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: WTO’s 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 and prospects; and general equilibrium analysis • Day 4: Doha prospects & implications for Iran; and CGE modelling of Iran’s economy

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 WTO’s contributions to growth of open economies

5. Outline of first morning • The gains-from-trade arguments • Key reason why trade barriers remain • WTO’s role in providing a counterforce • WTO’s 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-from–trade argument: allows nation’s 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 former’s 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 WTO’s 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 Iran’s 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 country’s 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) => 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. Anderson’s Vietnam’s 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 <4% of global GDP and <9% 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 world’s 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 country’s 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 country’s 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 int’l 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. Anderson’s “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 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 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 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)

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 = Japan’s 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