|◆ The new domestic content law created a new nontariff barrier starting in 1994, just as GATT had eliminated such nontariff barriers elsewhere. If the law stays in place, the United States will likely be forced to use GATT Article 28 and pay compensation to affected parties.|
|◆ Given buyers' reactions and the importance of exports, it is not obvious that the minimum domestic content requirement of 75% benefits the US leaf industry.|
|◆ Australia has an output quota policy similar to that of the United States, but it does not export and needs an import barrier to keep domestic prices above potential import prices.|
|◆ As in most of the developed world, domestic demand for tobacco in Australia has been falling (in part, because of tax increases and regulations). The domestic quota program is under stress and the government has agreed to buy out (some) grower quota to reduce the losses incurred by growers.|
|◆ As a part of the URA, Australia is eliminating its domestic content law and setting a tariff-rate quota at the average of recent imports. However, this quantity will be a large percentage of future domestic demand because the market itself is shrinking. The future outlook is for a much smaller tobacco industry in Australia with low domestic consumption, imports of leaf and no export potential.|
Finally, the inconsistency of the United States instituting a nontariff barrier for a major export industry just when other such barriers are being dismantled (in part due to US insistence) is particularly ironic given that the U S tobacco industry has operated a successful cartel and has a future dependent on exports. This new domestic content law will surely cause trade friction and related problems. Meanwhile, Australia has been pressured into eliminating its domestic content law. Its tobacco industry will almost surely decline significantly over the next few years but mainly as a result of declining domestic cigarette sales. Therefore, as Canada faces adjustments in its supply-managed commodity industries, the lessons from the United States and Australia may prove useful.
Alston, J. M. 1992. "Economics of Commodity Supply Controls", in Tilman Becker et al., eds., Improving Agricultural Trade Performance Under the GATT. Pp. 83-103. Kiel, Germany: Wissenschaftsverlag Vauk.
Alston, J. M., and D. A. Sumner. 1988. "A New Perspective on the Farm Program for US Tobacco". University of California, Department of Agricultural Economics, Davis, CA.
Beghin J. C., and F. Hu. 1994. "Declining US Tobacco Exports to Australia: A Derived Demand Approach to Competitiveness." International Agricultural Trade Research Consortium Working Paper 94-3, Minneapolis, Minnesota (June).