General Agreement on Tariffs and Trade: Agriculture Department's
Projected Benefits Are Subject to Some Uncertainty (Letter Report,
07/22/94, GAO/GGD/RCED-94-272).

Congress is considering legislation to implement the Final Act of the
Uruguay Round negotiations. One important issue is the likely impact of
the Final Act on U.S. agriculture. In March 1994, the U.S. Department of
Agriculture (USDA) issued a report projecting that the Final Act would
boost world agricultural trade and benefit U.S. agricultural exports,
employment, and farm income. GAO concludes that USDA used a reasonable
analytical framework in estimating the Final Act's effect on U.S.
agriculture. However, the assumptions it used in forecasting future
benefits--specifically the growth in world income, how countries would
change their agricultural policies to implement the Final Act, and the
response of producers to changing agricultural policies--are subject to
substantial uncertainty. Because events could unfold differently than
the assumptions in USDA's analysis, the anticipated benefits to U.S.
agriculture should be interpreted with caution.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GGD/RCED-94-272
     TITLE:  General Agreement on Tariffs and Trade: Agriculture 
             Department's Projected Benefits Are Subject to Some
             Uncertainty
      DATE:  07/22/94
   SUBJECT:  International trade
             Foreign governments
             International economic relations
             Agricultural industry
             International agreements
             Foreign trade policies
             Economic analysis
             Economic growth
             Tariffs
             International trade regulation
IDENTIFIER:  Australia
             European Union
             United Kingdom
             North American Free Trade Agreement
             NAFTA
             
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Cover
================================================================ COVER


Report to the Chairman, Committee on Agriculture, House of
Representatives

July 1994

GENERAL AGREEMENT ON TARIFFS AND
TRADE - AGRICULTURE DEPARTMENT'S
PROJECTED BENEFITS ARE SUBJECT TO
SOME UNCERTAINTY

GAO/GGD/RCED-94-272

GAO/GGD-94-272P

GAO/GGD/RCED-94-272 USDA-Projected Benefits


Abbreviations
=============================================================== ABBREV

  CAP - Common Agricultural Policy
  CEA - President's Council of Economic Advisers
  ECU - European Currency Unit
  EU - European Union
  FAPRI - Food and Agricultural Policy Research Institute
  GATT - General Agreement on Tariffs and Trade
  ITC - International Trade Commission
  UK - United Kingdom
  USDA - U.S.  Department of Agriculture
  USTR - U.S.  Trade Representative

Letter
=============================================================== LETTER


B-257821

July 22, 1994

The Honorable E (Kika) de la Garza
Chairman, Committee on Agriculture
House of Representatives

The Congress is considering legislation to implement the Final Act of
the Uruguay Round negotiations that were conducted under the auspices
of the General Agreement on Tariffs and Trade (GATT).\1 One important
issue relevant to congressional decision-making is the likely impact
of the Final Act on U.S.  agriculture. 

In March 1994, the U.S.  Department of Agriculture (USDA) issued a
report that projected the impact that the Final Act would have on
U.S.  agriculture in the years 2000 and 2005.  Generally speaking,
USDA found that the Final Act would increase world agricultural trade
and benefit U.S.  agricultural exports, employment, and farm income. 
As you requested, we assessed the analytical framework of USDA's
analysis and the assumptions that USDA used to prepare its report.\2
While we identified other analyses completed on the Final Act's
economic impact on agriculture, at the time of our review, the USDA
study was the most comprehensive report available.  Two other studies
were completed after our review--one by the Food and Agricultural
Policy Research Institute (FAPRI)\3 and one by the International
Trade Commission (ITC).\4


--------------------
\1 GATT is an international organization created in 1947 pursuant to
the GATT agreement that now has more than 100 nations as signatories. 
The GATT is devoted to the promotion of freer trade through
multilateral trade negotiations and was founded on the belief that
more liberalized trade would help the economies of all nations grow. 
For more information on the Final Act, see International Trade: 
Observations on the Uruguay Round Agreement (GAO/T-GGD-94-98, Feb. 
22, 1994) and the forthcoming two-volume GAO report General Agreement
on Tariffs and Trade:  Uruguay Round Final Act Should Produce Overall
U.S.  Economic Gains. 

\2 See Effects of the Uruguay Round Agreement on U.S.  Agricultural
Commodities, USDA, Office of Economics and the Economic Research
Service (Washington, D.C.:  Mar.  1994). 

\3 See The Implications of the Uruguay Round for U.S.  Agriculture,
FAPRI, University of Missouri and Iowa State University (Columbia,
Missouri, and Ames, Iowa:  June 1994). 

\4 See Potential Impact on the U.S.  Economy and Industries of the
GATT Uruguay Round Agreements, ITC (Washington, D.C.:  June 1994). 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

USDA used a reasonable analytical framework, consistent with common
economic principles and modeling practices, to determine the economic
effects of the Final Act on U.S.  agriculture.  However, USDA's
projected benefits of the Final Act to U.S.  agriculture should be
interpreted with caution.  Even though USDA made reasonable
assumptions in conducting its analysis, assumptions about future
events are subject to inherent uncertainty. 

In particular, assumptions concerning three areas crucial to USDA's
analysis are subject to substantial uncertainty:  assumptions about
projections for world income growth resulting from the Final Act,
assumptions about how governments of other countries would implement
the Final Act, and assumptions about how agricultural producers in
the United States and other countries would respond to the expected
changes in agricultural policies. 

Regarding the first area of uncertainty, projected world income
growth was the principal basis for USDA's estimated benefits to U.S. 
agriculture.  USDA used two growth scenarios for world income.  Under
the high-growth scenario, two-thirds of the projected income growth
was attributed to dynamic gains, and under the low-growth scenario,
one-half was attributed to dynamic gains.\5 According to an ITC
report,\6

economists believe that while dynamic gains from more liberalized
international trade can be substantial, dynamic gains cannot be
easily estimated.  To the extent that these gains are not achieved,
the level of USDA's projected benefits to U.S.  agriculture may be
affected. 

Regarding the second area of uncertainty, governments would have to
make some major agricultural policy changes to implement the Final
Act, as well as take actions to respond to the consequences of the
Final Act.  As is characteristic of this type of analysis, USDA was
not able to project or incorporate all of these potential policy
changes in its analysis.  For instance, USDA assumed that the
European Union (EU)\7 would reduce its subsidized exports of grain,
as required by the Final Act, but did not assume further restrictions
in production.  Since the EU would be unable to export its excess
production, USDA's study assumed that the EU would allow its holding
of surplus grain stocks to more than double to some 77 million tons
by 2005.  According to USDA, however, it is unlikely that the EU
would allow stocks to grow to this level; instead, the EU would
implement policies to control the stock buildup by reducing
production.  Depending on what action the EU takes, and what actions
other nations take to address similar types of problems, U.S.  export
opportunities and the projected benefits of the Final Act for U.S. 
agriculture may be affected. 

Regarding the third area of uncertainty, agricultural producers
worldwide respond to a complex set of internal and external policies,
some of which would be changed significantly by the Final Act.  As a
result, any model, even with the best information available, would
have difficulty in accurately predicting future trade flows,
particularly because the trade environment is expected to change
significantly if the Final Act is implemented. 


--------------------
\5 Generally speaking, dynamic gains are benefits derived from higher
productivity, either due to higher investment rates or better
technology, that is stimulated by trade liberalization. 

\6 See The Dynamic Effects of Trade Liberalization:  A Survey, ITC,
Office of Economics (Washington, D.C.:  Feb.  1993). 

\7 The European Union was formerly known as the European Community. 
It consists of 12 member countries:  Belgium, Denmark, France,
Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands,
Portugal, Spain, and the United Kingdom. 


   BACKGROUND
------------------------------------------------------------ Letter :2

Signed on April 15, 1994, the Final Act includes the most substantial
reform in international agricultural trade undertaken by GATT
contracting parties.\8 One of the most significant provisions that
would be required by the Final Act is that countries would have to
make specific reductions in three types of government support for
their agriculture sectors-- restrictions on access to markets,
subsidies on exports, and financial support for production. 

Although USDA expected the Final Act would increase world
agricultural trade, estimates of the extent to which individual
commodity sectors in the United States would benefit from the Final
Act vary.  USDA estimated that the Final Act would benefit U.S. 
agricultural exports, employment, and farm income by 2005.\9
Moreover, USDA predicted that these gains would reduce the need for
government outlays to support commodity prices and farmers' incomes. 
Each of these predicted effects is discussed in the following
paragraphs. 

  Exports.  USDA reported that the Final Act would lead to
     substantially improved access to foreign markets for U.S. 
     agricultural exports and that annual exports would increase by
     between $1.6 billion and $4.7 billion by the year 2000 and
     between $4.7 billion and $8.7 billion by 2005.  While USDA
     expected exports to grow for various commodities, grains and
     animal products accounted for almost 75 percent of these
     projected increases.  Some of the reasons that USDA cited for
     the anticipated expansion in U.S.  agricultural exports included
     the expected rise in world income, the expansion of market
     access resulting from the Final Act, and the requirement that
     other countries would have to reduce their subsidized exports
     more than the United States to meet the provisions of the Final
     Act. 

  Employment.  USDA predicted that U.S.  export-related employment
     would increase as a direct result of the expected growth in
     agricultural exports, resulting in an increase in employment of
     41,000 to 112,000 jobs by the year 2000 and 105,000 to 190,000
     jobs by 2005. 

  Farm income.  USDA predicted the Final Act would lead to an
     increase in U.S.  net farm sector annual income (net of
     expenses) of between $1.1 billion and $1.3 billion by the year
     2000 and between $1.9 billion and $2.5 billion by 2005.  The
     principal basis for this increase was attributed to the expected
     growth in world income, which USDA predicted would raise the
     demand for agricultural products, particularly for
     income-sensitive commodities such as meat, fruits, vegetables,
     and other specialty crops.  According to USDA, increased demand
     for beef, pork, and poultry means that U.S.  feedgrain and
     soybean producers would gain as well. 

  Government outlays.  USDA predicted that annual government outlays
     for agriculture could decline by $0.7 billion-$1.3 billion by
     the year 2000 and $2 billion-$2.6 billion by 2005.  USDA
     projected that expanded U.S.  exports would raise commodity
     prices and increase farm income, and thus reduce the overall
     need for current government support programs. 

While the USDA study reported that the Final Act would generally
benefit most U.S.  agricultural commodity sectors, these benefits
would not extend equally to all commodities.  For instance, USDA
projected that the U.S.  wheat sector would benefit substantially,
while there would be no effect on the U.S.  sugar sector.  In
appendix I we provide more information on the USDA-estimated effects
of the Final Act on eight major U.S.  commodity sectors. 


--------------------
\8 Attempts were made to address agricultural trade in the Dillon
Round (1960-62), the Kennedy Round (1963-67), and the Tokyo Round
(1973-79).  While the scope of these efforts was not as broad as the
Uruguay Round (1986-93) negotiations on agriculture, the rounds did
provide some liberalization of agricultural trade. 

\9 Some commodities would be adversely affected in the short run, as
identified by the previously cited ITC study.  For a further
discussion of possible short-term effects, see the forthcoming GAO
report International Trade:  Impact of the Uruguay Round on the
Export Enhancement Program. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :3

For this report, we assessed the analytical framework of USDA's
analysis and the assumptions that USDA used to determine the impact
of the Final Act on U.S.  agriculture.  We interviewed USDA officials
and reviewed USDA documentation describing USDA's analytical
framework and assumptions to determine whether the framework and
assumptions adhered to common economic knowledge and principles and
common modeling practices.  We also interviewed USDA officials
regarding the application of the model that USDA used in its
analytical framework to project the economic effects of the Final
Act.  We did not evaluate the details of USDA's model structure nor
did we verify the accuracy of USDA's data or computations.  We also
reviewed two other analyses completed by the governments of
Australia\10 and the United Kingdom (UK).\11 However, because these
studies had a different focus than the USDA study, our use of them
was limited to comparing some of their assumptions to those made by
USDA.  We did not evaluate two other studies that were completed in
June 1994--one by FAPRI\12 and one by ITC\13 --because they were
published after we completed our work. 

We did our work between March and May 1994 in accordance with
generally accepted government auditing standards.  For more
information on our scope and methodology, see appendix II. 


--------------------
\10 See N.  Andrews, I.  Roberts, and S.  Hester, "The Uruguay Round
Outcome:  Implications for Agriculture and Resource Commodities," in
Outlook 94, Australia Bureau of Agricultural Research (ABARE),
Macroeconomic and Trade Branch (Canberra, Australia:  1994). 

\11 See The GATT Uruguay Round Agreement and the Implications for EC
Agriculture, (unpublished), United Kingdom, Ministry of Agriculture,
Fisheries and Food (London, England:  Feb.  1994). 

\12 See Implications of the Uruguay Round for U.S.  Agriculture. 

\13 See Potential Impact on the U.S.  Economy and Industries. 


   USDA USED A REASONABLE
   ANALYTICAL FRAMEWORK
------------------------------------------------------------ Letter :4

USDA developed two scenarios--one baseline scenario assuming the
Final Act would not be in effect and the other scenario assuming the
Final Act would be in effect.  The difference between the scenarios
constituted the estimated economic effects of the Final Act.  To
develop and compare both scenarios, USDA used analysts' judgment as
well as an econometric model to predict the supply, demand, exports,
and imports for 13 major U.S.  agricultural commodity sectors, such
as wheat and rice.\14 USDA incorporated into the model information on
43 countries and regions, with up to 25 agricultural commodity
sectors per country.  It appears that USDA linked to each
agricultural commodity sector the expected direct and indirect
effects of the Final Act.  For example, USDA predicted the economic
effects for livestock and linked the results to the effects for
feedgrains, showing how changes in livestock production might affect
the demand for feedgrains, and vice versa. 

Moreover, USDA incorporated various assumptions that appeared to
consider the effects of the Final Act and were consistent with common
economic principles.  For instance, USDA incorporated assumptions on

economic factors such as growth in national income and predicted how
consumers and producers would respond to this income growth--that is,
USDA assumed that consumers with more income would purchase more
agricultural commodities, and farmers would produce more to meet the
increase in demand.  USDA also incorporated analysts' expectations of
trade under normal conditions by considering factors such as weather
fluctuations, technological development, and the continuation of
current law, including the North American Free Trade Agreement\15 and
the EU's Common Agricultural Policy.\16


--------------------
\14 USDA estimated the effect of the Final Act on 13 U.S.  commodity
sectors--wheat, corn, rice, beef, cotton, dairy products, eggs,
peanuts, pork, poultry, soybeans, specialty products (e.g., fruits),
and sugar. 

\15 The North American Free Trade Agreement, which took effect in
January 1994, is an agreement between the United States, Canada, and
Mexico that establishes a free trade area between the three countries
through the combined elimination of tariffs and other barriers to
trade, including in most agricultural sectors, mostly within 10
years. 

\16 The EU's Common Agricultural Policy (CAP) attempts to increase
agricultural productivity by promoting technical progress, ensuring a
fair standard of living for the agricultural community, stabilizing
markets, assuring the availability of supplies, and ensuring that
supplies reach consumers at reasonable prices.  In 1992, the EU
supported farmers through CAP at a cost of 36 billion European
Currency Units (ECU) (about $30 billion at the 1992 year-end exchange
rate of $1=1.19 ECU), which accounted for almost 60 percent of the
EU's 1992 budget. 


   USDA'S ESTIMATED BENEFITS MUST
   BE INTERPRETED WITH SOME
   CAUTION
------------------------------------------------------------ Letter :5

While USDA used a reasonable analytical framework to predict the
effects of the Final Act, USDA's projected benefits should be
interpreted with caution.  All results based on assumptions about
future events are inherently subject to uncertainty.  To the extent
that the assumptions used in USDA's analysis are different from
events that actually unfold, USDA's projected benefits may be
affected. 


      ASSUMPTIONS RELATED TO WORLD
      INCOME GROWTH
---------------------------------------------------------- Letter :5.1

In any agriculture impact analysis, consideration of world income
growth is critical.  Such growth is a major factor in determining the
demand for agricultural commodities.  For instance, common economic
theory states that, when consumers have higher income, they tend to
purchase larger quantities of some food products and more
higher-quality products.  USDA followed this logic and assumed that
growth in world income would lead to a higher demand for grains and
meat.  In fact, the projected growth in world income is the principal
basis for USDA's estimated benefits to U.S.  agriculture after the
year 2000. 

However, the assumptions of world income growth used by USDA are
subject to substantial uncertainty because the growth estimates
included, in part, economic gains that are difficult to estimate. 
The assumptions included both static and dynamic income gains
anticipated from more liberalized international trade.\17 According
to an ITC report,\18 most economists specializing in international
trade believe that dynamic gains from trade liberalization are larger
than static gains but agree that dynamic gains cannot be easily
estimated.  The governments of Australia and the UK did not include
dynamic gains in their economic analyses of the Final Act. 

USDA used two growth scenarios for world income.  In the
higher-growth scenario, USDA used the estimate developed by the U.S. 
Trade Representative (USTR) and the President's Council of Economic
Advisers (CEA).  This estimate projected that the Final Act could
increase world income over a 10-year period in real terms, equivalent
to a 5-percent increase in world income in 2005, compared with what
it would be without the Final Act.  The estimate included a rise in
U.S.  real income over a 10-year period, equivalent to a 4-percent
increase in U.S.  income by 2005.  USTR and CEA attributed two-thirds
of this increase in income to dynamic gains. 

The lower-growth scenario for the anticipated impact on U.S. 
agriculture was based on less optimistic expectations for dynamic
gains from more liberalized international trade.  Under this
lower-growth scenario, USDA--in conjunction with USTR and
CEA--projected the cumulative world income growth would be equivalent
to about 2.5 percent of world income in 2005, compared with what it
would be without the Final Act.  The cumulative U.S.  income growth
over 10 years would be about 1.7 percent of U.S.  income in 2005. 
One-half of this projected income increase was attributed to dynamic
gains. 

To the extent that the projected income growth used by USDA--in
either the high- or low-growth scenario--is not achieved as a result
of the Final Act, there is uncertainty about the degree to which
increased world demand for agricultural products, particularly meat
and grains, would be realized.  As a result, USDA's projected
benefits to U.S.  agriculture would be affected. 


--------------------
\17 Generally speaking, static gains are benefits anticipated from
resources being reallocated to more efficient sectors of an economy
and from the increase in real income for consumers and downstream
producers due to cheaper prices on imported goods.  As previously
mentioned, dynamic gains are benefits derived from higher
productivity, either due to higher investment rates or to better
technology, that is stimulated by the trade liberalization. 

\18 See The Dynamic Effects of Trade Liberalization. 


      ASSUMPTIONS RELATED TO HOW
      COUNTRIES WOULD IMPLEMENT
      THE FINAL ACT
---------------------------------------------------------- Letter :5.2

To estimate projected benefits for the United States, USDA assumed
that all member countries would implement the Final Act.  However,
USDA assumed only changes specifically required by the Final Act
would be made.  While this is a common analytical approach, U.S. 
export opportunities and the projected benefits of the Final Act for
U.S.  agriculture depend on the actions that other nations would take
to implement the Final Act, as well as the actions they would take to
respond to the consequences of the Final Act.  The governments of the
United States and of other countries might make significant changes
to their agricultural policies because of the Final Act's provisions. 
Many of these possible changes would require hard choices. 

As is characteristic of this kind of analysis, USDA was not able to
project or incorporate all of these possible policy changes in its
analysis.  For instance, USDA assumed that the EU would reduce its
subsidized wheat exports as required to meet the provisions of the
Final Act.\19 Since the EU would no longer be able to export surplus
grain,\20 USDA assumed that the EU would allow its grain stocks to
more than double to some 77 million tons, as shown in figure 1. 

   Figure 1:  USDA-Assumed EU
   Grain Stocks Under the Final
   Act

   (See figure in printed
   edition.)

Source:  USDA. 

This situation would occur because USDA assumed that the EU would not
significantly change its agricultural policies to avoid excess
production leading to a doubling of grain stocks.  Our review of the
UK's analysis and our discussions with foreign officials confirmed
that EU stock levels could potentially rise for the reasons USDA
cited, unless EU policies changed. 

Although USDA assumed this level of EU grain stock in its analysis,
USDA stated that it is unlikely that the EU would be willing to allow
stocks to rise to this high level and would, therefore, implement
policies to control the buildup of stocks.  While EU and UK officials
told us that they were aware of the potential buildup of grain
stocks, and the challenge for addressing it, the EU has not yet
proposed any action.  How the EU will respond to this problem, and
how other countries will address similar types of problems, will
affect the benefits that are realized by U.S.  agriculture.  Because
USDA was not able to project or incorporate potential policy changes
into its analysis, USDA's projected benefits should be interpreted
with caution. 


--------------------
\19 The Final Act specifies that industrialized member countries,
including the United States, must reduce their subsidized exports by
21 percent of volume and 36 percent in budget outlays over a 6-year
period, using 1986 to 1990 as the base level. 

\20 EU grains include wheat, corn, barley, rye, and other grains. 


      ASSUMPTIONS RELATED TO
      RESPONSES OF PRODUCERS IN A
      NEW TRADE ENVIRONMENT
---------------------------------------------------------- Letter :5.3

Another area of uncertainty concerns assumptions about how
agricultural producers in the United States and other countries would
likely respond to changes in agricultural policies.  U.S.  and other
agricultural producers respond to a complex set of internal and
external policies, some of which would be changed significantly by
the Final Act.  As a result, any model, including USDA's, even with
the best information available, would have difficulty in accurately
predicting future trade flows, particularly because the trade
environment would be altered significantly under the Final Act. 

For example, changes in agricultural policies might enable certain
other nations to emerge as significant competitors in certain
commodities.  This circumstance could result in fewer gains for U.S. 
exports and greater import penetration in the U.S.  market.  This is
especially true in the context of individual market sectors, where
the future performance of U.S.  and foreign producers might differ
substantially from what is currently projected due to the response to
the new environment. 


   CONCLUSIONS
------------------------------------------------------------ Letter :6

USDA used a reasonable analytical framework in estimating the effect
of the Final Act on U.S.  agriculture.  However, the assumptions it
used in forecasting future benefits--specifically the growth in world
income, how countries would change their agricultural policies to
implement the Final Act, and the response of producers to changing
agricultural policies--are subject to substantial uncertainty. 
Because events could unfold differently than the assumptions in
USDA's analysis, the anticipated benefits to U.S.  agriculture should
be interpreted with caution. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :7

We discussed the contents of this report with USDA officials,
including the Principal Economic Counselor and the Deputy Coordinator
of USDA's analysis of the Final Act, on June 28, 1994.  The USDA
officials agreed with this report's overall message and offered a few
clarifying comments.  Specifically, they said that the estimates of
world income growth projected by the Final Act were developed
primarily by USTR/CEA.  We made the appropriate changes to the report
based on USDA's comments to include a more explicit recognition of
USTR/CEA's role in developing world income growth projections. 


---------------------------------------------------------- Letter :7.1

We are sending copies of this report to Members of the House and
Senate Agriculture Committees; the U.S.  Trade Representative; the
Secretaries of Agriculture, Commerce, and State; the Chairman of the
U.S.  International Trade Commission; and other interested parties. 
Copies will also be made available to others upon request. 

Please contact us on (202) 512-5889 or (202) 512-5138, respectively,
if you have any questions concerning this report.  Other contributors
to this report are listed in appendix III. 

JayEtta Z.  Hecker, Director
International Trade, Finance,
 and Competitiveness
General Government Division

John W.  Harman, Director
Food and Agriculture Issues
Resources, Community, and
 Economic Development Division


U.S.  DEPARTMENT OF AGRICULTURE
(USDA) ESTIMATED EFFECTS OF FINAL
ACT ON EIGHT U.S.  COMMODITIES
=========================================================== Appendix I

The U.S.  Department of Agriculture (USDA) estimated what the effect
of the Final Act would be on 13 U.S.  commodity sectors--beef, corn,
cotton, dairy products, eggs, peanuts, pork, poultry, rice, soybeans,
specialty products,\1 sugar, and wheat--and reported that the Final
Act would generally benefit 11 of the individual sectors by 2005.  In
conducting its analysis, USDA used a variety of indicators, such as
commodity production, exports, prices (farm or producer), and gross
farm receipts or value of production.  For example, USDA projected
that 11 sectors--beef, corn, cotton, dairy products, eggs, pork,
poultry, rice, soybeans, specialty products, and wheat would
experience an increase in exports; 1 sector--peanuts--would
experience a decrease in exports; and 1 sector--sugar--would
experience no change in exports. 

We reviewed USDA's forecast for 8 of the 13 U.S.  commodity sectors
(beef, corn, dairy products, peanuts, rice, soybeans, sugar, and
wheat) to obtain insights into how USDA conducted its analysis of the
impact of the Final Act on these commodities.  Figures I.1-7
highlight some of the benefits reported by USDA for seven of these
commodities (sugar excluded).\2 For two of these sectors--beef and
peanuts--we have included explanatory notes on why all indicators for
these commodities do not show benefits from the Final Act. 

The benefits to U.S.  agricultural commodity sectors are shown as
percentage increases above USDA's baseline scenario in the areas of
production, exports, prices, and gross farm receipts or value of
production.  USDA provided both a high and low range of estimated
benefits of the Final Act for each commodity sector, except peanuts. 

   Figure I.1:  Anticipated
   Percentage Change From USDA
   Baseline for Beef by 2005

   (See figure in printed
   edition.)

Source:  USDA. 

USDA projected that under the low-growth scenario, U.S.  beef
production would fall 1 percent below the USDA baseline.  This
decline would be due to an increase in beef production costs brought
about by higher--Final Act-driven--feedgrain prices.  USDA also
projected that U.S.  domestic consumption of beef would decrease
under this scenario due to increases in the price of beef. 

   Figure I.2:  Anticipated
   Percentage Change From USDA
   Baseline for Corn by 2005

   (See figure in printed
   edition.)

Source:  USDA. 

   Figure I.3:  Anticipated
   Percentage Change From USDA
   Baseline for Dairy Products by
   2005

   (See figure in printed
   edition.)

Source:  USDA. 

   Figure I.4:  Anticipated
   Percentage Change From USDA
   Baseline for Peanuts by 2005

   (See figure in printed
   edition.)

Note:  Although we did not generally verify USDA's computations, we
noticed what appeared to be an error in USDA's estimate of the
increase in value of production for peanuts.  We brought this to the
attention of USDA officials.  The officials checked their
computations and informed us that they had made an error.  The
correct percentage change from the USDA baseline for the value of
production for peanuts is 20 percent rather than the 25 percent shown
in the USDA report.  Figure I.4 above reflects this correction. 

Source:  USDA. 

USDA provided only one estimate of the change from the baseline
forecast for peanuts--rather than a range bracketed by high and low
estimates of change as it did for other agricultural commodities. 
USDA projected that if the Final Act is implemented, U.S.  peanut
prices received by farmers would be 2 percent lower than in the USDA
baseline scenario.  This situation would occur because the U.S. 
minimum government support price would increase more slowly under the
Final Act due to the expected increase in imported peanuts.  USDA
also projected that domestic demand would increase for peanuts and
thus reduce the supply of this commodity available for export. 

   Figure I.5:  Anticipated
   Percentage Change From USDA
   Baseline for Rice by 2005

   (See figure in printed
   edition.)

Source:  USDA. 

   Figure I.6:  Anticipated
   Percentage Change From USDA
   Baseline for Soybeans by 2005

   (See figure in printed
   edition.)

Source:  USDA. 

   Figure 1.7:  Anticipated
   Percentage Change From USDA
   Baseline for Wheat by 2005

   (See figure in printed
   edition.)

Source:  USDA. 


--------------------
\1 Specialty products include fruits, tree nuts, and vegetables. 

\2 U.S.  sugar imports are subject to specific quotas and tariffs
that already meet the provisions of the Final Act for minimum market
access.  Even though the Final Act specifies that tariffs be reduced
over the next 6 years, USDA assumed that U.S.  sugar tariffs would
remain high enough to discourage additional imports.  As a result,
USDA predicted that the Final Act would not affect the U.S.  domestic
sugar market. 


OBJECTIVES, SCOPE, AND METHODOLOGY
========================================================== Appendix II

As you requested, we prepared this report on USDA's projected
economic effects of the Final Act of the Uruguay Round negotiations
to U.S.  agriculture to assist the Congress in considering
legislation to implement the General Agreement on Tariffs and Trade
(GATT).  Specifically, we assessed the analytical framework of USDA's
analysis and the assumptions that USDA used to prepare its report. 

To identify all studies completed on the Final Act's economic impact
on U.S.  agriculture, we interviewed U.S.  and foreign officials
representing various U.S.  and world organizations.  Specifically, we
contacted U.S.  officials representing USDA, the U.S.  Mission to the
General Agreement on Tariffs and Trade, the U.S.  Mission to the
European Union (EU), the U.S.  embassies in the United Kingdom (UK)
and France, the Congressional Research Service, the Office of
Technology Assessment, the Congressional Budget Office, and the Food
and Agricultural Policy Research Institute (FAPRI).  We also
contacted foreign officials representing the GATT Secretariat; the
EU; the UK's Ministry of Agriculture, Fisheries and Food; the British
National Farmers Union; the British and Australian embassies located
in Washington, D.C.; the Organization for Economic Cooperation and
Development; AgraEurope; and the United Nations Commission on Trade
and Development. 

We focused our review on the USDA study because it was the most
comprehensive report available during the time of our review.  We
also reviewed two other analyses completed by the governments of
Australia\1 and the UK.\2 However, because these studies had a
different focus than the USDA study, our use of them was limited to
comparing some of their assumptions to those made by USDA.  Two other
studies were completed in June 1994--one by FAPRI\3 and one by the
International Trade Commission (ITC).\4 However, we did not evaluate
these studies because they were published after we finished our
review. 

We assessed USDA's analytical framework to determine whether it
adhered to common economic principles and common modeling practices. 
We reviewed the two scenarios USDA developed:  one scenario assumed
that the Final Act would not be in effect, and the other scenario
assumed that Final Act would be in effect.  We did this by studying
USDA documentation describing the econometric model USDA used to
predict the effect of the Final Act on, among other things, world
prices and trade in agricultural commodities.  We also interviewed
USDA officials regarding the application of the model and whether
there were linkages between the results predicted by the model.  We
did not evaluate the details of USDA's model structure, nor did we
verify the accuracy of USDA's data or computations. 

To determine the reasonableness of USDA's assumptions, we reviewed
numerous assumptions USDA made for analyzing the two scenarios.  We
then identified the assumptions most important to USDA's analysis and
focused our evaluation on them.  We reviewed USDA documentation and
interviewed USDA officials to determine whether the assumptions USDA
made adhered to common economic knowledge and principles.  To the
extent the information was available, we also compared some of USDA's
assumptions with those made by other governments in their analyses
measuring the likely impact of the Final Act.  To obtain additional
information on the reasonableness of some of USDA's assumptions, we
interviewed officials representing the U.S.  Mission to the European
Union; the EU; the UK's Ministry of Agriculture, Fisheries and Food;
and the British National Farmers Union. 


--------------------
\1 See N.  Andrews, et al., The Uruguay Round Outcome. 

\2 See The GATT Uruguay Round Agreement. 

\3 See The Implications of the Uruguay Round for U.S.  Agriculture. 

\4 See Potential Impact on the U.S.  Economy and Industries. 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix III

GENERAL GOVERNMENT DIVISION,
WASHINGTON, D.C. 

John R.  Schultz, Assistant Director
Kurt W.  Kershow, Assignment Manager
Becky K.  Kennedy, Evaluator-in-Charge
Jane-Yu Li, Senior Economist
Susan S.  Westin, Senior Economist
Rona H.  Mendelsohn, Evaluator (Communications Analyst)
Margo A.  Mitchell, Secretary

RESOURCES, COMMUNITY, AND ECONOMIC
DEVELOPMENT DIVISION, WASHINGTON,
D.C. 

Juliann M.  Gerkens, Assistant Director
Mehrzad Nadji, Assistant Director for Economic Analysis
Carol E.  Bray, Senior Economist

OFFICE OF THE CHIEF ECONOMIST,
WASHINGTON, D.C. 

Loren Yager, Assistant Director

EUROPEAN OFFICE

Shirley A.  Brothwell, Senior Evaluator