Impact of OECD country agricultural protectionism on developing countries Lecture 30 Economics of Food Markets Alan Matthews

Developing countries harmed by OECD agricultural subsidies Many studies purport to show –Large gains from agricultural trade liberalisation –Large share of gains accruing to developing countries –All developing countries share in these gains Examples –IMF 2002: $128 billion, of which $30 billion to DCs –Goldin et al: 2003 $364 billion, of which $176 billion to DCs –Anderson 2003: $165 billion, of which $43 billion to DCs –World Bank 2004: $ billion from total trade liberalisation, more than half of which to DCs, of which agriculture would account for 70%

Developing countries harmed by OECD agricultural subsidies These numbers have been picked up by NGOs and contribute to the widespread view that protectionist agricultural policies in OECD countries are mainly responsible for preventing developing countries from benefiting from world trade.

Revisionist views PE models (ATPSM) have always been more ambiguous Panagariya 2002 “The presumption that such liberalization will broadly benefit the poor countries, implicit in the allegations that agricultural subsidies in the rich countries hurt the poor in developing countries, is unlikely to be supported by closer scrutiny in its unqualified form.” Charlton and Stiglitz 2004 “The existence of net losses for developing countries in some areas of reform should not imply that no reform is required—rather it suggests that a selective approach is needed.”

Recent World Bank estimates Anderson, Martin, Van der Mensbrugge, June 2005 USD billion2015 Base case 2001 Scaled dynamics 2001 Compara- tive static GTAP elasticities GTAP elas + fixed land World Dev countries Sub Saharan Africa South Africa Selected SSA countries Rest of SSA

Impact of Doha Round agreement (Bouet et al., 2004) Change in production Agri-food exports Agri-food imports Returns to land Change in welfare EU US Asia developed Cairns developed Mediterranean Cairns developing China RoW South Asia SSA World

Estimates of costs of OECD country agricultural protectionism for developing countries Anderson 2001: $12 billion Diao et al 2004: $4-8 billion Tokarick 2003: $4 billion Francois et al 2003: $1-3.5 billion (from 50% liberalisation) Anderson and Martin 2006: $26 billion Hertel and Keeney 2005: $9.5 billion Compare to net ODA flows of around $60 billion

Channels of impact Main impact is through terms of trade effect –Net exporters gain, net importers lose More generally, farmers gain and consumers lose –Depends on degree of market integration –Presumption that trade liberalisation is pro- poor Picture complicated by the role of preferences for net exporting countries

FAO World Agriculture Towards 2015/2030

Impact of different agricultural support measures Message that market access matters is largely valid, but…..for some sub-Saharan African countries, domestic subsidies may be more important (cotton, tobacco, peanuts)..the unimportance of subsidies is influenced by the Green Box status of various forms of direct payments. If some trade distortion results from such payments, impacts would be bigger

Impact of different agricultural support measures On other hand, export subsidies (despite NGO criticisms) now only important in dairy and sugar Yes, such subsidies have iniquitous competition effects, and are counter to WTO rules, but overall positive impact on developing countries of their elimination will be very limited

Conclusions from empirical work Multilateral liberalisation in agriculture is an important objective to pursue, but implications for developing countries are more nuanced –The adverse effects of developed country agricultural protection can be overstated, particularly for least developed countries –For middle income countries, faced with high protection, liberalisation means strong prospects for competitive export sectors –For poorer countries, rising import prices, preference erosion and more onerous standards darken picture considerably, particularly under partial reforms –Danger that crucial factors which will prevent many of the poorest countries from benefiting have not been properly addressed

The role of preferences and preference erosion

The role of preferences Winters: “poisoning the debate” Systemic criticisms –Divert trade between developing countries –Undermine support for multilateral system Preferences have no value –Poorly utilised (restrictive rules of origin) –Come attached with conditions –Uncertain, subject to frequent changes –Delay growth-promoting reforms

Average applied bilateral tariffs, agricultural sector, per cent, 2001 Tariffs applied by → Applied to ↓ EU25USAsia developed Cairns developed EU US Asia developed Cairns developed Mediterranean Sub Saharan Africa Cairns developing China South Asia Rest of World Average

In fact, preferences are well utilised EU agri-food imports under various regimes, 2002 RegimeEligible regime imports ‘000 Euro Actual regime imports ‘000 Euro Apparent utilisation rate Effective utilisation rate Share of actual imports Non-reciprocal preferential agreements 18,61012,29289%18.5% Cotonou5,9275,50093%95%8.3% GSP regular8,7554,38550%86%6.6% EBA1, %96%0.6% Reciprocal preferences Med, CEECs, EEA11,3818,72877% Non-preferential Duty-free MFN21, % MFN tariff > 04,2006.3% Total EU imports66,558100%

In fact, preferences are well utilised US agri-food imports under various regimes, 2002 RegimeEligible imports under regime ‘000 USD Actual imports under regime ‘000USD Apparent utilisation rate Effective utilisation rate Share of actual imports Non-reciprocal preferential agreements 4,1373,60787%6.2% AGOA % 0.2% GSP regular2,4561,41558%94%2.4% Reciprocal preferences NAFTA11,61611,53199%19.8% Non-preferential Duty-free MFN29, % MFN tariff > 014, % Total US imports58,368100%

…and quite effective Mixed evidence from statistical studies –Ozden and Reinhardt 2003, Stockel and Borrell,, 2001 argue preferences have no value But number of studies argue the opposite –Stevens and Kennan (2004) –Wainio and Gehlhar (2004) –Romalis (2003) Criticism of preferences driven by their systemic effects risks depriving some developing countries of something of real benefit to them

Who loses from preference erosion in agriculture? Bulk of losses fall on a narrow set of ‘highly preferred’ countries with exports concentrated in a handful of highly protected sectors: bananas, sugar, meat Big losers are mostly small islands and most sub-Saharan African states Possibility that MFN trade liberalisation or additional preferences could provide some offsetting gains Necessity of compensation package to ensure balanced outcome to the Round?

Where does the problem lie? Northern agricultural protectionism not a significant explanation of the problems facing the poorest countries to integrate into international trade –Lack of regional integration (South-South barriers) may be as/more important –Technical/SPS barriers which often prevent any trade at all ( EU restrictions on fish/shellfish exports, new EU SPS controls, affect food as well as primary produce)

The ‘Aid for Trade’ debate Aid for trade covers –Trade policy formulation –Trade facilitation –Trade adjustment –Trade-related infrastructure Various initiatives underway –IMF Trade Integration Facility –WTO and others, Integrated Framework –Proposals for preference erosion fund –Now part of the Doha Agenda

Conclusions Doha Round meant to be a development round Developing countries dissatisfied with outcome of Uruguay Round Developing countries have conflicting interests in the outcome Can sufficient flexibility be offered to developing countries while ensuring sufficient negotiating gains for developed countries?