Transcript The role of subsidies in agricultural trade reform

4-day course on Agricultural
Trade Policy and the WTO
Tehran, Iran, 15-18 May 2005
Outline of 4-day course
Principles each morning; practical, hands-on
analytical tools each afternoon
Day 1: WTO’s contribution to economic growth
and nature of protection patterns still in place;
and accessing trade & protection data
Day 2: WTO accession processes and
experiences; and partial equilibrium analysis
Day 3: Doha progress and prospects; and
general equilibrium analysis
Day 4: Doha prospects & implications for Iran;
and CGE modelling of Iran’s economy
Facilitators
Kym Anderson, Development Research
Group, World Bank, USA
Convener of morning sessions
Frank van Tongeren, LEI, Netherlands
Convener of afternoon sessions
‘Shuby’ Soamiely Andriamananjara,
World Bank Institute, USA
Overall coordinator
Day 1:
Gains from trade,
patterns of trade and protection,
and WTO’s contributions to
growth of open economies
Outline of first morning
The gains-from-trade arguments
Key reason why trade barriers remain
WTO’s role in providing a counterforce
WTO’s other benefits for governments
seeking to reform their economies
The patterns of protection that still remain in
the world, despite huge reductions since the
formation of GATT (1947) and WTO (1995)
Arguments for removing trade
barriers and subsidies
Standard gains-from–trade argument: allows nation’s
resources to be used to exploit its comparative
advantages by specializing its production in what it
does best
That in turn can increase (esp. in small economies):
scope for exploiting economies of scale,
capacity to deal with natural disasters
competitiveness of domestic markets,
variety of products available to producers and consumers,
enhanced learning and technological catch-up (esp. via FDI)
less wasteful rent-seeking lobbying activities by protectionist
groups
Arguments for removing trade
barriers and subsidies (continued)
Empirical evidence: there are many examples
of reformed economies that have boomed
and none of booming closed economies
Not to say openness is sufficient for sustained
rapid economic growth, but it is a necessary
condition
Other necessary conditions include:
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macroeconomic and political stability,
rule of law and establishment of property rights,
efficient provision of public goods (incl. safety nets), and
absence of distorting domestic policies
Developing countries’ arguments for
retaining agric protection include …
Stabilize food prices
Provide food security/self sufficiency, esp. in
the case of food-deficit countries
Offset terms of trade deterioration
Slow the depopulation of rural areas
BUT, all those policy objectives can be achieved
more efficiently by means other than
protection from import competition, none of
which are prevented by WTO
So why do most governments
still retain protectionist policies?
Because some workers and owners of some
productive resources, and less-competitive
farmers, fear that they will lose from reform,
and that social safety nets will not fully
compensate them
Any losses would be concentrated in the
hands of a few, while gains will be small per
capita for the many benefitting firms or
consumers, so the latter have less incentive
to counter the former’s lobbying
 A political equilibrium can involve protection
What can alter the political
equilibrium level of protection?
Wider dissemination of information on the
gains from trade
Technological innovations that lower trade
costs (e.g. ICT revolution), or increased
openness abroad, both of which increase the
incentive for exporters to lobby for reduced
protectionism by their home government
such globalization forces raise the rewards from
good economic governance -- and raise the cost of
poor economic governance (e.g., via FDI)
more countries are looking to open up, and that is
easier if done when others do likewise
Why WTO trade negotiations
make reform easier
They offer scope for exchange of market
access
And more so the larger the number of
countries taking part in a negotiating round
and the broader the product and issue
coverage
 Hence, WTO negotiations offer far more
scope than regional or bilateral negotiations
What else does WTO offer to
make accession worthwhile?
Exporters receive MFN treatment in markets
abroad
A major improvement for those now facing sanctions
Access to WTO’s dispute settlement process
Opportunity to ‘bind’ tariff commitments so as
to avoid future policy back-sliding
a means of warding off protectionist domestic vested
interests (the ‘Ullyses effect’)
Requirements to make policies more transparent
All of which reduce business uncertainty and so
encourage more investment
Expanded opportunities for
Iranian food exporters
WTO accession will lead to fewer barriers to
Iranian exports
Provides scope for greater specialization in those
products in which Iran is most competitive
internationally
Making the most of those opportunities also
requires reducing distortions within Iran’s
own economy
That will happen as Iran responds to WTO
members’ requests during accession negotiations,
but better to be pro-active and reform for the
country’s own sake
How WTO increases policy
transparency
Protocol of Accession document
Single enquiry point
Annual notifications of policy changes
Periodic trade policy review by WTO
Secretariat (every 4-6 years)
=> All of which lower the cost to
consumers/exporters of becoming
informed about protection policies
Reading for this topic
See the note entitled “Why the WTO
exists and what accession involves” (from
K. Anderson’s Vietnam’s Transforming Economy and
WTO Accession: Implications for Agriculture and
Rural Development, Singapore: Institute for
Southeast Asian Studies, 1999)
Patterns of
Agricultural Protection
The long history (very briefly)
Why bother to reduce sensitive agric
subsidies and trade barriers at WTO
… when agriculture contributes <4% of
global GDP and <9% of international trade?
Because while manufacturing import tariffs
are now low, agric protection has risen and
its applied (bound) import tariffs now average
nearly five (ten) times manufacturing tariffs
globally
Which means a lower mean and higher variance of
prices of farm products in international markets
Why bother to reduce agric
subsidies and trade barriers at WTO
That in turn means the vast majority of
the world’s poor, who rely on farming
for a living, are less able to trade their
way out of poverty
Why reform agric policies (cont.)
True, the harm to some poor farmers from
OECD agric protection is reduced via nonreciprocal trade preference schemes
But those discriminatory market access
schemes, like agric. export subsidies, rely on
undesirable exceptions to worthy WTO rules
And they exclude some significant developing
countries (China, India, Indonesia, Iran,
Vietnam) and so may harm more poor farmers,
through trade diversion, than they help globally
Nationally, too, poor farmers can be
harmed by own-country interventions
…
… despite the presence of large
agricultural subsidies
See, e.g. the CGE analysis for Iran by
Jensen and Tarr (RDE, 2003)
to be examined on Day 4
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 Uruguay
Round
History of government interventions in
agricultural markets
Been going on for millennia
Sometimes to raise tax revenue (discouraging
farmers)
Sometimes to boost food self-sufficiency (which
some view as boosting food security), thereby
encouraging some farmers
Sometimes to reduce domestic price fluctuations
helping consumers concerned with price peaks, or
helping producers concerned with price troughs
Three past features of agricultural
distortion patterns
1. The domestic-to-border price ratio
tended to be greater for agriculture
relative to that for manufacturing, the
higher a country’s per capita income
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 tended to be
greater, the higher a country’s
comparative disadvantage in agric,
other things equal
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 agricultural protectionist countries
mainly reducing troughs in farmer prices
and agricultural-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 prices of farm
products in international markets
And the use of trade policy to stabilize
domestic food markets exacerbated
fluctuations in international food prices
Reading
For more on how economists have
improved their monitoring and analysis
of trade policies, see K. Anderson’s
“Measuring Effects of Trade Policy
Distortions: How Far Have We Come?” The
World Economy 26(4): 413-40, April 2003.
Political economy of agricultural protection
Why was this pattern observed across
countries and over time for many decades?
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 it take until the 1990s for
countries to agree multilaterally to desist (or
at least slow the growth of agricultural
protectionism)?
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 developing
country farmers were affected hugely
led to formation of Cairns Group in 1986, whose
sole aim was to keep agriculture high on UR
agenda
• its agric. exports = Japan’s manufactures exports
Current protection pattern
Unilateral reforms by developing
countries since the 1980s have reduced
their export taxes and other negative
incentives for farmers
But some developing countries have
‘overshot’ and become protectionist
towards farmers
or could do in the future, because of their
much higher bound than applied tariffs
Implications for those countries
seeking WTO accession
Relatively wealthy and large acceding
countries, such as Iran (and China before
it), are going to be required to bind their
agricultural tariffs at low levels
Almost certainly at less than 20% on average