A remarkable historic WTO agreement signed in Nairobi in December abolishes agriculture export subsidies and will yield significant benefits for Australian exporters.
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While export subsidies on industrial products were prohibited more than 40 years ago, export subsidies have persisted in agricultural trade. However, the agreement reached by WTO Members at the 10th WTO Ministerial Conference in Nairobi last December means that WTO Members’ must now phase-out around US$12b worth of export subsidy entitlements in agricultural trade. While actual utilisation was less than this allowance, potentially large trade distortions have now been permanently removed. As a large agricultural exporter with minimal levels of producer support, Australian exporters will now be on a much more level playing field in global markets. Dairy, meat, wine and wheat exporters stand to make the largest gains.
The centrepiece of the December 2015 Nairobi Package was the decision to eliminate subsidies for agricultural exports and prevent their future use. Developed Members committed to eliminate scheduled export subsidies immediately — except for a handful of farm products where subsidies may continue until the end of 2020 — and developing countries will do so by 2018.  The WTO described the agreement as the ‘most significant outcome on agriculture’ in the organisation’s 20 year history.
Under the auspices of the WTO Agreement on Agriculture (1995) 16 members have a collective entitlement to spend around US$12b each year on agricultural export subsidies. This generous concession underlines the potential for trade distortion. Cereal, meat and dairy products accounted for 80% of available allowances for subsidised trade (Chart 1).
Australia is a leading world exporter of agricultural products (Chart 2) — with exports worth A$44b (14% of total exports) in 2014. Current support for those products are relatively low (Chart 3). Within the export subsidy component of support, Australia last used its allowance in 2000 (dairy).
Export subsidies are the most trade-distorting agricultural policies. By depressing and destabilising international market prices, export subsidy use by a small number of countries can lower farm incomes in other exporting countries such as Australia. This potential trade distortion will now be progressively removed and a much more level playing field for Australian agricultural exporters will emerge. Increased competitiveness will help Australian agricultural exporters sell their wares to the rapidly expanding Asian middle class and aid in the crucial diversification of Australia’s export base.
WTO rules permitted 16 WTO members to maintain export subsidy entitlements for certain agricultural products. But many countries have significantly reduced their export subsidies in recent years and usage rates are well below allowance caps. Since 2005, five economies have used their allowances for farm products that are amongst Australia’s top ten agricultural exports. But while the number of active allowances is small, the size of subsidised trade is substantial. Over A$6b has been spent since 2005 on export subsidies for Australia’s 10 largest agricultural exports.
Dairy exporters will reap the largest gains from the Nairobi Package — since 2005 over A$3.7b has been spent on dairy export subsidies by Canada, EU, Norway, Switzerland and the US. Meat, beef, wheat, wine and live animal exporters will also achieve gains (Chart 4). Elimination of distortive farm export subsidies has been a major objective of Australian trade policy since the 1970s.
With export subsidies now removed, negotiations can focus on the remaining pillars of inappropriate agricultural support and market access barriers. They can also put a spotlight on reducing global tariff levels and increase market opportunities for Australian exporters.
Despite all the problems confronting resource and non-resource exporters alike, exports continue to be a strong engine of growth in the Australian economy.
Over the past year, Australia’s export performance has struggled with a confluence of external headwinds. Most important is the challenge of China’s economic rebalancing. China’s construction boom fuelled Australia’s mining boom — the share of exports sent to China consequently grew from 10% to over 30% over the decade to FY2015 (the highest among G20 economies, Chart 5). China’s economic performance is therefore intricately linked to our own. Despite China’s well reported decelerating rate of growth, real GDP output remains strong owing to the enlarged size of the economy (Chart 6). But as China increasingly relies on consumption to drive growth, Australia’s resource exports have flailed (Chart 7) — sharp falls in commodity prices have overwhelmed a significant increase in export volumes.
Falling resources exports were only partly offset by increases in the value of services and agricultural exports. Trend export growth performance has therefore come slightly off its peak (Chart 8). The share of exports in GDP also dipped to just below 20% of GDP. Yet, overall net exports still contributed 1.4% to real GDP growth of 2.2% in 2014-15 (Chart 9).
Over the year ahead exports will remain strong. Treasury’s latest forecasts suggest net exports will contribute 1% pt to GDP growth in both 2015-16 and 2016-17. With other sectors of the domestic economy lacklustre, the RBA thinks year-ended GDP growth will continue to run below trend at 2½–3½% over the year to December 2016, and to increase to 3–4% over the year to June 2018.
The outlook for resource exports will continue to be marred by the Chinese property market slowdown and overcapacity in resource and energy intensive sectors weighing on prices. For instance, iron ore export values are expected to fall 14% this FY despite a 9% increase in volumes. Price declines have in turn led to falling mining investment. The Department of Industry’s latest Resource and Energy Major Projects Report reports that Australia's minerals and petroleum exploration expenditure fell 22% to A$5.4b in 2014-15. Yet resources exports are still expected to make a substantial contribution to growth, with several projects nearing completion and giving rise to an increase in production.
International trade agreements coupled with the benefits of a lower exchange rate and energy input costs will also aid Australia’s non-resource exports. In particular, tourism, education, premium food and wine and business services have significant capacity to capitalise on growing demand from the Asian middle class. Treasury expects Australia’s major trading partner growth to be 4% over this year and next, about 0.5% pt higher than world growth. This reflects the relative strength of East Asian economies and their positive outlook. Amongst the countries rated by S&P, those with negative outlooks outweigh those with positive outlooks by a ratio of 3 to 1. Asia is the only region with a positive outlook balance.
Free trade agreements with Korea and Japan spurred a revival of wine export sales last year after a decade of annual average contractions. The next phase of the Australian wine export renaissance is expected from China — as the benefits of ChAFTA come online.
The value of Australian wine exports accelerated 14% to A$2.1b over 2015. This marks a dramatic turnaround after an annual average industry contraction of 5% since peaking in 2007. Asia dominated the increased business (Chart 10). The value of Australian wine exports to North East Asia was up 46% over 2015. In particular, momentum behind wine export sales is being driven by free trade agreements with Korea and Japan.
The Korean FTA which came into effect in December 2014 eliminated a 15% wine tariff and put Australia on equal terms with Chile and Europe. Wine exports to Korea over the year subsequently increased almost 40% by value and volume.
The Japan-Australia Economic Partnership Agreement (JAEPA) came into effect last January and eliminated tariffs on bulk wine. Over 2015, bulk wine exports increased five-fold by volume and four-fold by value. JAEPA will phase out the original 15% tariff on bottled wine to zero over seven years. Following a tariff reduction to 11.3% in April 2015, bottled wine exports to Japan increased 5% to A$35m over the remainder of the year.
The good news is all the better given that the growth of wine exports into Asia is dominated by the premium segments (over A$10 per litre) (Chart 11). This is a more profitable trade, especially for small and mid-sized wine makers.
The next phase of the Australian wine export renaissance is expected from China — following ChAFTA’s entry into force on 20 December. Chinese tariffs on wine will be phased out over four years — but increased negotiations with Chinese distributors for Australian imports have already began.
The Chinese market is already Australia’s largest in the over A$7.50 a litre segment. The value of wine exports to China increased 66% to A$370m over 2015 (to 18% of the total). The surge in China’s middle class and the reorientation of the economy away from exports and investment in favour of consumption, will compound market access advantages and suggests a positive outlook for Australian wine exports.
Improved economic conditions in Australia’s two largest established export regions — Europe and North America — along with a more competitive AUD are also driving improved export prospects for the wine industry.
 Some developing Members with scheduled entitlements will have until 2020. All developing Members will keep the flexibility to cover certain marketing and transport costs for agriculture exports until the end of 2023, and the poorest and food-importing countries would enjoy additional time to cut export subsidies.
Cassandra Winzenried, Senior Economist
The views expressed in Export Monitor are Efic’s. They do not represent the views of the Australian Government. The information in this report is published for general information only and does not comprise advice or a recommendation of any kind. While Efic endeavours to ensure this information is accurate and current at the time of publication, Efic makes no representation or warranty as to its reliability, accuracy or completeness. To the maximum extent permitted by law, Efic will not be liable to you or any other person for any loss or damage suffered or incurred by any person arising from any act, or failure to act, on the basis of any information or opinions contained in this report.