Pacific Economic Review, 12: 3 (2007) doi: 10.1111/j.1468-0106.2007.00355.x
pp. 319–333
AGRICULTURAL AND NAMA REFORM UNDER DOHA: IMPLICATIONS FOR ASIA-PACIFIC ECONOMIES
Melbourne, Pacific PER 2007 1361-374X ORIGINAL XXX Trade K. ⅓ Blackwell policy Economic ⅔⅓ Australia ARTICLES reform ⅓ Publishing fi. Review ⅞ under ¾⅓Asia DohaPty Ltd Blackwell Publishing Asia
K A* World Bank, Washington DC W M World Bank, Washington DC Abstract. This paper provides estimates of the potential gains to the Asia Pacific region from completely freeing merchandise trade globally and from partial liberalizations that might emerge from the Doha Round. Particular attention is given to agriculture, where the majority of the gains would arise. The results suggest that moving to free global merchandise trade would boost real incomes in the Western Pacific proportionately more than in other regions. The Doha partial liberalization scenarios considered would move the world only a small way towards complete free trade, but inreasingly so the more developing countries themselves are willing to open up.
Trade policy reform is of particular importance to the Asia-Pacific region given the strong trade orientation of the region and its high level of engagement in the multilateral trade negotiations under the Doha Development Agenda. While hopes were initially high that the WTO’s trade ministerial meeting held in Hong Kong in December 2005 would reach agreement on the modalities for liberalization under this agreement, these hopes had to be revised downwards prior to the ministerial. One of the key contributing factors to this lowering of ambition was difficulties in identifying countries’ interests and the consequences of different approaches to reform, in what is an extremely complex and interdependent set of policies. The suspension of the negotiations in July 2006 and their slow resumption in February 2007, highlights the difficulties involved in reaching agreement between so many actors at different levels of economic development. At the broadest level, key questions for trade policy-makers include: what is the relative importance of liberalizing agricultural products, non-agricultural goods and services? Another key question is the relative importance of liberalizing trade in developed or developing countries: is it enough for developing countries to obtain gains in market access to high income countries, or do large gains to developing countries require liberalization also of their own barriers? Within the controversial agricultural sector, which of the three pillars – market access, domestic support or export subsidies – should be the focus of attention, or should negotiators seek a balance between the three? Finally, how should *Address for correspondence: Kym Anderson, Development Research Group, The World Bank, Mailstop MC3-303, 1818 H Street NW, Washington DC 20433, USA. Email:
[email protected]. Revision of a paper for the University of Hong Kong conference on ‘The Economics of the Doha Round and the WTO’, organized by R.E. Baldwin and K.C. Fung, Hong Kong, 16–17 December 2005. This is a product of the World Bank’s DfID-funded project on Agricultural Trade Reform and the Doha Development Agenda. The authors are grateful for helpful comments from conference participants and for funding from the UK’s Department for International Development. The views expressed are the authors’ alone and not necessarily those of the World Bank, its executive directors or the countries they represent, nor the funder of the project. © 2007 The Authors Journal compilation © 2007 Blackwell Publishing Ltd
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policy-makers view the exceptions to be allowed to industrial and developing countries. Is allowing some products to be treated as ‘sensitive’ or ‘special’ a low-cost way to obtain a political agreement, or does it amount to throwing the baby out with the bathwater? All of these questions are critical to assessing the consequences of a round outcome, but none can be answered on the basis of economic theory. Detailed information on the structure of production, trade, protection and existing WTO commitments is needed to provide a comprehensive set of responses. In this paper, we attempt to provide answers to these questions, which are of intense interest to policy-makers concerned with trade in the region. Because it is important to understand the way in which results for such broad questions as we address are obtained, we begin by explaining the methodology and data used in this analysis. We then consider the question of the relative importance of trade reform in agriculture and non-agriculture for the benefit obtained by different countries and groups of countries from liberalization by developed and developing countries – and particularly for Asia-Pacific countries. We then turn to the question of the relative importance of agricultural trade reform under the three different pillars of the agriculture agreement. Finally, we consider the implications of different potential scenarios for reform for the benefits obtained by different countries. 1.
The model used for this analysis is the World Bank’s global, dynamic computable general equilibrium (CGE) model, known as ‘Linkage’ (van der Mensbrugghe, 2005). It is a relatively straightforward CGE model but with some characteristics that distinguish it from standard comparative static models such as the GTAP model. A key difference is that it is recursive dynamic, so it begins with 2001 as its base year and was solved annually through to 2015. The dynamics are driven by exogenous population and labour supply growth, savings driven capital accumulation and labour augmenting technological progress (as assumed for the World Bank’s Global Economic Prospects exercise in 2004). In any given year, factor stocks are fixed. Producers minimize costs subject to constant returns to scale in production technology; consumers maximize utility; and all markets, including the market for labour, are cleared with flexible prices. There are three types of production structures in the model. Crop sectors reflect the substitution possibility between extensive and intensive farming. Livestock sectors reflect the substitution possibility between pasture and intensive feeding. All other sectors reflect the standard capital-labour substitution (with two types of labour, skilled and unskilled). There is a single representative household for each modelled region, allocating income to consumption using the extended linear expenditure system. Trade is modelled using a nested Armington structure in which aggregate import demand is the outcome of allocating domestic absorption between domestic goods and aggregate imports and then aggregate import demand is allocated across source countries to determine the bilateral trade flows. © 2007 The Authors Journal compilation © 2007 Blackwell Publishing Ltd
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The model covers six sources of protection. The most important involves the bilateral tariffs. There are also bilateral export subsidies. Domestically, subsidies are represented comprehensively only in agriculture, where they apply to intermediate goods, outputs and payments to capital and land. Three closure rules are used. First, government fiscal balances are fixed in any given year. The fiscal objective is met by changing the level of lump sum taxes on households. This implies that losses of tariff revenues are replaced by higher direct taxes on households. Second, the current account balance is fixed. Given that other external financial flows are fixed, this implies that ex ante changes to the trade balance are reflected in ex post changes to the real exchange rate. For example, if import tariffs are reduced, the propensity to import increases. Additional imports are financed by increasing export revenues, which is typically achieved by a real exchange rate depreciation. Finally, investment in the model is driven by savings. With fixed public and foreign savings, investment is driven by two factors – changes in the savings behaviour of households and changes in the unit cost of investment. The latter can play an important role in a dynamic model if imported capital goods are taxed. Because the capital account is exogenous, rates of return across countries can differ over time and across simulations. The model solves only for relative prices. The numeraire, or price anchor, in the model is given by the export price index of manufactured exports from high income countries. This price is fixed at unity in the base year and throughout the projection period to 2015. The newest version of the Linkage model is based on Release 6.05 of the GTAP database. Compared with Version 5 of the GTAP database, Version 6.05 has a 2001 base year instead of 1997, updated national and trade data and, importantly, a new source for the protection data. The detailed database on bilateral protection integrates, at the tariff level, trade preferences, specific tariffs and a partial evaluation of non-tariff barriers such as tariff rate quotas. Tariffs are lower in the new GTAP database than they were in the previous version because of the inclusion of bilateral trade preferences and of major trade reforms between 1997 and 2001. These included the continued implementation of the Uruguay Round Agreement, especially the elimination of quotas on textile and clothing trade and China’s progress towards WTO accession. These reforms contributed to the increase in trade’s share of world GDP (gross domestic product) from 44 to 46% during those four years. Prior to undertaking the analysis, the protection data were adjusted to take into account liberalization commitments that have, or will, deliver reductions in protection below 2001 levels even in the absence of a Doha agreement. These included China’s WTO accession commitments, the accession of new countries to the European Union and the final post-2001 reductions in developing country agricultural tariffs agreed in the Uruguay Round. The trade database in the model is based on UN COMTRADE data at a fine level of disaggregation. Both data reported by the exporter and the importer in each bilateral trade flow are considered, with the reconciled value derived taking into account the historical reliability of data from each partner (Gehlhar, 2002). For Hong Kong and the Netherlands, the trade estimates © 2007 The Authors Journal compilation © 2007 Blackwell Publishing Ltd
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Table 1. Import-weighted average applied tariffs, by sector and region, 2001(%) Importing region High income countries Developing countriesa Middle income Low income Developing countries by region East Asia and the Pacific of which China South Asia Europe and Central Asia Middle East & North Africa Sub-Saharan Africa Latin America & Caribbean World total
Agriculture, processed food
Textiles, clothing
Other manufacturing
All goods
16.0 17.7 (14.2) 16.5 22.2
7.5 17.0 (14.3) 16.8 17.9
1.3 8.3 (7.1) 7.3 14.5
2.9 9.9 (8.4) 8.9 15.9
26.3 37.6 33.9 14.8 14.1 18.2 10.3 16.7
17.8 19.4 20.1 10.7 27.1 23.7 11.3 10.2
8.6 11.3 22.2 4.1 7.2 10.5 7.1 3.5
10.5 13.6 23.5 6.0 9.8 12.6 7.7 5.2
Note: Numbers in parentheses are the averages at the start of 2005 following WTO accessions including China; the completion of Uruguay Round implementation including the end of textile quotas under the Multifibre Arrangement; and the eastward enlargement of the European Union to 25 members. Source: Authors’ compilations from the GTAP database Version 6.05.
re-exports from domestic exports, which has important implications both for their own trade flows and for the reported trade flows of countries such as China, which make extensive use of these ports. The version of the L model used for this study is a 27-region, 25-sector aggregation of the GTAP database. There is a heavy emphasis on agriculture and food, which account for 13 of the 25 sectors identified in the analysis and a focus on the largest commodity exporters and importers. 2.
The main source of protection resides in tariffs or border barriers, although some countries – notably, high income countries – also have significant agricultural production and export subsidies. The average import tariff for agriculture and food is 16.0% for high income countries and 17.7% for developing countries, while for manufactures other than textiles and clothing, it is 8.3% for developing countries and just 1.3% for high income countries (Table 1). The averages, of course, obscure large variations across countries and commodities. For example, if high income countries put tariffs on temperate zone farm products at a prohibitive 100% but set tariffs on tropical products such as coffee at zero, the import weighted average agricultural tariff can be quite low. Commodity averages also obscure bilateral differences. India, for example, has an average tariff on agriculture and food of 82% on imports from East Asia, but only 20% on imports from sub-Saharan Africa. For high income countries agricultural tariffs on goods from low income countries are lower than on imports from high and middle income countries. In other sectors, however, there is less evidence © 2007 The Authors Journal compilation © 2007 Blackwell Publishing Ltd
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Table 2. Impacts on real income from removing all global merchandise trade distortions (including agricultural subsidies), without and with own-country participation, by country/region, 2015 (changes relative to the baseline, in 2001 dollars and %) Real income gain p.a. ($ billion)
Total gain as That due just to change in % of baseline terms of trade ($ billion) income
From other From own + From other From own + From own + countries’ others’ countries’ others’ others’ reforms reforms reforms reforms reforms Australia and New Zealand EU 25 plus EFTA USA Canada Japan South Korea and Taiwan Hong Kong and Singapore China Indonesia Thailand Vietnam Rest of East Asia High income countries Middle income countries Low income countries World total
6.2 40.6 21.6 1.7 17.4 17.0 8.7 16.6 3.6 9.8 2.4 2.8
6.1 65.2 16.2 3.8 54.6 44.6 11.2 5.6 1.9 7.7 3.0 5.3 201.6 69.5 16.2 287.3
4.4 29.7 18.8 1.2 13.7 10.0 6.6 12.5 1.5 3.9 1.5 1.8
3.5 0.5 10.7 –0.3 7.5 0.4 7.9 –8.3 0.2 0.7 –0.2 –0.9 30.3 –16.7 –12.9 0.6
1.0 0.6 0.1 0.4 1.1 3.5 2.6 0.2 0.7 3.8 5.2 1.9 0.6 0.8 0.8 0.7
Source: Authors’ World Bank L model simulations.
of preferences at this level of aggregation. Imports of textiles and clothing – indeed, of all merchandise – from low income countries face a higher average tariff in high income countries than do imports from middle or high income countries. 3.
Negotiators have only limited amounts of negotiating capital and would like to be able to allocate it in ways that promise the greatest potential gains to their countries. However, identifying the direction from which the greatest gains might be obtained is difficult, since this depends not only upon the actions taken by the country itself, but also on those of all its trading partners. Table 2 shows that, overall, East Asia would gain disproportionately when expressed as a percentage of GDP. The second pair of columns in Table 2 shows the income effects of changes in the international terms of trade for each country. For some developing countries the terms of trade effect is negative, reducing somewhat the gains from improved efficiency of domestic resource use (especially in China and India). A comparison of columns 4 (‘other countries’) and 5 (‘own plus other countries’) of Table 1 reveals that it is mainly owncountry reform that is lowering developing countries’ terms of trade. © 2007 The Authors Journal compilation © 2007 Blackwell Publishing Ltd
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Table 3. Regional and sectoral source of gains from full liberalization of global merchandise trade, developing and high income countries, 2015a($ billion)
Developing Developing countries liberalize: Agriculture and food 28 Textile and apparel 9 Other merchandise 6 All sectors 43 High income countries liberalize: Agriculture and food 26 Textile and apparel 13 Other merchandise 4 All sectors 43 All countries liberalize: Agriculture and food 54 Textile and apparel 22 Other merchandise 10 All sectors 86
Japan
South Korea & Taiwan
China Asian DCs
All East
1 0 1 2
1 2 7 10
2 2 8 12
8 1 –9 0
15 1 –4 12
135 15 9 159
4 0 –1 3
35 1 9 45
31 1 1 33
–6 8 4 6
–2 12 4 14
182 38 67 287
6 0 0 6
36 3 16 55
33 3 9 45
2 8 –4 6
13 14 –1 26
High income
World
ANZ
19 14 52 85
47 23 58 128
109 2 5 116 128 16 57 201
Note: aFigures may not add because of rounding and interactions between policy instruments. Source: Authors’ World Bank L model simulations.
Since the current negotiations differentiate between liberalization to be undertaken by industrial and developing countries and between liberalization of agricultural and non-agricultural goods, we provide an assessment in Table 3 of the total potential gains under each of these categories. These gains are reported for high income and developing countries as two groups and also for key countries in the Asia-Pacific region. While we would have liked to present similar information on the potential gains from liberalization of trade in services, the data necessary for such an assessment are not yet available. The results in Table 3 show that full global liberalization of agricultural and food trade would generate very substantial economic welfare gains, amounting to $287 billion per year. Despite its relatively small size in the global economy and in international trade, agricultural trade reform contributes $182 billion, or 63%, of that total. For East Asian developing countries, the importance of agricultural trade reform is nearly as high, accounting for around half of the total gains. However, its importance comes from the agricultural policies of developing rather than high income countries, as the latter’s reform reduce economic welfare in these net food importing countries. Also striking is the importance to these countries of textile and clothing tariffs – even though the quotas on those products were eliminated at the end of 2004. The importance of own liberalization relative to liberalization by trading partners varies considerably across countries. For Japan, South Korea and Taiwan, the importance of agricultural reform is extremely large as a share of © 2007 The Authors Journal compilation © 2007 Blackwell Publishing Ltd
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the gains from own reform. These gains from own agricultural liberalization mean that the overall potential benefits from multilateral reform for these three economies will come primarily from liberalization by the high income group of which they are a part. By contrast, lightly-protected Australia and New Zealand gain most from agricultural reform by other, especially high income, countries. The above results are for full trade liberalization. Smaller changes can be expected to result from partial reforms of the sort being negotiated currently under the Doha Development Agenda. 4.
What will the Doha package ultimately contain? While we cannot be sure, the Doha framework agreement (WTO, 2004) and the Hong Kong Ministerial Declaration (WTO, 2005) provide some clear guidelines and we can examine the consequences of a number of the choices that need to be made within those frameworks. Based on the analysis in Anderson et al. (2006), we assume agricultural export subsidies are eliminated by 2013 and that domestic support for agriculture is cut in just four economies: by an average of 28% for the USA, 18% for Norway, 16% for the EU and 10% for Australia (relative to 2001 levels, as explained above). More difficult to determine are the likely nature and extent of reductions in market access barriers, so a number of scenarios are considered initially for agricultural and food products in isolation of non-agricultural tariff cuts, before also incorporating some non-agricultural market access. Throughout this section, the WTO usage of the term ‘developing countries’ applies when allocating Special and Differential Treatment (SDT) in the form of lesser commitments to reform, which means Hong Kong, South Korea, Singapore and Taiwan are all able to enjoy SDT despite their high income status. 4.1.
Five scenarios
The experiments begin for Scenario 1 with a progressive or tiered reduction formula with marginal agricultural tariff rate reductions of 45%, 70% and 75% within each of the three bands defined by the Harbinson (WTO, 2003) inflection points of tariff rates of 15 and 90% for developed countries (that is, for low agricultural tariffs the marginal rate of reduction is 45%, for medium-level tariffs it is 70% and for the highest tariffs it is 75%) and for developing countries the reductions are 35%, 40%, 50% and 60% within each of their four bands (except least developed countries are not required to undertake any reduction commitments). Even these large cuts to bound tariffs (which are about halfway between those proposed by the USA and the EU in late 2005 in the lead-up to the Hong Kong Ministerial meeting) would lead to the average applied tariffs on agricultural and food products in 2015 being only one-third lower globally (10.0 instead of 15.2%) and 12.5 instead of 14.2% for developing countries. © 2007 The Authors Journal compilation © 2007 Blackwell Publishing Ltd
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Scenario 2 examines the consequences of including ‘Sensitive’ farm products as allowed for in the July Framework, with developed countries allowed to treat 2% of their HS6 agricultural tariff lines as sensitive and, we assume, subject to just a 15% tariff cut,1 and double those proportions of products for both developing and least developed countries, in part to incorporate also their demand for ‘Special’ products treatment.2 This would lead to the average agricultural tariff falling only to 13.5% in both high income and developing countries. Scenario 3 considers the effects of adding to Scenario 2 a tariff cap of 200% such that any product with a bound tariff in excess of that limit will be subjected to a reduction down to that cap rate, which leads to average cuts in agricultural tariffs of 18% for both developed and developing countries. This would lead to the average agricultural tariff falling in 2015 considerably more for high income countries (to 11.5%) and but only very slightly more (to 13.3%) for developing countries. Scenario 4 adds to Scenario 1 the cuts in non-agricultural tariff bindings of 50% in developed countries, 33% in developing countries and zero in least developed countries. That lowers the average tariff on all merchandise from 2.9% in the baseline to 1.6% for high income countries and from 8.4 to 7.5% for developing countries. Finally, Scenario 5 makes developing (including least developed) countries full participants in the round, undertaking the same reductions in bound (but not necessarily applied) tariffs as the developed countries in Scenario 4. It lowers the average tariff on all merchandise for developing countries from 8.4 to 6.8 instead of 7.5%, a cut of almost one-fifth in this case instead of just one-ninth as in Scenario 4. 4.2.
Estimated welfare and trade effects of those scenarios as of 2015
The welfare consequences of implementing these various reforms over the 2005–2010 period and allowing the global economy to adjust to 2015 are summarized in Table 4(a) in dollar terms and in Table 4(b) as percentage changes in real income in 2015. Column 1 of Table 4(a) suggests that agricultural liberalization using the harmonizing formula (Scenario 1) would generate a global gain of $75 billion even without the inclusion of non-agricultural tariff reform. But almost all those benefits accrue to the reforming high income economies (with whom we include protective South Korea and Taiwan as well as Hong Kong and Singapore in this and subsequent tables) such that low and middle income countries would 1
Some proposals involve larger cuts in tariffs on these goods. As described in Jean et al. (2006), ‘sensitive’ farm products are chosen for each country by taking into account the importance of the product, the height of its existing tariff and the gap between its bound and applied tariffs in that country. Special products are intended to improve livelihood and food security by permitting protection to staple foods with large expenditure shares produced by subsistence farmers. There is a risk that these could prejudice their own objectives – providing little benefit to ‘subsistence’ farmers and raising the costs of living of the poor (see Ivanic and Martin, 2007). 2
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Table 4. Change in real income in alternative Doha scenarios, 2015 (2001 $ billion and percentage changes from baseline) (a) Dollar change Scen. 1
Scen. 2
Scen. 3
Scen. 4
Scen. 5
Scen. 1
Scen. 2
Scen. 3
Scen. 4
Scen. 5
2.0 29.5 3.0 1.4 18.9 10.9 –0.1 –0.5 0.1 0.9 –0.1 0.1 65.6 19.7 9.0 8.0 1.0 74.5
1.1 10.7 2.3 0.5 1.8 1.7 –0.1 –1.5 0.2 0.6 0.0 0.0 18.1 1.2 –0.4 –0.5 0.1 17.7
1.2 10.9 2.1 0.4 12.9 15.9 –0.2 –1.1 0.0 0.8 –0.1 1.0 43.2 16.8 1.1 1.0 0.0 44.3
2.4 31.4 4.9 0.9 23.7 15.0 1.5 1.7 1.0 2.0 –0.5 0.3 79.9 32.6 16.1 12.5 3.6 96.1
2.8 35.7 6.6 1.0 25.4 22.6 2.2 1.6 1.2 2.7 –0.6 0.6 96.4 47.7 22.9 17.1 5.9 119.3
0.35 0.29 0.02 0.15 0.38 0.86 –0.02 –0.02 0.05 0.43 –0.20 0.02 0.20 0.17 0.09 0.10 0.05 0.18
0.20 0.11 0.02 0.05 0.04 0.13 –0.03 –0.06 0.07 0.29 –0.09 0.01 0.06 0.01 0.00 –0.01 0.01 0.04
0.20 0.11 0.01 0.05 0.26 1.26 –0.04 –0.04 0.01 0.38 –0.16 0.36 0.13 0.14 0.01 0.01 0.00 0.10
0.42 0.31 0.03 0.10 0.48 1.19 0.35 0.07 0.37 0.99 –0.83 0.09 0.25 0.27 0.16 0.15 0.18 0.23
0.48 0.36 0.05 0.11 0.51 1.79 0.52 0.06 0.44 1.33 –0.97 0.22 0.30 0.40 0.22 0.21 0.30 0.28
Source: Authors’ World Bank Linkage model simulations.
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Australia & New Zealand EU 25 plus EFTA USA Canada Japan South Korea and Taiwan Hong Kong and Singapore China Indonesia Thailand Vietnam Rest of East Asia High income countries WTO Dev. countries Developing countries (WB) Middle income countries Low income countries World total
(b) percentage change
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gain only $9 billion. This is largely because their tariff binding overhang is so great as to lead to almost no cuts in their applied tariffs. Were countries allowed to have lesser cuts for even just 2% of their farm products they declare to be ‘sensitive’ (and another 2% in developing countries for their ‘special’ farm products), those global gains would shrink to just $18 billion and developing countries as a group would be worse off (Scenario 2). If such exceptions are to be made, it would be important to exploit the opportunity – provided for in the Ministerial Declaration – to put a cap on bound tariffs. Scenario 3 shows that even a cap as high as 200%, would restore at least half of the welfare gain foregone by allowing such exceptional treatment for ‘sensitive’ and ‘special’ farm products. The final two scenarios add non-agricultural tariff cuts to the agricultural reforms in the preceding scenarios. In Scenario 4, lesser cuts are provided for developing countries’ non-agricultural tariffs, as is the case for all the preceding agricultural cut scenarios. Even so, the gain to developing countries doubles by adding these non-farm reforms, relative to Scenario 1 where only agriculture is cut, contributing one-third of the extra boost to global welfare ($7.1 billion out of the $21.6 billion difference between the global gains from Scenarios 1 and 4). In Scenario 5, the developing (including least developed) countries fully engage in the reform process, foregoing the lesser cuts provided for in Scenarios 1–4. That boosts their and global welfare substantially, because their cuts in bound tariffs lead to considerably larger cuts in applied tariffs. Nonetheless, the global average merchandise tariff hardly changes if there were just agricultural reform, whereas it falls by almost one-third or 1.5 percentage points when manufacturing is included in the reform package. Retaining lesser cuts for developing countries as in Scenario 4 would yield a global gain of $96 billion from Doha merchandise liberalization, which is a sizable one-third of what is on the table (the potential welfare gain from full liberalization of $287 billion, reported in Table 2). But for developing countries the gain would be only $16 billion, which is less than one-fifth of that group’s potential gain shown in Table 2 of $86 billion. If developing countries forego the option of reforming less than developed countries, their gain would rise by 42%, or an extra $7 billion. How big would be the consequences of partial reform for farm output and employment growth over the Doha implementation period post-2004? If there were completely free trade, farm output would decline (instead of growing slightly) in just the EU and Japan while growing slower in a few other highly protective countries – but, for most countries and regions, farming activities would expand. The Doha Scenario 4 would involve much less reform than a move to free trade and hence a much slower loss of farm output for the EU and Japan – but also less output growth than under free trade for the vast majority of countries where farm output would be greater. For most of the protective economies, Doha Scenario 4 would simply slow the growth of farm output a little over the coming decade. The farm employment picture is somewhat different. Typically, economic growth leads to declines in not only the relative importance of agriculture but also in absolute numbers employed in © 2007 The Authors Journal compilation © 2007 Blackwell Publishing Ltd
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Figure 1. Welfare gains from Doha partial reform scenarios as a percentage of gain from global reform, high income and developing countries, 2015 Ag + NAMA – SDT = Doha Scenario 5: full participation by developing countries Ag + NAMA = Doha Scenario 4: same as Doha 5 but includes SDT for DCs Ag only = Doha Scenario 1: same as Doha 4 but without NAMA reform Ag – SSP + cap = Doha Scenario 2: same as Doha 1 but exemptions for sensitive and special products and a tariff cap of 200% Ag – SSP = Doha Scenario 2: same as Doha 2 but no tariff cap Source: Authors’ World Bank L model simulations.
farming once a country reaches middle income status. Thus it is not surprising that numerous middle and high income countries are projected to lose farm jobs over the next decade in our baseline scenario. For the most protected farm sectors, that rate of farm employment decline would more than double if the world were to move to completely free trade; but it would increase only slightly under Doha Scenario 4. For most developing economies, though, farm employment would grow a little faster under that Doha scenario as compared with the baseline, allowing them to absorb more workers on their farms (Anderson et al., 2006, table 12.17). A summary of the effects on economic welfare of these scenarios as compared with full liberalization is provided in Figure 1. Clearly, the more exceptions are made, the less distance the world will move towards realizing the potential gains from opening up our national economies. 5. ’ Liberalizing merchandise trade under Doha has the potential for a disproportionately high share of the gains to be available for developing countries (relative to their share of the global economy). Moreover, it is the poorest people in developing countries that appear to be most likely to gain from global trade © 2007 The Authors Journal compilation © 2007 Blackwell Publishing Ltd
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liberalization, namely farmers and unskilled labourers in developing countries.3 However, to realize that potential gain, it is in agriculture that by far the greatest cuts in bound tariffs and subsidies are required. However, the political sensitivity of farm support programmes ensures that such reform will not be easily agreed to. Even if it is, allowing lesser cuts for even just a few ‘sensitive’ and ‘special’ farm products would reduce hugely the gains from reform, given the tariff peaks currently in place. Expanding non-agricultural market access at the same time as reforming agriculture would increase the prospects for a successful conclusion to the Doha Development Agenda. For East Asia’s developing countries, much of that would come from reducing barriers to textile and clothing trade. With South-South trade expansion potentially contributing half the benefits to developing countries from further reform, now that developing countries are trading much more with each other, they would be the major beneficiaries of reforms within their own region. This is especially so in East Asia, where fragmentation of the production process is at its greatest. Hopefully, the political will can be mustered to ensure the Doha Round does indeed exploit its potential to make a major contribution to development. The estimated welfare implications of the reform scenarios for East Asian countries vary considerably, depending on the extent to which: (i) they protect their own agricultural sectors; and (ii) they face market access barriers abroad for both farm and textile products. The largest potential gains from full liberalization, in absolute terms, accrue to Japan and South Korea. When expressed as a percentage of GP, the gains to South Korea are treble those for Japan. This reflects the extremely high distortions in the South Korean agricultural sector and the considerably greater significance still of that sector in South Korea than in Japan. Interestingly, the gains to these countries from partial liberalization remain very substantial, as long as the liberalization is sufficiently rigorous as to create some reform in their agricultural sectors. When, in Scenario 5, both agricultural and non-agricultural trade barriers are reduced in developed and developing countries, the gains to South Korea and Japan are actually greater than from full, global liberalization (due to the less adverse terms of trade change in the partial reform case). However, exceptions such as for ‘sensitive’ farm products could potentially wipe out virtually all of the gains from this partial liberalization. Hong Kong and Singapore have the potential to make significant gains from full liberalization. Virtually all of these gains come from reforms by trading partners, which improve their terms of trade. While partial agricultural liberalization has a small negative impact on welfare in these economies through terms of trade deterioration, the inclusion of non-agricultural trade reform in the package converts this negative impact into a positive – the terms of trade are improved by increases in demand for exports and services related to exports, from these economies. 3
For detailed analyses of the poverty consequences of the above Doha scenarios, see Hertel and Winters (2006).
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For China, there is the potential for worthwhile gains from global trade reform. However, this requires comprehensive trade reform. Partial liberalization would not bring that about; indeed, partial agricultural liberalization could have a small negative impact on welfare. While China has some significant agricultural exports – and faces higher agricultural trade barriers than virtually any other country (Martin, 2001) – they are only a small share of China’s total exports. Further, China’s agricultural tariff rates are now low relative to many other countries, making the terms of trade deterioration associated with own reform more important relative to the efficiency gains. For China, a balanced package is particularly important because there are gains from a reform package that includes both agricultural and non-agricultural trade barriers. Full liberalization would provide worthwhile gains to Indonesia, estimated at 0.7% of GDP and roughly in line with the overall potential gains to developed countries. The gains to Indonesia from a partial agricultural trade reform of the type considered in Doha would be considerably smaller, but remain positive. Because of Indonesia’s export interests in non-agricultural products and because of welfare benefits from reform of Indonesia’s own non-agricultural barriers, Indonesia’s gains from a Doha-type package would be much greater, at $1.2 billion per year, than the gains of $0.1 billion per year from an agricultural package alone. Thailand and South Korea potentially stand to gain more from comprehensive agricultural reform than virtually any other economy, with potential gains equalling 3.8% and 5.2% of GDP, respectively, from overall trade reform. The gains to Thailand from a potential Doha-type agreement are much lower than from full reform though: $0.9 billion per year from an agricultural trade reform package alone compared with $9.8 billion per year from full reform. They fall further, to $0.6 billion per year, when ‘sensitive’ and ‘special’ farm products are reformed less. The gains to Thailand of a balanced package, including reforms by developed and developing countries, are a much more substantial $2.7 billion per year. Vietnam provides an interesting contrast. The potential gains are substantial, at an estimated 5.2% of GDP. However, our Doha scenarios have small negative impacts on Vietnam. Under these scenarios, any liberalization by Vietnam is not included because Vietnam is not currently a signatory to the WTO agreement. Under these circumstances, the gains from partial reform of agricultural policies involve a small negative impact on welfare, as does reform of non-agricultural trade policies. Clearly, this suggests that fuller participation by Vietnam in the WTO process would be highly desirable. For the rest of East Asia as a bloc, there are potentially quite substantial overall gains, at 1.9% of GDP. However, the partial reforms of the type considered in this paper would generate only a very small share of that. Agricultural reforms are estimated to raise annual GDP by $100 million per year, a gain that would be eliminated by the use of ‘sensitive’ and ‘special’ farm products as we have modelled them. A broader package, including non-agricultural market access, has the potential to generate gains six times as large for the countries in this residual group. © 2007 The Authors Journal compilation © 2007 Blackwell Publishing Ltd
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This paper has shown that agricultural protection is high in both industrial and developing countries and that it is particularly high in some of the more advanced East Asian economies, such as Japan, South Korea and Taiwan. The combination of these distortions and those on non-agricultural trade mean that there are substantial potential gains from global trade reform. We estimate the potential gains at almost $290 billion per year, with the gains to developing countries as a group larger (relative to their GDP) at 0.8%, than the gains to the high income countries at 0.6%. The potential gains to East Asian developing countries are more or less evenly divided between gains from industrial country reforms and those from reforms by the industrial countries. However, the relative importance of the two types of gain depends heavily on the situation of the particular country. South Korea, Taiwan and Japan, in particular, would benefit much more from reforms by the high income economies (including themselves) than from reforms by low and middle income countries. Analysis of reform scenarios of the type being considered under the Doha Agenda shows that most scenarios would generate much smaller gains than complete liberalization, although these gains could be worthwhile if the liberalization is pursued with sufficient ambition. A package involving tiered formula cuts in agriculture and cuts of around 50% in non-agricultural tariff bindings would generate potential global gains of around $120 billion per year, with around $23 billion accruing to developing economies, including China, Indonesia and Thailand. An ambitious Doha-type scenario for agriculture could generate global gains of around $75 billion per year. Unfortunately, only about $9 billion of these gains would accrue to developing countries. This gain is relatively small for most developing countries, except for agricultural exporters such as Thailand, in large part because developing countries undertake relatively little liberalization. This reflects the fact that the gap between bound and applied rates in developing countries is typically quite large and that developing countries’ tariff cuts are smaller than those for the industrial countries. There is a serious risk that the overall gains from agricultural liberalization will be greatly reduced by the inclusion of seemingly innocuous ‘sensitive’ and ‘special’ product treatment. Unless restrained, even two percent of tariff lines designated in this way could virtually reduce the global gains from agricultural reform by about 80% and completely eliminate the gains to developing countries. Clearly, the number of products of this type needs to be minimized and any such provisions coupled with additional disciplines such as a tariff cap if the gains are not to be completely lost. Anderson, K., W. Martin and D. van der Mensbrugghe (2006) ‘Market and Welfare Implications of the Doha Reform Scenarios’, in K. Anderson and W. Martin (eds), Agricultural Trade © 2007 The Authors Journal compilation © 2007 Blackwell Publishing Ltd
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Reform and the Doha Development Agenda. London: Palgrave Macmillan (co-published with the World Bank). Gehlhar, M. (2002) ‘Reconciling Merchandise Trade Data’, in Global Trade, Assistance and Production: the GTAP 5 Data Base. Center for Global Trade Analysis, Purdue University. www.gtap.org. Hertel, T. W. and L. A. Winters (eds) (2006) Poverty and the WTO: Impacts of the Doha Development Agenda. London: Palgrave Macmillan ( co-published with the World Bank) . Ivanic, M. and W. Martin (2007) Potential Implications of Agricultural Special Products for Poverty in Low-income Countries, Mimeo, World Bank. Jean, S., D. Laborde and W. Martin (2006) ‘Consequences of Alternative Formulas for Agricultural Tariff Cuts’, in K. Anderson and W. Martin (eds), Agricultural Trade Reform and the Doha Development Agenda. London: Palgrave Macmillan (co-published with the World Bank). Martin, W. (2001) ‘Implications of Reform and WTO Accession for China’s Agricultural’, Economics in Transition 9, 717–42. van der Mensbrugghe, D. (2005) ‘L Technical Reference Document: Version 6.0’, The World Bank, Washington, DC, mimeo and at www.worldbank.org/prospects/linkagemodel. World Bank (2004) Global Economic Prospects: Realizing the Development Promise of the Doha Agenda. Washington DC: The World Bank. WTO (2003) ‘Negotiations on Agriculture: First Draft of Modalities for the Further Commitments’, TN/AG/W/1/Rev.1, Geneva: World Trade Organization, 19 March (The Harbinson Draft). WTO (2004) ‘Decision Adopted by the General Council on 1 August 2004’, WT/L/579, Geneva: World Trade Organization, 2 August (The July Framework Agreement). WTO (2005) ‘Doha Work Program: Draft Ministerial Declaration: Revision’, Ministerial Conference, Sixth Session, Hong Kong, 13–18 December, WT/MIN(05)/W/3/Rev.2, Geneva: World Trade Organization.
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