Reflections in the Time of Cold Storage

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The Doha Round negotiations have been put into cold storage, at least for a while. During this hiatus, it may be useful to reflect on the policy choices governments are likely to face if the most likely scenario foreshadowed in agriculture comes to pass.
The collapse of the round has been described as ‘tragic’ by some and welcomed by others. Both these perspectives can be justified. It is useful at this point to analyse the numbers on the table and speculate on the likely impacts in the agricultural sector. Quantitative analysis indicates that:
• Almost all countries are likely to increase their agricultural exports.
• The changes in agricultural trade flows are primarily driven by improvements in market access in the European Union and Japan. Export subsidies, domestic support, special products, safeguards and developing country tariff reductions are of lesser importance.
• The global welfare gains are relatively modest.
• Many, if not most, developing country WTO Members would experience a loss in welfare because of rising import prices, preference erosion, loss of quota rents and the absence of any meaningful reform to their own economies.
Results supporting these conclusions are based on an application of a global partial equilibrium agricultural trade model.1 In this brief note a likely scenario is described and resulting tariff changes, trade and welfare effects presented. A large number of countries are estimated to experience an increase in exports but a fall in overall welfare.
What’s on the Table?
The key parameters of a likely negotiated outcome are shown in Table 1. Agreed are linear tariff cuts within bands with exemptions for sensitive products on up to four percent of tariff lines. Tariff cuts on exempted products may be as low as one third of the formula cuts. To compensate, an expansion of the tariff rate quota to four percent of domestic consumption is required. The major uncertainty here is the selection of sensitive products, which need not be specified until a later stage in the negotiations. Export subsidies would eventually be eliminated and there will be substantial reductions in allowable domestic support expenditure.
For modelling purposes the approach taken here is to assume that the most sensitive industries attract the highest tariffs. In developing countries the percentage difference between applied and bound rates was taken as the criteria, with products having the lowest difference being selected as sensitive.
Not modelled here are special safeguard measures designed to protect against import surges and price falls. This reflects the static nature of the model rather than the lack of consensus on this issue in the negotiations.
Water Wrung from Tariffs
If the specified scenario were to be implemented, average tariffs in the European Union of the 34 products covered in the model would be reduced from 15 to 8 percent, and Japanese tariffs reduced from 50 to 20 percent. There is a substantial cut in developing country bound rates, but the change in applied rates is minimal, from 20 to 17 percent. This reflects the binding overhang and the exemptions. LDCs are not required to reduce their tariffs.
Surge in Trade
Global agricultural trade is estimated to increase by 11 percent once producers and consumers have adjusted to price changes. The European Union and Japan account for nearly 90 percent of the change in global imports. Developing country imports are virtually unchanged because they undertake few reductions in applied tariffs. LDCs would import less in response to rising world prices.
All developing countries are estimated to increase their total agricultural exports, but almost half the increase in imports is supplied by the larger developing countries, Brazil, China, India and Argentina. These countries provide the wheat, beef and sugar required by the European Union and livestock products imported into Japan.
Welfare Gains and Losses
Changes in exports do not reflect the costs of producing the additional exports. A more complete measure is welfare, which is measured here as the change in producer and consumer surplus plus change in government revenue from tariffs and expenditure on export subsidies and domestic support. This is shown in Table 2 (see page 6).
Many developing countries are net agricultural importers who currently benefit from preferences and would lose from preference erosion, loss of quota rents, or the general increases in prices of temperate imports. In fact, only 23 out of 91 developing countries, and two of the 45 LDCs are estimated to experience a welfare gain from agricultural liberalisation.
Exports or Welfare
In spite of the projected growth in exports, perhaps it is not surprising the agricultural negotiations have been frozen given the large number of small economies that would potentially experience a welfare loss if the numbers on the table were implemented. The question for policy makers is what weight to place on export growth rather than welfare. Developing countries could capture some allocative efficiency gains if they undertook substantial reforms themselves, but the distribution of gains and losses will inevitably be unequal.
The usual modelling caveats apply, including data quality, the absence of dynamic effects, and whether the scenario modelled here would actually be implemented. In particular, the gains and losses are underestimated because the production and price data are an average of 2002 to 2004. The recent higher prices for some commodities, especially wheat, would inflate the results.
David Vanzetti is Visiting Fellow at the Crawford School of Economics and Government, Australian National University, Canberra.
endnote
1 ATPSM is a 150-region, 34-commodity agricultural trade model developed by FAO and UNCTAD. The model covers the major commodities of interest to developing countries but excludes some, such as wool. For documentation, see www.unctad.org/tab
.