Agricultural policy reform under the WTO and Doha Kym Anderson Development Research Group, World Bank PREM Week, Washington DC, 25 April 2005

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

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

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

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

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

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

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

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

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)

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

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?

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)

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

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

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)

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

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)

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

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)

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

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

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

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

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?

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

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

Current applied tariffs (%) Agriculture and food Textiles and clothing Other merchandise Low-income countries Middle- income countries 17 7 High-income countries 1681

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 ) 2/3rds accrues to high-income countries But as % of GDP, the benefit to DCs is twice that for developed countries

Full liberalization: global gain ($bn) $ billion due to reform by: Agric & food Textiles clothing Other manuf TOTAL High-income countries (55%) Developing countries (45%) All countries ’ policies 182 (62%) 38 (14%) 67 (24%) 287 (100%)

Full lib’n: gains to developing countries $billion due to reform by: Agric & food Textiles & clothing Other manuf. TOTAL High-income countries (50%) Developing countries (50%) All countries ’ policies 54 (62%) 22 (27%) 10 (11%) 86 (100%)

Relative importance of 3 agric pillars Welfare gains from: % of gain to: Agric market access Agric domestic support Agric export subsidies All agric policies Developing countries % World %

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

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

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

Effects of full lib’n on DC agric & food % change in: Real value of agric and food output Real value of agric and food exports Real net farm income Brazil Sub-Saharan Africa 2489 All developing countries 2675

Effects of full lib’n on DC factor rewards % change in: Farm land Unskilled wages Skilled wages Brazil Sub-Saharan Africa All developing countries

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

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

Key elements of the Doha Agenda as 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)

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

Binding overhang in agric tariffs, % BoundApplied Mercosur 3413 LDCs 7813 All DCs 4821

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

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%

Agricultural domestic support Cut in bound AMS need not reduce applied support, because of binding overhang here as well (with 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%

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)

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 ’

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 1/3 rd 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

Effects of Doha lib’n on DC applied tariffs % applied tariff in: Baseline 2015 Doha (with lesser cuts by DCs) Doha-All Brazil Middle-income countries Low-income countries

Effects of full & Doha lib’n on DC welfare % change in real income in: Full global lib ’ n Doha (with lesser cuts by DCs) Doha-All Brazil Middle-income countries Low-income countries

Doha welfare gains (Percent change from baseline income in 2015)

Importance of 3 agric pillars to LICs’ welfare gain from Doha Under Doha with S&D, gain to low-income countries is $3.6 billion per year If agric export subsidies and domestic support were not cut, gain would still be $3.6 billion => which confirms that most of gains from agric reform come from increased market access, not from subsidy cuts

Effects of full & Doha lib’n on DCs’ exports $ billion p.a. change in exports of: Full global lib ’ n Doha (exports to all countries) Doha (exports to just high- income countries) Doha (exports to other DCs) Agriculture and food Other merchandise

Effects of full & Doha lib’n on DC share of agric and food production that is exported % in: Baseline 2015 Full global lib ’ n Doha (with lesser cuts by DCs) Brazil Middle-income countries Low-income countries 8128

Key cotton findings for DCs Removal of cotton subsidies in US and EU would: raise DC share of global cotton exports from 56% to 85%, and raise Brazil’s export price by >8%, but SSA’s by <2%

Lessons and implications Cuts in agric tariffs and domestic support bindings need to be large to get beyond binding overhang Even large cuts in agric tariffs do little if ‘sensitive’ and ‘special’ products are subjected to lesser cuts Unless a tariff cap of, say, 100% is enforced or there’s a large expansion in TRQs of ‘sensitive’ products DCs would have to make few cuts because of their huge binding overhang So can afford to tone down their demands for lesser cuts (and ‘special’ products) and exchange it for greater access to OECD agric markets including ‘sensitive’ products

Lessons and implications (cont) Adding non-agric market access to Doha package could double the welfare gains to DCs even with their lesser cuts, and it helps balance the North- South exchange of ‘concessions’ Some LDCs could lose slightly, as could some households within DCs that gain, if they reform little – the focus of the following presentations

New working papers and forthcoming book Anderson, K. and W. Martin, ‘ Agricultural Trade Reform and the Doha Development Agenda ’, The World Economy September 2005 (forthcoming, also as a WB Policy Research Working Paper, May 2005) Anderson, K., W. Martin and D. van der Mensbrugghe, ‘ Would Multilateral Trade Reform Benefit Sub-Saharan Africa? ’ (forthcoming as a WB Policy Research Working Paper, May 2005) Anderson, K. and W. Martin (eds.), Agricultural Trade Reform and the Doha Development Agenda, Washington DC: World Bank, forthcoming summer 2005 but draft chapters now available on World Bank website