Doha Round: Agriculture

There is a new report by the non-partisan Congressional Budget Office (CBO) looking at economist's estimates for the costs and benefits from trade liberalization in agriculture. The report leaves significant room for government action to address intra-country distributional effects. The report highlights that the European Union (and EFTA, consisting the non-EU European countries, Iceland, Norway, Liechtenstein and Switzerland) have the most welfare-reducing policies in regards to trade. The U.S., while it has significant barriers to trade in agriculture, does not have restrictions of the level of the EU. The U.S. has, so far, been the country most willing to call the bluff of the EU in reducing trade barriers in agriculture.

As for the gains from complete liberalization of trade in agriculture, the CBO reports:

"Estimates from a number of studies are generally consistent with an annual welfare benefit to the world of roughly $50 billion to $185 billion (measured in 2001 dollars) by 2015, or 0.1 percent to 0.4 percent of the value of world output of all goods and services, from the static and investment effects of full global agricultural liberalization phased in from 2005 through 2010."

This presents a significant overall welfare benefit from reducing the barriers to trade. However, it does not address whether the benefits would be shared equally among participating countries. The large discrepancy in estimates of benefits is due to what measure of welfare is used, static or dynamic. Static effects include the efficiency gains gleaned from correcting distorted allocations of resources caused by tariffs and non-tariff barriers to trade. Dynamic effects concern the productivity gains that will result with increased trade from exposure to competition and investment from firms that have access to higher-productivity technology.

The study also looks at the distributional effects of trade liberalization and notes that: "a number of developing countries—those that are net importers of agricultural products—would be harmed by the elimination of domestic and especially export subsidies." Furthermore, "The World Bank analysis indicates that eliminating export subsidies would lead to a static annual welfare increase of $2.6 billion for high-income countries and a static annual welfare loss of $1.0 billion for developing countries. Moreover, 14 of the 17 individual developing countries and developing-country regions studied would see their welfare decline."

This evidence suggests that while the overall gains from freeing trade are significant, certain aspects of the liberalization, the reduction of export subsidies, would reduce the gains from trade for developing countries. However, this reduction in welfare has a dual effect. In theory, reducing subsidies for country A on its agricultural exports will, as the data show, beneficial. It will benefit the exporting country by reducing the cost imposed by providing the subsidies. However, it will raise the cost of importing goods for the importing country, country B. Because the importing country has its own agricultural producers, the effect will be mitigated. The farmers in country B will be helped by the increase in the price of imported agricultural goods, while the consumers in country B will be hurt by higher prices.
The report notes that “The EU is by far the dominant provider of export subsidies, providing 85 percent to 90 percent of the world’s total”, with the U.S. and Japan representing the second and third providers, respectively. Because of this, country A in the above theoretical exposition will be a developing country while country B will most likely be a developing country. Since developing countries have a significant portion of their population involved in agriculture (and the percentage increases as you move from developing to the least-developed), the offsetting effect of reductions in export subsidies benefiting domestic farmers. Politically, reducing the poverty of some of the poorest citizens (the farmers) through higher prices could be beneficial. The government could also implement policies in urban areas to combat poverty, while allowing freer trade to assuage the poverty of the rural areas.

In a warning about the transition stages between restricted and free trade, the report advises that:

"The studies that CBO reviewed are nearly unanimous in predicting that the United States and all other developed countries would benefit in terms of their economic welfare from the global elimination of all policies distorting agricultural trade. Similarly, almost all of the studies agree that developing countries as a group would gain, but by a
smaller amount, and some studies indicate that some developing countries would lose initially. Over time, however, some or all of the countries that initially lost would eventually gain as the investment and productivity effects of liberalization overtook the negative static effects on those countries." (italics added)

This provides another reason for governments to initiate social support mechanisms for agriculture. Because the transition could lead to decreases in welfare in the short-term, governments should prepare strategies to compensate those who lose initially from trade; this could be financed by the tariffs on the 2 percent of goods classified as ‘strategic’ (and the additional 2 percent developing countries are allowed to mark as ‘special’).
The CBO report provides an interesting perspective on the wage changes that would result from reducing barriers to trade in agricultural goods.

”Assuming that owners of capital tend to be wealthier, on average, than either unskilled or skilled labor, which is likely to be true in most countries, the larger increase in wages should tend to reduce income inequality within countries.”

Furthermore, ”developing countries’ imports would increase significantly as a result of developing countries’ liberalization, adding considerably to their welfare gain.” The beneficial aspects of reducing barriers to trade can be substantial, if the developed countries fully participate in the liberalization. Freer trade can reduce poverty and inequality. However, there is a considerable role for government in easing the transition costs associated with reducing agricultural trade barriers. It is up to the WTO to ensure that compensating policies are not sabotaged by developed countries’ lobbyists who want unregulated access to developed countries.