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 int’l merchandise trade • OECD manufacturing tariffs have fallen by 9/10ths over the past 60 years to <4%, while agricultural protection has risen • Agric. applied (bound) tariffs now average nearly 5 (10) times manufactures tariffs globally • Also, the vast majority of the world’s 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 ACP’s 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 country’s 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

8. Three past features of agricultural distortion patterns (continued) • 2. Agricultural protection was greater, the higher a country’s 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)

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

12. Political economy of agricultural protection • Why was this pattern is observed across countries and over time? • Since each country’s policy choice exacerbates the long-run downward trend and fluctuations in int’l 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 int’l markets to century’s lowest level by 1986 • which more than doubled the welfare costs of agricultural protection over the 1980s (Tyers and Anderson 1992)

14. 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 = Japan’s man. exports

15. 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

16. 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)

17. 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

18. 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)

19. 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

20. 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 int’l prices fall)

21. 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

23. 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

24. The Doha round’s 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

25. What differentiates our new study? • Its point of departure is the WTO’s July 2004 Framework agreement • It examines in detail each of the 3 agricultural pillars plus preferences, cotton subsidies, non-agricultural tariffs, and S&D for DCs’ reform • It ‘adds up’ the consequences of current policies and prospective Doha reforms using data from CEPII/ITC & Bank’s 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?

27. Modeling Doha reform packages using World Bank’s 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

28. 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

29. Current applied tariffs (%)

30. Linkage model’s 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

31. Full liberalization: global gain ($bn)

32. Full lib’n: gains to developing countries

33. Relative importance of 3 agric pillars

34. Welfare gain from full Liberalization(percentage change from baseline income in 2015)

35. Ag & food output rise from full lib’n(percentage change from baseline income in 2015)

36. Real farm income rise from full lib’n(percentage change from baseline income in 2015)

37. Effects of full lib’n on DC agric & food

38. Effects of full lib’n on DC factor rewards

39. Take-away messages from full lib’n • 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 lib’n 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

40. 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 Brazil’s cotton exports by >8% • 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

41. Key elements of the Doha Agendaas 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)

42. 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, %

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 AMS>20%, 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%

47. 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)

48. 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’

49. 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 lib’n on DC applied tariffs