Agricultural policy reform under the WTO and Doha

1
Agricultural policy reformunder the WTO and Doha

• Kym Anderson
• Development Research Group, World Bank
• PREM Week, Washington DC, 25 April 2005

2
Why much of the focus in DDA must be on
agriculture

• even though it provides less than 4 of global
  GDP and 9 of intl merchandise trade
• OECD manufacturing tariffs have fallen by 9/10ths
  over the past 60 years to lt4, while agricultural
  protection has risen
• Agric. applied (bound) tariffs now average nearly
  5 (10) times manufactures tariffs globally
• Also, the vast majority of the worlds poor rely
  on farming for a living, and may be hurt by agric
  protection policies of rich countries

3
Why focus on agriculture (cont.)

• True, the harm to some DC farmers from
  rich-country agricultural protection is reduced
  via non-reciprocal preference schemes such as the
  ACPs Lome Agreement, EBA and AGOA
• But those schemes contravene the core WTO rule of
  non-discrimination
• In particular, they exclude numerous populous DCs
  (eg Brazil, China, India, Indonesia, Pakistan,
  Vietnam)
• Hence they may harm more poor farmers (through
  trade diversion) than they help

4
Questions re. past, present, future of
agriculture in the WTO

• Why the Uruguay Round (but not earlier GATT
  rounds) addressed agriculture
• extent of pre-WTO growth in agricultural
  protectionism
• How URAA addressed agriculture, and its economic
  effects
• Challenges for Doha round and beyond

5
Why the UR (but not earlier GATT rounds)
addressed agriculture

• The long history of government interventions that
  distort agricultural markets
• Distinctive features of distortions across
  countries and over time
• Reasons for those features, for agriculture
  being neglected by GATT prior to 1986
• Why agriculture was included in the UR

6
History of government interventions in
agricultural markets

• Been going on for millennia
• see Old Testament, e.g.
• Sometimes to raise tax revenue
• Sometimes to boost food self-sufficiency/food
  security
• Sometimes to reduce domestic price fluctuations
• consumers concerned with peaks
• producers concerned with troughs

7
Three past features of agricultural distortion
patterns

• 1. The domestic-to-border price ratio was greater
  for agriculture relative to that for
  manufacturing, the higher a countrys per capita
  income, cet. par.
• i.e. poor (rich) countries tended to depress
  (raise) incentives for farmers relative to
  manufacturers vis-a-vis international market
  price ratios

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Three past features of agricultural distortion
patterns (continued)

• 2. Agricultural protection was greater, the
  higher a countrys comparative disadvantage in
  agric, cet. par.
• i.e. countries that would be net food exporters
  (importers) under free trade tended to depress
  (raise) incentives for farmers relative to
  manufacturers

9
Three past features of agricultural distortion
patterns (continued)

• 3. All countries tended to use trade policy
  measures to reduce fluctuations in domestic food
  prices and quantities
• with agric-protective countries mainly reducing
  troughs in farmer prices
• and agric-taxing countries mainly reducing peaks
  in consumer prices of food

10
Implications for agricultural protectionism

• As economies grew and their agric. comparative
  advantage declined, they tended to gradually
  reduce their discouragement of farmers (and
  support for food consumers), and to replace it
  with increasing support for farmers (at the
  expense of consumers and/or taxpayers)

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Implications for food prices in intl markets

• Over time, the decline in agric taxation and
  growth in agric protectionism that accompanied
  economic growth put downward pressure on intl
  agric prices
• And the use of trade policy to stabilize domestic
  food markets exacerbated fluctuations in intl
  food prices

12
Political economy of agricultural protection

• Why was this pattern is observed across countries
  and over time?
• Since each countrys policy choice exacerbates
  the long-run downward trend and fluctuations in
  intl food prices, it encouraged other countries
  to follow suit
• So why did countries not agree multilaterally to
  desist before the 1990s?

13
What was different about the 1980s that brought
agric to the Uruguay Round?

• CAP-generated surpluses led to disposal via EU
  export subsidies
• US ( Canada) retaliated in kind
• Pushed real food prices in intl markets to
  centurys lowest level by 1986
• which more than doubled the welfare costs of
  agricultural protection over the 1980s (Tyers and
  Anderson 1992)

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Who brought agriculture into the UR?

• US farmers were hurt more by EU policies than EU
  farmers were by US policies
• Australia/NZ and food-exporting DC farmers were
  affected hugely
• led to formation of Cairns Group in 1986, whose
  sole aim was to keep agriculture high on UR
  agenda
• its ag. exports Japans man. exports
  

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How URAA addressed agriculture

• Sought commitments to reduce protectionist
  interventions in 3 areas
• cut agricultural export subsidies
• cut domestic subsidies to farmers
• cut barriers to agric and food imports
• with SPS Agreement to reduce the likelihood of
  re-instrumentalization

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How URAA addressed agriculture (continued)

• Explicit cuts were agreed to on all three types
  of measures
• but in each case there was lots of wriggle
  room, such that in practice very little reform
  has occurred
• 1. Agric export subsidies to be cut
• 36 by value, 21 by volume over six years to
  2000 (or, for DCs, by 2/3rds those rates by 2004)

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How URAA addressed agriculture (continued)

• 2. Amber box domestic subsidies to farmers to be
  cut by 20 in aggregate by 2000 (or 13.3 for DCs
  by 2004)
• but blue box and green box and de minimis
  exceptions ensure almost no cuts have taken place

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How URAA addressed agriculture (continued)

• 3. Import market access
• tariffication of NTBs
• tariffs bound and reduced by 36 (unweighted
  average) and by 15 on each item
• minimum access of 3-5 of domestic market to be
  guaranteed by tariff rate quotas (TRQs)

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How URAA addressed agriculture (continued)

• Dirty tariffication meant very little increased
  market access in practice
• It also left most countries with the opportunity
  to vary their applied tariffs upward if desired
  (e.g. to keep domestic price from falling)
• so the hoped-for reduction in international price
  fluctuations did not materialized

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How URAA addressed agriculture (continued)

• Tariff rate quotas (TRQs) have several
  undesirable features
• they legitimize a role for STEs
• they generate quota rents
• recipients of which now oppose TRQ expansion and
  cuts to applied out-of-quota tariffs
• they can discriminate between import-supplying
  countries
• they reduce welfare more than similarly
  protective tariffs (especially as intl prices
  fall)

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Challenges for Doha and beyond

• The UR brought agric into the GATT mainstream,
  but
• export subsidies are still allowed
• a form of QR still restricts imports
• few OECD countries have reduced their assistance
  to farmers since 1995
• Hence agriculture remains by far the most
  protected goods sector post-UR

22
(No Transcript)
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Challenges ahead (continued)

• If tariff rate quotas in agric prove as difficult
  to remove as QRs on textile trade, they may be
  still with us in 2050!
• 43 WTO members have TRQs, and more than half use
  them
• The gap between the in-quota and out-of-quota
  tariffs provides huge gains to license holders
• which means some previous supporters of agric
  trade reform are now less so

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The Doha rounds progress

• Rocky start (Seattle 1999, Cancun 2003), but by
  July 2004 WTO members had put together a
  Framework agreement that focused mostly on
  resolving agric issues
• If implemented, how much economic impact would it
  have, including relative to a move to complete
  free trade?
• This was the subject of a DECRG research project
  over the past 12 months

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What differentiates our new study?

• Its point of departure is the WTOs July 2004
  Framework agreement
• It examines in detail each of the 3 agricultural
  pillars plus preferences, cotton subsidies,
  non-agricultural tariffs, and SD for DCs reform
• It adds up the consequences of current policies
  and prospective Doha reforms using data from
  CEPII/ITC Banks Linkage model, incorporating
• bound as well as applied tariffs at the HS6 level
• non-reciprocal as well as reciprocal preferential
  tariffs
• key trade policy changes to the start of 2005

26
Questions addressed

• What are the potential welfare gains from full
  goods trade reform, by country/region, due to
• developed relative to developing countries
  policies?
• agriculture relative to manufacturing policies?
• within agric., tariffs relative to export
  subsidies and domestic support?
• How close might Doha get to completely freeing
  merchandise trade, in welfare and trade terms,
  based on July 2004 Framework agreement?

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Modeling Doha reform packages using World Banks
Linkage Model

• Recursive dynamic CGE model
• We start with GTAP 2001 protection data and
  project on-going reforms from 2001 to end-2004
• Uruguay Round including ATC
• EU25 enlargement
• WTO accession for China, etc.
• Then we assume no further reform as global
  economy grows to 2015 (according to World Bank
  population, income, etc. projections), to get our
  global baseline scenario for 2015, against which
  to compare reform scenarios

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Comparison with earlier studies

• Welfare effects are smaller than when GTAP
  Version 5 database for 1997 is used (as in
  GEP2004, e.g.) because
• Much liberalization since 1997, including
  implementation of unilateral reforms and regional
  and UR agreements
• Non-reciprocal preferences are now in database
• New provider (CEPII/ITC) of protection data

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Current applied tariffs ()
Agriculture and food Textiles and clothing Other merchandise
Low-income countries 22 18 15
Middle-income countries 17 17 7
High-income countries 16 8 1
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Linkage models gain by 2015 from removing
current protection policies

• Global benefit from removing current tariffs on
  all goods plus agricultural subsidies would be
  287 billion per year by 2015
• (Would have been about 350 billion if we
  included key reforms during 2001-04)
• 2/3rds accrues to high-income countries
• But as of GDP, the benefit to DCs is twice that
  for developed countries

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Full liberalization global gain (bn)
billion due to reform by Agric food Textiles clothing Other manuf TOTAL
High-income countries 133 16 9 159 (55)
Developing countries 42 24 58 126 (45)
All countries policies 182 (62) 38 (14) 67 (24) 287 (100)
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Full libn gains to developing countries
billion due to reform by Agric food Textiles clothing Other manuf. TOTAL
High-income countries 26 15 4 44 (50)
Developing countries 27 9 6 45 (50)
All countries policies 54 (62) 22 (27) 10 (11) 86 (100)
33
Relative importance of 3 agric pillars
Welfare gains from of gain to Agric market access Agric domestic support Agric export subsidies All agric policies
Developing countries 106 2 -8 100

World 93 5 2 100
34
Welfare gain from full Liberalization(percentage
change from baseline income in 2015)
35
Ag food output rise from full libn(percentage
change from baseline income in 2015)
36
Real farm income rise from full libn(percentage
change from baseline income in 2015)
37
Effects of full libn on DC agric food
change in Real value of agric and food output Real value of agric and food exports Real net farm income
Brazil 34 121 52
Sub-Saharan Africa 2 48 9
All developing countries 2 67 5
38
Effects of full libn on DC factor rewards
change in Farm land Unskilled wages Skilled wages
Brazil 1.8 2.7 1.4
Sub-Saharan Africa 4.9 6.0 4.3
All developing countries 0.9 3.5 3.0
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Take-away messages from full libn

• Potential gains from further trade reform are
  large
• Even after UR and recent accessions to WTO and EU
• ?Must find the political will for Doha success
• DCs would gain disproportionately from reform
• Notwithstanding non-reciprocal tariff preferences
• But as much would come from South-South as
  South-North trade growth, hence importance of DC
  libn too
• Agricultural reforms are the highest priority for
  goods, from global and DC viewpoints, and if Doha
  is to be pro-development and pro-poor

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Take-away messages (continued)

• Removal of agric export subsidies great
  achievement
• Removing cotton subsidies in US and EU would
  raise DC share of global cotton exports from 56
  to 85
• and price of Brazils cotton exports by gt8
• Reducing/disciplining other trade-distorting
  agric domestic support is crucial too, not least
  to prevent re-instrumentation of agric protection
  when tariffs are cut
• But, gains to DCs from agric subsidy cuts could
  be multiplied many-fold by also cutting agric
  tariffs
• with half those potential market access gains
  coming from South-South trade growth

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Key elements of the Doha Agenda as shown in the
July 2004 Framework agreement

• 3 agricultural pillars (including cotton)
• Non-agricultural market access
• Services
• Trade facilitation
• Lesser tariff and subsidy cuts for developing
  countries (DCs) and zero cuts for least-developed
  countries (LDCs)

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Our prospective Doha scenarios

• We assume no services reform, no new trade
  facilitation, but
• phase out of agricultural export subsidies
• tiered cut to agricultural domestic support
• and tiered cut to agric and non-agric bound
  tariffs under various alternative market access
  packages

43
Binding overhang in agric tariffs,
Bound Applied
Mercosur 34 13
LDCs 78 13
All DCs 48 21
44
Agricultural market access

• Tiered formula for cutting bound tariffs (with
  smaller cuts for DCs)
• Formula sought by Harbinson yielded almost no
  gains to DCs
• especially if lesser (15) cuts for 2 of
  products that are sensitive and another 2 of
  DC products that are special
• So we increased each cut by 10 percentage points
  more than Harbinson

45
Tiered ag tariff formula line-by-line

• Tiers in developed countries at 15 90 bound
  tariffs
• Harbinson cuts of 40, 50 and 60
• Deeper cuts marginal cuts 45, 70 75
• Tiers in developing countries at 20, 60, 120
  bound tariffs
• Harbinson cuts of 25, 30, 35 and 40
• Deeper formula marginal cuts 35, 40, 50 60

46
Agricultural domestic support

• Cut in bound AMS need not reduce applied support,
  because of binding overhang here as well (with
  1986-88 ref. prices)
• and overhang can be increased by abolishing admin
  prices used to calculate market price support
• We apply a tiered reduction in bound AMS
• 75 if AMSgt20, otherwise 60 for developed
  countries (40 for developing, zero for LDCs)
• Leads to only 4 members reducing support
• US 28, Norway 18, EU 16, Australia 10

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Non-agric market access, and extent of DC
willingness to reform

• 50 cut in bound rates for high-income countries,
  33 for DCs, 0 for LDCs
• We also examine the effects of DCs (including
  LDCs) becoming full participants in Doha agric
  and NAMA cuts (Doha-All scenario)
• recalling from earlier Rounds that DCs only got
  what they gave, in terms of increased market
  access (see Finger 1974, 1976 Finger and
  Schuknecht 2001)

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Results from Doha agric reform

• Tiered formula cut as per Harbinson gives the
  world 54 billion, but little goes to DCs
• So we increased all cuts by 10 percentage points,
  which gave a 75 billion global gain
• Even then, only 9 billion go to DCs
• if HICs exempt just 2 sensitive products
  (DCs 4), global gain shrinks to 18 billion, and
  DCs gain disappears
• although a 200 tariff cap reduces much of that
  shrinkage
• Small DC gains because of their (a) lesser cuts
  and (b) large tariff binding overhang

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Adding non-agric market access

• Adding 50/33/0 cuts to non-agric bound tariffs
  boosts global gain from agric tiered formula cut
  from 75 to 96 billion pa
• That 96 billion gets the world 1/3rd of the way
  to the potential gains from complete free trade
  in merchandise
• (but that share is smaller as of gains from
  removing also all services trade barriers, unless
  services markets also are opened up)
• If DCs and LDCs fully participate in market
  access, global gain goes up to 119 billion

50
Effects of Doha libn on DC applied tariffs
applied tariff in Baseline 2015 Doha (with lesser cuts by DCs) Doha-All
Brazil 9.5 9.2 8.5
Middle-income countries 7.2 6.3 5.6
Low-income countries 15.6 14.6 13.4
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Effects of full Doha libn on DC welfare
change in real income in Full global libn Doha (with lesser cuts by DCs) Doha-All
Brazil 1.5 0.55 0.59
Middle-income countries 0.8 0.15 0.21
Low-income countries 0.8 0.18 0.30
52
Doha welfare gains(Percent change from baseline
income in 2015)
53
Importance of 3 agric pillars to LICs welfare
gain from Doha

• Under Doha with SD, gain to low-income countries
  is 3.6 billion per year
• If agric export subsidies and domestic support
  were not cut, gain would still be 3.6 billion
• gt which confirms that most of gains from agric
  reform come from increased market access, not
  from subsidy cuts

54
Effects of full Doha libn on DCs exports
billion p.a. change in exports of Full global libn Doha (exports to all countries) Doha (exports to just high-income countries) Doha (exports to other DCs)
Agriculture and food 210 41 31 10
Other merchandise 399 37 31 6
55
Effects of full Doha libn on DC share of agric
and food production that is exported
in Baseline 2015 Full global libn Doha (with lesser cuts by DCs)
Brazil 17 29 22
Middle-income countries 7 11 8
Low-income countries 8 12 8
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Key cotton findings for DCs

• Removal of cotton subsidies in US and EU would
• raise DC share of global cotton exports from 56
  to 85, and
• raise Brazils export price by gt8, but SSAs by
  lt2

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Lessons and implications

• Cuts in agric tariffs and domestic support
  bindings need to be large to get beyond binding
  overhang
• Even large cuts in agric tariffs do little if
  sensitive and special products are subjected
  to lesser cuts
• Unless a tariff cap of, say, 100 is enforced or
  theres a large expansion in TRQs of sensitive
  products
• DCs would have to make few cuts because of their
  huge binding overhang
• So can afford to tone down their demands for
  lesser cuts (and special products) and exchange
  it for greater access to OECD agric markets
  including sensitive products

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Lessons and implications (cont)

• Adding non-agric market access to Doha package
  could double the welfare gains to DCs even with
  their lesser cuts, and it helps balance the
  North-South exchange of concessions
• Some LDCs could lose slightly, as could some
  households within DCs that gain, if they reform
  little the focus of the following presentations

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New working papers and forthcoming book

• Anderson, K. and W. Martin, Agricultural Trade
  Reform and the Doha Development Agenda, The
  World Economy September 2005 (forthcoming, also
  as a WB Policy Research Working Paper, May 2005)
• Anderson, K., W. Martin and D. van der
  Mensbrugghe, Would Multilateral Trade Reform
  Benefit Sub-Saharan Africa? (forthcoming as a WB
  Policy Research Working Paper, May 2005)
• Anderson, K. and W. Martin (eds.), Agricultural
  Trade Reform and the Doha Development Agenda,
  Washington DC World Bank, forthcoming summer
  2005 but draft chapters now available on World
  Bank website