News and Analysis • Volume 12 • Number 2 • March 2008

Who Gains from Farm Tariff Cuts?

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Recent ICTSD, IPC and IFPRI analysis shows that the February 2008 draft agriculture modalities would lead to a significant overall reduction in EU and US tariffs. Many key developing country exports would nevertheless continue to face significant import duties.

The average trade-weighted applied tariff would fall from 7.9 to 3.5 percent for goods entering the US market. However, tariffs for some products – such as sugar, tobacco and dairy – would only be reduced to 16.5, 12.8 and 12.4 percent from 46.8, 42.6 and 28.1 percent, respectively. Tariffs on products likely to be designated as sensitive would fall from 50.4 to 29.3 percent. These products include important developing country export commodities, such as processed dairy, beef, sugar, chocolate, tobacco goods and frozen orange juice.

The overall EU outcomes are largely similar although the specific figures and products differ. While average trade-weighted agricultural tariffs would fall to 9.5 percent from 23.4 percent, sugar, cereals, meat and dairy would continue to face significantly higher tariffs than other products. These products are also most likely to be designated as sensitive.

By contrast, the February draft’s provisions on domestic support are not projected to lead to any decrease in actual applied spending for the US after the end of the implementation period. Estimates of US farm expenditure until 2015 show that total Amber and Blue Box, as well as overall trade-distorting domestic support (OTDS), spending is likely to remain nearly constant, while Green Box payments are expected to increase substantially. Current bindings for product-specific support for dairy would be exceeded by US$400 million in 2010 and US$700 million in 2015. The increases in sugar support would reach US$15 million in 2015 and US$400 million for cotton.

In the EU, the ongoing common agricultural policy (CAP) reform will yield significant reductions in domestic support. However, the February modalities are unlikely to result in substantial changes in actual spending until 2013/2014 when current projected rates of Amber Box and OTDS payments will reach the proposed limits. Product-specific support is expected to be converted to Green Box-compatible terms, or limited due to budgetary constraints.

Market Access for EU and US Exporters

The proposed modalities offer improved overall gains in market access for US and EU exports. Overall applied tariffs facing US exports will be reduced by 20 percent – down from 15.72 to 12.54 percent. Gains in developed country markets will be the largest, reducing average tariffs from 20.46 to 14.63 percent. Cuts proposed by chair Falconer would reduce the ‘water’ in developing country tariffs and, on average, result in real cuts in applied rates even after accounting for sensitive products, and special product flexibilities (see Facts and Figures on page 1).

Similarly, average tariffs applied to EU exports would be reduced from 18.2 to 11.7 percent. After taking into account sensitive products, the average applied tariff would fall from 18.9 to 12.1 percent in developed country markets. Reductions in applied tariffs would be minimal in small and vulnerable economies and recently acceded WTO Members when special flexibilities for their positions are considered. The analysis also shows that sensitive products provide the greatest protection against EU exports in developed country markets. More specifically, without sensitive products, tariffs facing EU exports in developed countries would be reduced from 18.9 to 8.8 percent. When sensitive products are taken into account, the average tariff rises from 8.8 to 12.1 percent – a 38 percent increase. In developing countries, the initial average tariff facing EU exports goes down from 19.1 to 15.2 percent if no flexibility is allowed, and to 17.8 percent when flexibilities are taken into account. This represents an increase of only 17 percent.

The research was presented at an ICTSD dialogue on the draft agriculture modalities on 12 March 2008. Detailed findings of the studies can be found at www.ictsd.org/dlgue/2008-03- 12/2008-03-12-doc.htm