Modeling full global trade policy reform and Doha scenarios Dominique van der Mensbrugghe and Kym Anderson The World Bank Washington DC, 6 December 2005

Three questions to be addressed Why have the World Bank’s estimates of the economic gains from full global trade reform changed over time? What is at stake currently? How do those gains from full global reform compare with the gains from partial reform commitments that might emerge out of the Doha Development Agenda?

First question: Why do the numbers change? I. New estimate of gains from full global merchandise trade reform reflect changes in: Growth, structural changes and policy reforms between 1997 and 2001 An improvement in the incorporation of preferences and specific tariffs And recent policy changes (China’s WTO accession, phase-out of textile and clothing quotas, and EU expansion). II. New estimates of gains from Doha scenarios reflect: Interpretation of WTO’s July 2004 Framework Agreement Ability to utilize both bound and applied tariff rates.

Key messages, however, remain the same: Multilateral trade reform raises income and lowers poverty Major income gains come through agricultural reform For developing countries, South/South reform is as important as greater market access in the North Doha can lead to substantial income gains but… Could be gutted by widespread use of exemptions Needs significant offers especially from developing countries to overcome binding overhang

Comparison of GTAP5 and GTAP6 tariffs (Percent, 1997 for GTAP5, 2001 & 2005 for GTAP6) Agriculture and food Apparent significant reform between 1997 and 2001… …Small aggregate impact of preferences, but more important at regional/sectoral level …Move from 2001 to 2005 mainly impacts developing countries, particularly China’s WTO accession commitments. Source: GTAP (release 5.4 and 6.0 and own trade-weighted aggregation).

Non-agriculture (NAMA) Comparison of GTAP5 and GTAP6 tariffs (Percent, 1997 for GTAP5, 2001 & 2005 for GTAP6) Agriculture and food Non-agriculture (NAMA) Source: GTAP (release 5.4 and 6.0 and own trade-weighted aggregation).

Solid downward trend in applied tariffs (simple average tariffs, percent) Agriculture Non-agriculture Note: Tariffs shown are simple averages across countries and goods. Source: UNCTAD Trains database.

Real income gains from full global trade reform (Difference in real income from baseline in 2015, $billion) Developing High-income Source: Linkage model simulations.

Decomposition of baseline by region (Percent difference in real income in 2015) GTAP 6 w/ preferences (2001) GTAP 6 w/o preferences (2001) GTAP6 Baseline (2005) Source: Linkage model simulations.

Why poverty impacts have changed (Decline in number of poor ($2/day) with global full merchandise trade reform) Note: Though a large proportion of the change in the poverty impact comes from the change in the baseline, the poverty forecast for 2015 has also changed from 2.3 billion to 2.0 billion. Source: Linkage model simulations.

Second question: What is at stake currently? What are the costs of current protection and agric subsidies, due to: agriculture relative to manufacturing policies? developed relative to developing countries’ policies? and own- relative to other-countries’ policies? within agriculture, tariffs relative to export subsidies and domestic support? which farm commodity programs matter most? how are cotton markets affected? of relevance to the Cotton Initiative

Cost of current protection policies by 2015 Global cost of current tariffs on all goods plus agricultural subsidies: $287 billion p.a. plus cost of services regulations (so times 2?) As % of GDP, cost to developing countries is 1/3rd higher than to high-income countries and nearly twice as high for Sub-Saharan Africa These costs are potential gains from liberalization

Sources of cost to global economy $ billion due to policies in: Agric & food Textiles & clothing Other merch. TOTAL High-income countries 135 15 9 159 (55%) Developing countries 47 23 58 128 (45%) All countries’ policies 182 (63%) 38 (14%) 67 (23%) 287 (100%)

Sources of cost to developing countries $billion due to policies in: Agric & food Textiles & clothing Other merch. TOTAL High-income countries (50%) Developing countries All countries’ policies (63%) (25%) (12%) (100%)

Relative importance of 3 agric pillars Welfare effects from: % for: Agric market access Agric domestic support Agric export subsidies All agric policies Developing countries 109 1 -10 100 High-income countries 89 6 5 World 93 2

Intuition behind why agric market access dominates subsidies in terms of welfare and trade 60% of PSE for OECD countries is due to ‘market price support” from tariffs and export subsidies Need to add non-OECD agric protection, which mostly comes from tariffs PSE only refers to primary agric; cost of support for processed agric (even net of the inflated prices of protected farm products) is even bigger than for primary agric – and all via trade measures Trade measures are roughly twice as costly as direct producer support, because they also distort the consumer side of market See Anderson, Martin and Valenzuela, ‘The Relative Importance of Global Agricultural Subsidies and Market Access”, Dec. 2005 Download at www.worldbank.org/trade/wto

Contribution of key products to global welfare cost of agricultural protection, % Rice 20 Sugar 18 Meats (esp. beef) 16 Other grains 11 Oilseed products 7 Dairy products 5 Other agriculture and food 23 Total 100%

Share of global output exported, percent (excluding intra-EU trade) Now If free trade Rice 3% 9% Sugar 6% 20% Meats 7% 15% Other grains 12% Oilseeds 31% 37% Dairy products 11% All agriculture and food

Effects of full liberalization on real factor rewards % change in: Farm land Unskilled labor Skilled labor Developing 0.9 3.5 3.0 Latin America 17.5 3.8 1.8 Sub-Saharan Africa 4.9 6.0 4.3

Impact of freeing markets on cotton (US$billion per year) Output value Value added Export value Developed countries -5.1 -2.9 -3.6 Sub-Saharan Africa 2.2 1.1 1.9 Other developing 3.0 1.0 2.3 WORLD 0.1 -0.7 0.6

Take-away messages on costs of current policies Potential gains from further trade reform are large DCs, esp. SSA, would gain disproportionately, notwithstanding non-reciprocal tariff preferences But DCs would gain as much from DC reform, including own, as from rich-country reform Agricultural reforms are the highest priority for goods, from global, DC and SSA welfare viewpoints & market access is the main area for agric reform gains

Third question: What gains to expect from Doha? I. Less aggressive reductions (than in GEP 04) Scenarios based on interpretation of July 2004 Framework Agreement (AgBook) Huge improvements in ability to model scenarios due to new database that includes applied and bound tariffs II. New Doha scenarios: we examine the importance of… Binding overhang Sensitive and special products Special and differential treatment

Big cuts in bound rates needed to reduce applied agricultural tariffs, because of “binding overhang” % av. tariff, trade-weighted Applied Bound Source: K. Anderson and W. Martin eds. 2006 Agricultural Trade Reform and the Doha Development Agenda, New York: Palgrave MacMillan

Tiered formula cuts for bound tariffs in agriculture High-income < 15 15 < t < 90 > 90 Percent reduction in tariffs 45 70 75 Developing (x/ LDCs) < 20 20 < t < 60 60 < t < 120 >120 35 40 50 60 Formula cuts for bound tariffs in non-agriculture… 50% for high-income 33% for developing, 0% for LDCs Source: Anderson, Martin and van der Mensbrugghe (2006), Chapter 12 in Agricultural Trade Reform & the Doha Development Agenda, (AgBook).

Also, big cuts needed to reduce binding overhang in domestic support (‘Water’ in aggregate measure of support) US$ billion Bound Applied — EU proposal — US proposal — G-20 proposal Source: de Gorter and Cook (2006), Chapter 7 in Trade, Doha, and Development: A Window into the issues, edited by R. Newfarmer.

Current ag proposals & our book’s key scenarios Top tariff cut, % Sensitive products, % Tariff cap, HIC/DC EU/US AMS cut, % US proposal 90 1 75/x 83/60 G-20 proposal 75 ≤1 100/150 80/70 EU proposal 60 8 70/60 G-10 proposal 45-50 10-15 NONE Book’s key scenarios 0,2,5 200/200

Doha scenarios (Percent gain in real income from Doha scenario as share of global trade reform) High-income Developing Ag+NAMA-SDT—No exemptions, no caps, no SDT. Ag+NAMA—Same as above but includes SDT. Ag Only—Only agriculture, no exemptions, no caps, includes SDT. Ag-SSP+Cap—Same as above plus exemptions (HIC-2%, LMY-4%) and caps (200%). Ag-SSP—Same as above but no caps.

Implications if Doha negotiators are to deliver a pro-development outcome Developing countries need to become more fully engaged by making more aggressive market access offers, in both agric and non-agric High-income countries need to find ways to contain the welfare-limiting effect of allowing less reform for sensitive products (SPs), such as: Restricting the % of tariff lines (e.g, ≤1%?) Or defining the restriction in terms of imports Insisting on more than trivial cuts in SP tariffs Requiring large TRQ expansions for all SPs Imposing a cap (e.g. ≤ 100%?) on all SP tariffs