A Critical Mass Agreement on cereals trade

The setup

Let’s imagine that 38 countries agree to eliminate their barriers to imports of cereals (wheat, maize, rice, barley, sorghum). The countries are: Argentina, Australia, Brazil, Canada, Chile, China, Colombia, EC, Egypt, India, Indonesia, Israel, Japan, Jordan, Korea, Kuwait, Malaysia, Mexico, Morocco, New Zealand, Nigeria, Norway, Peru , Philippines, Qatar, Saudi Arabia, Singapore, South Africa, Switzerland, Taiwan, Thailand, Turkey, Ukraine, United Arab Emirates, Uruguay, US, Venezuela, Vietnam.

Together, these countries account for just over 80% of world trade inthese cereals.

Table 1: CMA countries’ exports, imports (millions of tonnes) and share of world trade
WheatShare (%)RiceShare (%)BarleyShare (%)MaizeShare (%)SorghumShare (%)Avg. Share
Exports (m t)8480279016777598799
Imports (m t)6761135116796482697
Share world trade (%)717278909882

The results

The following is a brief summary of the key results of the simulation. I’ll be publishing more details later in the year in conjunction with my fellow-researcher Andrew Stoler of the Institute for International Trade.

As in most agricultural trade liberalization scenarios, the overall pattern of the model projections is an increase in developing exports to developed countries (Table 3) where moderate to high applied rates of duty are matched by relatively high levels of market consumption. In the CMA scenario, however, some of the largest (India, China, Indonesia) and most highly protected (Indonesia for rice) developing country markets are also opened up.

Table 2: Percent change in world prices

As market barriers fall, consumption increases in markets where the barriers formerly held domestic prices above the world market price. Demand on the world market rises due to the higher total level of imports pushing world market prices up by between 3% for barley and 10% for wheat (Table 2).

Eliminating import barriers to these grains in the thirty-eight CMA countries lifts world export revenues by 23% and the export revenues of the CMA countries as a group by 18% (Table 3). The static increase in the group’s total welfare is almost $4 billion due to both the higher level of producer surplus in CMA exporting countries (higher world-market prices) such and to higher consumer surpluses in formerly protected CMA importing countries. Although world market prices rise, grains cost less than they used to in markets such as Japan and Western Europe when the barriers are pulled down, so consumers in those large markets are better-off.

Table 3: Change in welfare and export revenue
^Brazil, China, India, Indonesia
Change in total welfare $ millionsChange in Export Revenue %
Cent. America & Carib.-13810
Central Asia5938
Central & E Europe33732
Four Emerging^-68149
CMA Participants3,89518
East Asia Dvg88318
Least Developed-274196
North Africa & M East -49481
North America-16916
South America -22916
South Asia9695
Sub-Sharan Africa-24675
Western Europe929-30

Least developed countries see the largest increase in exports (from a low base) but reduced total welfare because import prices are now higher. The higher world prices result in a net welfare loss Sub-Saharan Africa of $246 million. Most of this loss in the model, however, is due to reduced government revenue due to lower tariffs and consequent loss of producer surplus mostly on rice and wheat in Nigeria and, to a small extent, in South Africa. As you would expect, some of the biggest trade gains among the CMA countries accrue to the competitive, low protection, grains exporters such as the United States, Canada, Australia and Argentina (Table 4).

Table 4: Changes in net trade balance, $US millions 2006
United States793891601-11,483
New Zealand-5-0-0-0-0-6
Korea Rep.-3829-1811-0-15
European Union-2,977137-4991-3,437

India enjoys the biggest growth in net-exports of grains (exports minus imports) following CMA liberalization, outstripping even the United States as a result of a switch to exports from domestic sales (producers see better opportunities on world markets once domestic prices are no longer protected). India’s high export surplus also reflects its strong export sales in the ‘base’ period used in this version of the model. Although it experiences a small growth in net imports of $102 million, China’s overall cereals trade is in near balance. It’s no surprise taht Indonesia sees a $400 million increase in rice imports once border protection is eliminated. This fully accounts for its increase in cereal imports. Japan, too, sees cereal imports increase by almost a billion dollars, mostly in rice.

The biggest absolute changes occur in the EU where a $3 billion dollar increase in wheat imports dominates its own (and the global) projections.

Eliminating subsidies, too

Suppose that a CMA agreement, in addition to cutting import barriers to zero were to include an agreement to eliminate export subsidies on cereals and trade-distorting domestic supports on cereals.

Although this sounds like a radical an extension of the CMA idea, it is not. If import barriers are eliminated, trade-distorting domestic supports, which take the form of market support subsidies, would be for all practical purposes infeasible.

Owning to the national-treatment obligation of GATT, any market supports offered in an open market would ‘leak’ immediately to imports creating an un-stoppable hole in the support budget. So it is possible—even likely—that a CMA agreement to eliminate border barriers would have to be complemented by an agreement to eliminate trade-distorting domestic supports.

Almost all export subsidies are offered by the European Union, which has already planned their elimination as part of its internal market reforms.

Table 5: Change in total welfare and export revenue
Change in total welfare ($ m)Change export revenue %
Cent. America & Carib.-17115
Central Asia7344
Central & E Europe42840
Four Emerging-68658
CMA Participants6,07018
East Asia Dvg2,11623
Least Developed-310219
North Africa & M East -628107
North America-1817
South America -23519
South Asia128108
Sub-Sharan Africa-28182
Western Europe1,744-60

The differences in this scenario are due in part to world price changes that are significantly larger than in the access-only scenario; wheat prices rise by 12%. But the biggest changes—positive and negative in different regions—are due to the elimination of huge subsidies to production and export, especially in the developed economies.

The global welfare gain is strongly positive and larger than in the ‘barrier-only’ scenario by more than $2 billion (Table 5, compare Table 2). “Winners” far outnumber losers, suggesting that some overall compensation transfer mechanism would be possible that would ensure no one is worse off as a result of the changes. The CMA members again receive a larger benefit than the world-as-a-whole despite (or because of) the fact that they are cutting subsidies as well as access barriers.

Developing countries as a group see net welfare benefits that are almost four times the benefits in the first scenario on account of larger producer surpluses (higher producer prices). But net importers, such as the countries of sub-Saharan Africa, face slightly larger net welfare losses because the loss of export subsidies

About the ATPSM model

The ATPSM model that I used for these simulations was constructed by economists in the Trade Division of the UN Conference on Trade and Development (UNCTAD). There is a downloadable version of this model, which runs under recent versions of the Windows operating system. It uses trade data created for the model by the FAO and UNCTAD contained in a set of Microsoft Access database tables. Production and consumption data are an average of actual data for 2002 – 2004. Prices are FAO estimates from 2006, a year in which prices were about 1% higher than the average for 2004- 2007.

In the jargon, the ATPSM model is a deterministic, partial equilibrium, comparative static model. It begins with a ‘snapshot’ description of the world, contained in the Access database tables. This ‘toy’ world is based on the actual production, consumption and prices of 35 commodities in 151 countries. The model works by applying a trade policy ‘shock’ to this set of facts in the form of a change in trade barriers chosen by the modeler. Trade barriers work, mostly, by changing relative prices and the level of government taxes. In reaction to the ‘shock’, the model forces its representation of domestic and world markets to find a new set of prices where excess (too much or too little) supply and demand initially caused by the trade-policy shock ‘clears’. That is, the model finds a new set of prices at which global production and consumption are roughly equal after taking account of imports and exports. Now we have a new ‘snapshot’ of the world, comprising a new set of ‘equilibrium’ prices along with new patterns of production, consumption and trade flows. The model allows the user to make a comparison between the ‘pre-shock’ and the ‘post-shock’ snapshots.

You can probably guess that this sort of mathematical exercise necessarily leaves out a lot of things that happen in ‘real’ markets. To keep the simulations manageable, the model takes no account, for example, of the vast differences in information available to people in different parts of the market. It ignores the impact of monopoly pricing by state enterprises—although not where this pricing is directly related to a trade barrier—and the many subtle influences of investors’ and speculators’ behavior in commodities markets. ATPSM also ignores the impact of stocks.

But even with these simplifications the ATPSM model can still show us important and non-obvious relationships between producers, consumers and government policies as a result of changes in trade barriers. What is most interesting is the shape of the changes: who is better-off and who is worse-off. The scale of the change is also indicative, although the absolute values are not likely to be reliable.

One final remark about the limits of the ATPSM simulations. The projected results are very likely to be much too small compared to the ‘real’ world impacts of the simulated changes. The ATPSM does not capture the ‘dynamic’ factors of change in the commodity markets that we are simulating.

One example of a ‘dynamic’ factor is learning or the impact of technology. When imports take a larger share of a market because of a change in trade barriers, one of the effects that goes hand-in-hand with the tougher competitive conditions for local producers is the import of new technologies, or designs or plant varieties or flavors or… any aspect of learning and innovation that producers elsewhere have adopted to improve their competitiveness. Local producers imitate or perhaps acquire the new technology in order to stay competitive with imports, lifting their productivity. They are likely, too, to build on and improve the technology for local conditions.

These factors have a strong and valuable impact on growth and trade, typically accounting for a much bigger impact over time (even at discounted prices) than the initial impacts of the trade barrier reduction. ATPSM does not capture these results.

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