4-day course on Agricultural Trade Policy and the WTO

Tehran, Iran, 15-18 May 2005

Outline of 4-day coursePrinciples each morning; practical, hands-on analytical tools each afternoonDay 1: WTO’s contribution to economic growth and nature of protection patterns still in place; and accessing trade & protection dataDay 2: WTO accession processes and experiences; and partial equilibrium analysisDay 3: Doha progress and prospects; and general equilibrium analysisDay 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 argumentsKey reason why trade barriers remainWTO’s role in providing a counterforceWTO’s other benefits for governments seeking to reform their economiesThe 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 bestThat in turn can increase (esp. in small economies):

scope for exploiting economies of scale,capacity to deal with natural disasterscompetitiveness 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:• 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 pricesProvide food security/self sufficiency, esp. in the case of food-deficit countriesOffset terms of trade deteriorationSlow 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 themAny 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 tradeTechnological 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 processOpportunity 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 transparentAll 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 documentSingle enquiry pointAnnual notifications of policy changesPeriodic 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 ofAgricultural 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 non-reciprocal trade preference schemesBut those discriminatory market access schemes, like agric. export subsidies, rely on undesirable exceptions to worthy WTO rulesAnd 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 subsidiesSee, 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 marketsDistinctive features of distortions across countries and over timeReasons for those features, & for agriculture being neglected by GATT prior to 1986Why agriculture was included in the Uruguay Round

History of government interventions in agricultural markets

Been going on for millenniaSometimes to raise tax revenue (discouraging farmers)Sometimes to boost food self-sufficiency (which some view as boosting food security), thereby encouraging some farmersSometimes to reduce domestic price fluctuations

helping consumers concerned with price peaks, orhelping 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 marketsAnd 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 subsidiesUS (& Canada) retaliated in kindPushed 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 policiesAustralia/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