Agriculture: the heart of the DDA

Kym AndersonDevelopment Research Group World Bank

African/LDCs Ambassadors Seminar on Doha, Washington DC, 13 March 2006

Why much of the focus in DDA must be on agriculture & food …

… even though it provides only 6% of global GDP and 7% of int’l trade in goods & services

Because:54% of employment in DCs is in agricultureTwo-thirds or more of the world’s poor rely on farming for a living, & may be hurt by agric protection policies of other countries

Why much of the focus in DDA must be on agriculture & food …

And, OECD manufacturing tariffs have fallen by 9/10ths over the past 60 years to <4%, while agricultural protection has risen

Agric. applied (bound) tariffs now average nearly 5 (10) times manufacturing tariffs globally

Why focus on agriculture (cont.)True, the harm to some DC farmers from rich-country agricultural protection is reduced via non-reciprocal preference schemes such as the EU’s ACP & EBA agreements, and AGOA But those schemes contravene the core WTO rule of non-discriminationIn particular, they exclude some populous DCs (eg China, India, Indonesia, Pakistan, Vietnam)Hence they may harm more poor farmers (through trade diversion) than they help

Questions addressedTo what extent are subsidy and trade policies of high-income (and other) countries affecting welfare in DCs?What are the effects of current tariffs and subsidies on DCs, due to:

agriculture relative to manufacturing policies?developed relative to developing countries’ policies?

• and own- relative to other-countries’ policies?within agriculture, tariffs relative to export subsidies and domestic support policies?

What is needed to ensure Doha partial reforms benefit the poor in Africa and other LDCs?

Based on two new World Bank booksAnderson, K. and W. Martin (eds.), Agricultural Trade Reform and the Doha Development Agenda, 2006

summarized in an article in The World Economy, Sept 2005

Hertel, T. and L.A. Winters (eds.), Poverty and the WTO, 2006

summarized in an article in The World Economy, August 2005

Additional background papers are available at www.worldbank.org/trade/wto

What differentiates our new study?

We use the new GTAP protection database which includes, for the first time, non-reciprocal preferential tariffs as of 2001We amend it to include key trade policy commitments to 2005We use the Linkage model, which first projects the world economy to 2015, to report the consequences of current policies and of partial reform under the DDA

Cost of current protection policies by 2015

Global cost of current tariffs on all goods plus agricultural subsidies: $287 billion p.a.As % of GDP, cost to developing countries is 1/3rd higher than to high-income countries

and nearly twice as high for Sub-Saharan Africadespite a favorable terms of trade effect for DCs

These costs are potential gains from liberalization

Our results are lower-bound estimates because they ignore:

Dynamic effectsPro-competitive effectsImpact of increase in product varietyGains from services trade and investment reformThe risk that, without Doha, agricultural (and other) protectionism could riseComplementary domestic reforms

Sources of cost to global economy

$ billion due to policies in:

Agric & food

Textiles clothing

Other merch.

TOTAL

High-income countries

135 15 9 159(55%)

Developing countries

47 23 58 128 (45%)

All countries’ policies

182(63%)

38(14%)

67(23%)

287(100%)

Sources of cost to developing countries

$billion due to policies in:

Agric & food

Textiles &

clothing

Other merch.

TOTAL

High-income countries (50%)

Developing countries (50%)

All countries’ policies

(63%) (25%) (12%) (100%)

Relative importance of own reform (% impact on real income)

Own-reform

Other countrie

s’ reforms

All countrie

s’ reforms

South Africa 0.1 0.8 0.9Rest of Sub-Saharan Africa

0.6 0.6 1.2

Relative importance of 3 agric pillars % of

effects from:

Agric market access

Agric domesti

c support

Agric export

subsidies

All agric

policies

Global welfare

93 5 2 100Global agric trade

86 16 -2 100

Non-OECD farm income

52 38 10 100

Why agricultural market access dominates subsidies in welfare, trade and farm income

60% of PSE for OECD countries is due to ‘market price support” from tariffs and export subsidiesNeed to add non-OECD agric protection, which mostly comes from tariffsPSE only refers to primary agric; cost of support for processed agric (even net of the inflated prices of protected farm products) is even bigger than for primary agric – and all via trade measuresTrade measures are roughly twice as costly as direct producer support, because they also distort the consumer side of the market

See Anderson, Martin and Valenzuela, ‘The Relative Importance of Global Agricultural Subsidies and Market Access”, Dec. 2005 at www.worldbank.org/trade/wto

Effects of full global lib’n on SSA agric

% change in:

Real value of agric and

food exports

Real net farm

income

South Africa 56 10Other Southern Africa

50 9

Rest of Sub-Saharan Africa

45 5

All SSAfrica 50 7

What about Arvind Panagariya’s critique?

Won’t net food-importing DCs have to pay more for imports if agricultural tariffs and subsidies are cut?And won’t those DCs receiving preferential access for their agricultural exports to OECD markets lose through preference erosion?

Effects of just OECD agric lib’n on SSA

$billion change inreal income due to change in:

Agric and food

Non-agric goods

Import prices -0.4 -0.5Export prices 0.9 1.5Total terms of trade

0.6 0.9

Effects of global lib’n on DC share of global exports (including intra-EU), %

Primary agric

Processed food

Textiles &

clothing

Other goods

Base 47 34 63 30

Free trade

62 40 67 32

Effects of global lib’n on value of DC exports ($billion annual boost)

Agric and food

Non-agric

primary

Other goods

TOTAL (includin

g services)

LICs 36 6 112 158

MICs 156 23 271 446

Effects of global lib’n on shares of global production exported (%)

Primary agric

Processed food

Textiles/

clothing

Other goods

base 8 7 28 24

lib’n 12 12 35 26

Take-away messages on costs of current policies/benefits from full liberalization

Potential gains from further trade reform are large

must find the political will for Doha success

DCs, esp. SSA, would gain disproportionately, notwithstanding non-reciprocal tariff preferences

provided DCs reform too, including own-reform

Agricultural reforms are the highest priority for goods, from global and DC welfare viewpoints

Elements of the Doha Agenda as shown in the July 2004 Framework agreement

3 agricultural pillarsNon-agricultural market accessServicesLesser tariff and subsidy cuts for developing countries (DCs) and zero cuts for least-developed countries (LDCs)

Key agricultural elements of the Doha Agenda to watch

Reduction in tariff and subsidy ‘binding overhang’Treatment of ‘sensitive’ and ‘special’ products (SSPs)Tariff cap, and whether it applies to SSPsExtent of Special and Differential Treatment (SDT) invoked by developing and least-developed countries in terms of their willingness to reform

Our modelled Doha scenarios

75% tiered cut to bound agric tariffs• without & with sensitive and special products• without & with a tariff cap of 200%• with & without Special and Differential Treatment (SDT)

75% tiered cut to domestic ag subsidy ceilingsAbolition of agric export subsidies50%/33%/0% cut in bound non-agric tariffsServices policies unchanged

Big cuts needed to reduce applied agric tariffs, because of “binding overhang”

Bound%

Applied%

High-income countries

27 14

Developing countries (excluding LDCs)

48 20

Least developed countries (LDCs)

78 13

Also big cuts in domestic support limits needed to reduce DS binding overhang

-

10

20

30

40

50

60

70

EU US Japan Korea Mexico Canada

US proposal

G-20 proposal

EU proposal

Overhang

Applied

0

1 0

2 0

3 0

4 0

5 0

A g + N A M A - S D T A g + N A M A A g O n l y A g - S S P + C a p A g - S S P

Doha scenarios: Doha scenarios: gain in real income from gain in real income from Doha as % of gain from full global trade reformDoha as % of gain from full global trade reform

High-income

Developing

Ag+NAMA—Same as above but includes SDT.Ag Only—Only agriculture, no exemptions, no caps, includes SDT.

Ag-SSP—Same as above but no caps.Ag-SSP+Cap—Same as above plus exemptions (HIC-2%, LMY-4%) and caps (200%).

Ag+NAMA-SDT—No exemptions, no caps, no SDT.

Real farm income rise from 2nd Doha (percentage change from baseline income in 2015)

- 1 .5 3 .5 8 .5 1 3 .5 1 8 .5

B r a z i l

R e s t o f L A C

A r g e n t i n a

T h a i l a n d

M e x i c o

R e s t o f S S A

R e s t o f E a s t A s i a

R e s t o f S . A s i a

R e s t o f S A D C

I n d o n e s i a

S o u t h A f r i c a

M E N A

B a n g l a d e s h

C h i n a

V i e t n a m

I n d i a

What about the cotton initiative?

Under full lib’n, net income from and exports of cotton in SSA would be 31% and 55% greaterSSA would enjoy 52% of global welfare gain76% of SSA gain would be due to subsidy cutSee paper by Anderson and Valenzuela, “The Doha Cotton Initiative: A Tale of Two Issues”, Feb. 2006 at www.worldbank.org/trade/wto

Implications for developing countries’ Doha negotiating strategies

Need to seek ambitious outcome on agric market access, not just on subsidies

despite domestic sensitivities (which SSM and ‘special products’ can manage, especially if rural public goods are increased)

Need to also encourage developing countries, not just developed countries, to become more fully engaged

otherwise, this won’t be much of a development round

Implications for Sub-Saharan AfricaOECD cotton subsidy reform is crucialBut SSA and LDCs will get only a small fraction of their potential gains from a move to global free trade unless they fully participates (no SDT)

SSA gain would almost treble if it foregoes SDT

Better to do that under Doha, so as to get reciprocity and/or more “aid for trade”, rather than unilaterally?

especially as that would lead to less trade diversion when EPAs are signed with EU