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USDA report on the impact of trade liberalisation on international dairy markets

31 March 2006

This USDA Economic Research Service report on the estimated impacts of trade liberalisation in international dairy markets uses ‘a partial equilibrium, multiple-commodity, multi-region model of agricultural policy and trade ... to simulate the effects of changes in domestic and trade policy on dairy production, consumption, prices and trade’.

The report notes that despite the Uruguay Round the dairy sector remains ‘the most protected agricultural sector’. It describes the dairy trade as ‘characterised by “megatariffs” (tariffs usually over 100%), tariff-rate quotas ... and export subsidies’. In addition ‘many countries provide trade-distorting income and price support to the dairy sector ... as a result, much of the world trade in dairy products is driven more by policy intervention than by market factors’.

It concludes that ‘international dairy-policy reform would result in lower global supplies of milk and dairy products, higher world dairy prices, and higher value of dairy trade’. However, the production decline would be small because contraction in some countries would be tempered by expansion in other countries.

The report suggests that in the EU the impact would be largely neutral since the effects of price declines on production would be offset by the removal of quotas. However the structure of EU exports would change with declines in butter and dried milk products and a maintenance of the EU’s share of an expanding cheese market.

Editorial comment

The report implies that in the EU liberalisation would largely reallocate dairy production between EU member states rather than reducing significantly the overall level of EU dairy production. This would appear to be consistent with the underlying objective of CAP reform, namely to shift internal production to the lowest-cost areas of production.

Comment

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