Trade Note June 27, 2005 Agricultural Market Access: The Key to Doha Success Almost two-thirds of the economic higher in developing than developed gains that would come from countries (18 compared with 16 percent on dismantling all merchandise trade average in 2001), and because a large The barriers and farm subsidies globally minority of developing country trade is now World Bank would come from agriculture. with other developing countries. Group According to our latest research1, this is so for the world as a whole, and Within agriculture, developing countries ­ www.worldbank.org also for developing countries as a including the G-20 ­ are emphasizing group. Developing countries are especially the need for cuts to agricultural therefore right to focus on agriculture subsidies. This is partly because they do not in the negotiations. want to lower their own food import restrictions, as well as because it may To date that focus has been almost adversely affect their international terms of exclusively on developed country trade. However, this may be detrimental policies. That is understandable, given economically: our modeling results indicate that many in developing countries feel that 93 percent of the welfare gains from International they did not get a good deal out of the removing distortions to agricultural Uruguay Round and so are determined incentives globally would come from Trade to get significantly more commitments reducing import tariffs, while only 2 percent Department under Doha from developed countries is due to export subsidies and 5 percent to before they contemplate opening their domestic support measures (Table 2). own markets further. However, our Certainly it is important to discipline those modeling suggests that over half the domestic subsidies and phase out export gains to developing countries from subsidies, so as to prevent re- global agricultural reforms would instrumentation of assistance from tariffs to come from liberalization by domestic subsidies and to bring agriculture By Kym developing countries themselves into line with non-farm trade in terms of not Anderson and (Table1). The reason is two-fold: using export subsidies. But to ignore market Will Martin because agricultural tariffs are even access in the Doha round would be to Table 1: Effects on developing country economic forego most of the potential gains from welfare of full trade liberalization from different goods trade reform. groups of countries and products, 2015 (percent) From full liberalization of: These notes summarize The Three Pillars recent research on global Agricul- Textiles Other All The current Doha round has the advantage trade issues. They reflect ture and and manufac- Goods solely the views of the food clothing tures over the Uruguay Round of beginning from author, and do not Percentage the framework of rules and disciplines necessarily reflect the due to: agreed in that previous Round's views of the World Bank Developed Group or its Executive country Agricultural Round. In particular, it has the Directors, or the countries policies 30 17 3 50 three clearly identified "pillars" of market they represent. Developing access, export subsidies, and domestic countries' policies 33 10 7 50 support on which to focus. True, it took All more than three years to agree on a Trade Note 23 Countries' Policies 63 27 10 100 framework for the current negotiations, reached at the end of July 2004, but now TRADE NOTE June 2, 2005 that July Framework Agreement is likely to Large cuts in bound rates are needed also to guide the negotiations for some time. It erase binding overhang in agricultural therefore provides a strong basis for tariffs. Table 3 shows there is substantial undertaking ex ante analysis of various binding overhang in agricultural tariffs: the options potentially available to WTO average bound rate in developed countries is members during the Doha negotiations. almost twice as high as the average applied rate, and in developing countries the ratio is Table 2: Distribution of global welfare impacts of fully even greater. Thus large reductions in removing agricultural tariffs and subsidies, 2001, (percent) bound rates are needed before it is possible to bring about any improvements in market Beneficiary region: access. To bring the global average actual Agricultural High- Developing World agricultural tariff down by one-third, bound liberalization incomea countries component: countries rates would have to be reduced for High-incomea developed countries by at least 45 percent, countries' and up to 75 percent for the highest tariffs, liberalization of: under a tiered formula. Import market access 66 27 93 Table 3: Agricultural weighted average import tariffs, Export by region, 2001, (percent, ad valorem equivalent, subsidies 5 -3 2 weights based on imports) Bound tariff Applied tariffa Domestic support 4 1 5 Developed countries 27 14 All measures 75 25 100 Developing countries 48 21 a High-income countries include the newly industrialized East Asian customs of which: LDCs 78 13 territories of Hong Kong, Korea, Singapore and Taiwan as well as Europe's transition economies that joined the EU in April 2004. World 37 17 aIncludes preferences and in-quota TRQ rates where relevant, as well as the ad valorem equivalent of specific tariffs. Developed countries include Europe's transition economies that joined the EU in April 2004. The `developing In turning to what might be achievable countries' definition used here is that adopted by the WTO and so includes East Asia's four newly industrialized tiger economies. under a Doha partial reform package, the devil is going to be in the details. For Even large cuts in bound tariffs do little if example, commitments on domestic support "sensitive products" are exempted. If for farmers are so much higher than actual members succumb to the political support levels at present that the 20 percent temptation to put limits on tariff cuts for the cut in the total bound AMS, promised in the most sensitive farm products, much of the July Framework Agreement as an early prospective gain from Doha could installment will require no actual support evaporate. Even if only 2 percent of HS6 reductions for any WTO member. Indeed a agricultural tariff lines in developed cut as huge as 75 percent for those with countries are classified as sensitive (and 4 most domestic support is needed to get some percent in developing countries, to action, and even then it would only require incorporate also their "Special Products" cuts in 2001 levels of domestic support for demand), and are thereby subject to just a four WTO actors: the US (by 28 percent), 15 percent tariff cut (as a substitute for the the EU (by 18 percent), Norway (by 16 TRQ expansion mentioned in the percent) and Australia by 10 percent ­ and Framework Agreement), the welfare gains the EU and Australia have already from global agricultural reform would introduced reforms of that order since 2001, shrink by three-quarters. However, if at the so may need to do no further cutting under same time any product with a bound tariff in even that formula. excess of 200 percent had to reduce it to 2 TRADE NOTE June 2, 2005 that cap rate, the welfare gain would shrink overstates the degree of liberalization in the by `only' one-third. base year and thus understates the effects of further MFN liberalization. Third, the Given the high binding overhang of analysis here considers only merchandise developing countries, even with their high trade effects and does not incorporate tariffs ­ and even if tiered formulae are used effects of services trade distortions. The to cut highest bindings most ­ relatively few services negotiations have proceeded of them would have to cut their actual tariffs fitfully and the amount of new liberalization and subsidies at all. That is even truer if may eventually prove to be minimal. "Special Products" are subjected to smaller Nonetheless, services liberalization has a cuts. Politically this makes it easier for powerful growth effect (Mattoo, et al, developing and least developed countries to 2001), and these are not included in our offer big cuts on bound rates. calculations. Cutting in the opposite direction is that fact that benefits are not as Expanding non-agricultural market access automatic as the models assume because would add substantially to the gains from real world constraints on supply response agricultural reform. By adding a 50 percent may impede exporters in developing cut to non-agricultural tariffs by developed countries from taking advantage of new countries (and 33 percent by developing opportunities. Nonetheless, the weight of countries and zero by LDCs) to the tiered these facts suggests that the absolute benefit formula cut to agricultural tariffs would is likely to be larger than the $96 billion in double the gain from Doha for developing our calculations. countries. That would bring the global gain to $96 billion from Doha merchandise Most of the developing countries' gains liberalization, roughly one-third of the from that comprehensive Doha scenario go potential welfare gain from full to numerous large developing countries, liberalization of $287 billion. notably Brazil, Argentina and Other Latin America plus India, Thailand and South These absolute numbers undoubtedly Africa plus others in southern Africa. The underestimate the actual magnitudes of rest of Sub-Saharan Africa gains when non- prospective benefits. First, merchandise agricultural market access is expanded and trade liberalization opens domestic markets especially when developing countries to new competition and improved participate as full partners in the technology, and this, together with scale negotiations. An important part of this result effects from specialization, tends to increase is increases in market access ­ on a non- productivity. These dynamic productivity discriminatory basis ­ by other developing effects can multiply the gains several-fold. countries. Second, our calculations assume preferences in regional and other preferential trading Some least developed countries in Sub- arrangements are fully utilized, and that Saharan Africa and elsewhere may be slight developing countries have access at the losers in our static Doha simulations when listed rates. However, more detailed analysis developed countries cut their tariffs and shows that rarely is this the case. Brenton those LDCs choose not to reform at all (2003), for example, found that much themselves. That results from their terms of eligible trade does not take advantage of trade deteriorating either because of tariff preferential access, probably because of preference erosion on their exports or onerous rules of origin obligations or because they are net food importers and so quantitative limits built into the schemes. would face higher prices for their imports of Our modeling cannot take this temperate foods. Our simulations overstate underutilization into account and hence the benefits of tariff preferences for LDCs, 3 TRADE NOTE June 2, 2005 however, since they ignore the trade- excess of, say, 100 percent had to reduce it dampening effect of complex rules of origin to that cap rate. and the grabbing of much of the rents by developed-country importers. But even if Third, expanding non-agricultural market they were to be losers after correcting for access at the same time as reforming those realities, it remains true that agriculture is essential. A balanced preference-receiving countries could always exchange of concession is impossible be compensated for preference erosion via without adding other sectors. With other increased aid at relatively very small cost to merchandise included, the trade expansion current preference providers ­ and in the would be four times greater for both rich process other developing countries currently and poor countries ­ and poverty in low- hurt by LCD preferences would enjoy income countries would be reduced greater access to the markets of reforming considerably more. developed countries. And fourth, developing countries have to What is to be Done? contribute to the round, particularly through Several clear implications for the Doha South-South "concessions". Since round follow from this analysis. First, in developing countries are trading so much addition to outlawing agricultural export more with each other now, they are the subsidies, domestic support bindings must major beneficiaries of reforms within their be cut very substantially, to reduce binding own regions. Upper middle-income overhang. In so doing, the highest- countries might consider giving least subsidizing countries, namely the EU and developed countries duty-free access to US, need to reduce their support, not just for their markets (mirroring the recent the sake of their own economies but also to initiatives of developed countries), but encourage developing countries to better than such discriminatory action reciprocate by opening their markets as a would be MFN tariff reductions by them. quid pro quo. An initial installment of a 20 Even least developed countries should percent cut is nothing more than a start consider reducing their tariff binding towards getting rid of that overhang. overhang at least, since doing that in the context of Doha gives them more scope to Second, even more importantly, agricultural demand "concessions" (or compensation for tariff bindings must be cut hugely so that preference erosion or other contributors to some genuine market opening can occur. terms of trade deterioration) from richer Getting rid of the tariff binding overhang countries ­ and yet would not require them that resulted from the `dirty tariffication' of to cut their own applied tariffs very much. the Uruguay Round should be the first priority, but more than that is needed if Conclusion market access is to expand. Exempting even The good news is that there is a great deal to just a few "Sensitive" and "Special" be gained from liberalizing merchandise ­ products is undesirable as it would reduce and especially agricultural ­ trade under hugely the gains from reform and would Doha, with a disproportionately high share tend to divert resources into, instead of away of that potential gain available for from, enterprises in which countries have developing countries (relative to their share their least comparative advantage. If it turns of the global economy). To realize that out to be politically impossible not to potential gain, it is in agriculture that by far designate some "Sensitive" and "Special" the greatest reform is required. However, products, it would be crucial to impose a cap the political sensitivity of farm support such that any product with a bound tariff in programs, coupled with the complexities of the measures introduced in the Uruguay 4 TRADE NOTE June 2, 2005 Round Agreement on Agriculture and of the agencies for least developed countries modalities set out in the Doha Framework (Hoekman and Prowse, 2005). This may Agreement of July 2004, ensure the devil well provide an attractive path for will be in the details of the final Doha developing countries seeking to trade their agreement. To realize more of their potential way out of poverty, not least because it gains from trade, developing and least would help offset the tendency for an developed countries would need to fully expanded aid flow to cause a real exchange participate in trade (and complementary rate appreciation. As well, it is potentially a domestic) reforms, and to invest more in far more efficient way for developed trade facilitation. High-income countries countries to assist people in low-income could encourage them to do so by being countries than the current systems of tariff willing to open up their own markets more preferences. to developing country exports, and by providing more targeted aid. 1 Detailed analysis is forthcoming in the author's To that end, a new proposal has been put article in the September 2005 issue of The World forward to reward developing country Economy, and in a World Bank book edited by the authors called Agricultural Trade and the Doha commitments to greater trade reform with an Development Agenda to be co-published by Palgrave expansion of trade-facilitating aid, to be Macmillan and The World Bank by November 2005. provided by a major expansion of the Chapters can be downloaded at current Integrated Framework which is http://www.worldbank.org/trade/wto operated by a consortium of international References Brenton, P., 2003 "Rules of Origin in Free Trade Agreements" Trade Note No. 4. Washington, D.C.: The World Bank, http://www.worldbank.org/trade/ Hoekman, B., and Prowse, S., 2005, "Development and the WTO: Beyond Business as Usual", Bridges, No.2-3 February-March 2005, International Centre for Trade and Sustainable Development, Geneva, Switzerland. Mattoo, et al., 2001, "Measuring Services Trade Liberalization and its Impact on Economic Growth: An Illustration." Policy Research Working Paper No. 2655. Washington, D.C.: The World Bank. Further Reading Anderson, K. and W. Martin (2005), `Agricultural Trade Reform and the Doha Development Agenda', Policy Research Working Paper No. 3607, The World Bank, Washington, DC, May. (Forthcoming in The World Economy 28(9), September.) Anderson, K., W. Martin and D. van der Mensbrugghe (2005b), `Would Multilateral Trade Reform Benefit Sub-Saharan Africa?' Policy Research Working Paper, The World Bank, Washington, DC, July. This note was prepared by Kym Anderson, Lead Economist (Trade Policy) and Will Martin, Research Manager in the Development Research Group of the World Bank in Washington DC. The authors are grateful for the collaboration of numerous colleagues, especially Dominique van der Mensbrugghe and Tom Hertel, and for research funding from the UK's Department for International Development. This Trade Note can be downloaded at http://www.worldbank.org/trade/ 5