Implications of WTO Tariff Reductions for EU and US Dairy Policy

The objective of this study is to measure the impact of proposed Doha Round tariff reductions on the global dairy industry and dairy policy. We examine how proposed tariff reductions affect global trade and prices, and the implications for the European Union and the United States. Since international market conditions can vary, we examine the implications of liberalization under two sets of market conditions. The first corresponds to the year 2004 in which there was a global surplus of dairy products. In that year import protection ensured that U.S prices of dairy products were above world prices. The second corresponds to 2007, when dairy products globally were in short supply and U.S. domestic prices were at or below world prices. We show that proposed tariff reductions have different implications for dairy commodities depending on policy assumptions. For cheese and dry whole milk, tariff reductions reduce supplies and raise world prices due to reduced production in the EU. However, without a change in EU policies global butter prices would decline due an increase in EU supplies. Production shifts away from cheese into butter production, increasing the supply of butter on the world market. We conclude that with trade liberalization EU intervention prices or milk quotas would have to be reduced in order to counteract an increase in butter production and increased use of export restitution payments for that commodity.