4-day course on Agricultural Trade Policy and the WTO

1
4-day course on Agricultural Trade Policy and the
WTO

• Tehran, Iran, 15-18 May 2005

2
Outline of 4-day course

• Principles each morning practical, hands-on
  analytical tools each afternoon
• Day 1 WTOs contribution to economic growth and
  nature of protection patterns still in place and
  accessing trade protection data
• Day 2 WTO accession processes and experiences
  and partial equilibrium analysis
• Day 3 Doha progress, prospects implications
  for Iran and general equilibrium analysis
• Day 4 Scope for CGE modelling for Iran

3
Facilitators

• Kym Anderson, Development Research Group, World
  Bank, USA
• Convener of morning sessions
• Frank van Tongeren, LEI, Netherlands
• Convener of afternoon sessions
• Shuby Soamiely Andriamananjara, World Bank
  Institute, USA
• Overall coordinator

4
Day 1 Gains from trade, patterns of trade and
protection, and WTOs contributions to growth of
open economies
5
Outline of first morning

• The gains-from-trade arguments
• Key reason why trade barriers remain
• WTOs role in providing a counterforce
• WTOs other benefits for governments seeking to
  reform their economies
• The patterns of protection that still remain in
  the world, despite huge reductions since the
  formation of GATT (1947) and WTO (1995)

6
Arguments for removing trade barriers and
subsidies

• Standard gains-fromtrade argument allows
  nations resources to be used to exploit its
  comparative advantages by specializing its
  production in what it does best
• That in turn can increase (esp. in small
  economies)
• scope for exploiting economies of scale,
• capacity to deal with natural disasters
• competitiveness of domestic markets,
• variety of products available to producers and
  consumers,
• enhanced learning and technological catch-up
  (esp. via FDI)
• less wasteful rent-seeking lobbying activities by
  protectionist groups

7
Arguments for removing trade barriers and
subsidies (continued)

• Empirical evidence there are many examples of
  reformed economies that have boomed
• and none of booming closed economies
• Not to say openness is sufficient for sustained
  rapid economic growth, but it is a necessary
  condition
• Other necessary conditions include
• macroeconomic and political stability,
• rule of law and establishment of property rights,
  
• efficient provision of public goods (incl. safety
  nets), and
• absence of distorting domestic policies

8
Developing countries arguments for retaining
agric protection include

• Stabilize food prices
• Provide food security/self sufficiency, esp. in
  the case of food-deficit countries
• Offset terms of trade deterioration
• Slow the depopulation of rural areas
• BUT, all those policy objectives can be achieved
  more efficiently by means other than protection
  from import competition, none of which are
  prevented by WTO

9
So why do most governments still retain
protectionist policies?

• Because some workers and owners of some
  productive resources, and less-competitive
  farmers, fear that they will lose from reform,
  and that social safety nets will not fully
  compensate them
• Any losses would be concentrated in the hands of
  a few, while gains will be small per capita for
  the many benefitting firms or consumers, so the
  latter have less incentive to counter the
  formers lobbying
• ? A political equilibrium can involve protection

10
What can alter the political equilibrium level of
protection?

• Wider dissemination of information on the gains
  from trade
• Technological innovations that lower trade costs
  (e.g. ICT revolution), or increased openness
  abroad, both of which increase the incentive for
  exporters to lobby for reduced protectionism by
  their home government
• such globalization forces raise the rewards from
  good economic governance -- and raise the cost of
  poor economic governance (e.g., via FDI)
• ?more countries are looking to open up, and that
  is easier if done when others do likewise

11
Why WTO trade negotiations make reform easier

• They offer scope for exchange of market access
• And more so the larger the number of countries
  taking part in a negotiating round and the
  broader the product and issue coverage
• ? Hence, WTO negotiations offer far more scope
  than regional or bilateral negotiations

12
What else does WTO offer to make accession
worthwhile?

• Exporters receive MFN treatment in markets abroad
• A major improvement for those now facing
  sanctions
• Access to WTOs dispute settlement process
• Opportunity to bind tariff commitments so as to
  avoid future policy back-sliding
• a means of warding off protectionist domestic
  vested interests (the Ullyses effect)
• Requirements to make policies more transparent
• All of which reduce business uncertainty and so
  encourage more investment

13
Expanded opportunities for Iranian food exporters

• WTO accession will lead to fewer barriers to
  Iranian exports
• Provides scope for greater specialization in
  those products in which Iran is most competitive
  internationally
• Making the most of those opportunities also
  requires reducing distortions within Irans own
  economy
• That will happen as Iran responds to WTO members
  requests during accession negotiations, but
  better to be pro-active and reform for the
  countrys own sake

14
How WTO increases policy transparency

• Protocol of Accession document
• Single enquiry point
• Annual notifications of policy changes
• Periodic trade policy review by WTO Secretariat
  (every 4-6 years)
• gt All of which lower the cost to
  consumers/exporters of becoming informed about
  protection policies

15
Reading for this topic

• See the note entitled Why the WTO exists and
  what accession involves (from K. Andersons
  Vietnams Transforming Economy and WTO Accession
  Implications for Agriculture and Rural
  Development, Singapore Institute for Southeast
  Asian Studies, 1999)

16
Patterns ofAgricultural Protection

• The long history (very briefly)

17
Why bother to reduce sensitive agric subsidies
and trade barriers at WTO

• when agriculture contributes lt4 of global GDP
  and lt9 of international trade?
• Because while manufacturing import tariffs are
  now low, agric protection has risen and its
  applied (bound) import tariffs now average nearly
  five (ten) times manufacturing tariffs globally
• Which means a lower mean and higher variance of
  prices of farm products in international markets

18
Why bother to reduce agric subsidies and trade
barriers at WTO

• That in turn means the vast majority of the
  worlds poor, who rely on farming for a living,
  are less able to trade their way out of poverty

19
Why reform agric policies (cont.)

• True, the harm to some poor farmers from OECD
  agric protection is reduced via non-reciprocal
  trade preference schemes
• But those discriminatory market access schemes,
  like agric. export subsidies, rely on undesirable
  exceptions to worthy WTO rules
• And they exclude some significant developing
  countries (China, India, Indonesia, Iran,
  Vietnam) and so may harm more poor farmers,
  through trade diversion, than they help globally

20
Nationally, too, poor farmers can be harmed by
own-country interventions

• despite the presence of large agricultural
  subsidies
• See, e.g. the CGE analysis for Iran by Jensen and
  Tarr (RDE, 2003)
• to be examined on Day 4

21
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 Uruguay Round

22
History of government interventions in
agricultural markets

• Been going on for millennia
• Sometimes to raise tax revenue (discouraging
  farmers)
• Sometimes to boost food self-sufficiency (which
  some view as boosting food security), thereby
  encouraging some farmers
• Sometimes to reduce domestic price fluctuations
• helping consumers concerned with price peaks, or
• helping producers concerned with price troughs

23
Three past features of agricultural distortion
patterns

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

24
Three past features of agricultural distortion
patterns (continued)

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

25
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 agricultural protectionist countries mainly
  reducing troughs in farmer prices
• and agricultural-taxing countries mainly reducing
  peaks in consumer prices of food

26
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)

27
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 prices
  of farm products in international markets
• And the use of trade policy to stabilize domestic
  food markets exacerbated fluctuations in
  international food prices

28
Reading

• For more on how economists have improved their
  monitoring and analysis of trade policies, see K.
  Andersons Measuring Effects of Trade Policy
  Distortions How Far Have We Come? The World
  Economy 26(4) 413-40, April 2003.

29
Political economy of agricultural protection

• Why was this pattern observed across countries
  and over time for many decades?
• 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 it take until the 1990s for countries
  to agree multilaterally to desist (or at least
  slow the growth of agricultural protectionism)?

30
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)

31
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 developing
  country farmers were affected hugely
• led to formation of Cairns Group in 1986, whose
  sole aim was to keep agriculture high on UR
  agenda
• its agric. exports Japans manufactures exports
  

32
Current protection pattern

• Unilateral reforms by developing countries since
  the 1980s have reduced their export taxes and
  other negative incentives for farmers
• But some developing countries have overshot and
  become protectionist towards farmers
• or could do in the future, because of their much
  higher bound than applied tariffs

33
Implications for those countries seeking WTO
accession

• Relatively wealthy and large acceding countries,
  such as Iran (and China before it), are going to
  be required to bind their agricultural tariffs at
  low levels
• Almost certainly at less than 20 on average