. China’s horticultural exports account for more than one-half of its agricultural exports . Given China’s rich agricultural resources, abundant labor supply, and large population, it has great potential to play a much more prominent role in agricultural trade in the coming years, as both an exporter and an importer. China uses both tariff and non-tariff barriers to restrict agricultural imports. China has in place high import tariffs on certain agricultural commodities currently exported by California, such as citrus, table grapes, wine, beef and dairy products. There is also evidence that the value added tax in China, as currently applied, results in a price break for domestic field crops as compared to imports, of about 4 percent . China has import tariffs on citrus and table grapes of approximately 10 percent and maintains a restrictive tariff rate quota on cotton. As part of its WTO accession negotiations, China agreed to a significant lowering of these tariffs to around 10 to 12 percent. In addition, if the WTO liberalizes world trade in clothing and textiles , then China will undoubtedly expand exports of clothing and textiles. This could result in increased imports of cotton into China. Domestic developments in China not directly related to trade policy but related to rising incomes may also present opportunities for California agricultural exports to that country. For example, both the USDA Foreign Agricultural Service and the popular press have recently highlighted the growing importance of western-style supermarkets in Chinese cities, replacing more traditional markets. This may present a new opportunity for California producers, with new opportunities to supply pre-packaged or processed products and products that require refrigeration.