Modeling ‘critical mass’ trade agreements

An ‘alternate’ approach to trade agreements

I’ve men­tioned in ear­li­er posts that I’ve been look­ing at ‘crit­i­cal mass’ (CM) agree­ments among economies that could open world agri­cul­tur­al mar­kets, using the same approach as the 1998 Infor­ma­tion Tech­nol­o­gy Agree­ment (ITA) that abol­ished all import bar­ri­ers on defined IT prod­ucts such as com­put­er chips, disc dri­ves, cables, LCD screens and so forth. The ITA now cov­ers more than 90% of all trade in these prod­ucts ensur­ing that tar­iffs do not stand in the way of the rapid growth of IT tech­nol­o­gy.

CM agree­ments are not a typ­i­cal GATT/WTO approach to trade agree­ments but they have been used occa­sion­al­ly for many decades. For exam­ple, nego­ti­a­tions in the late 1970’s to con­trol export sub­si­dies and anti-dump­ing and to open up mar­kets for gov­ern­ment pro­cure­ment were based on CM agree­ments col­lec­tive­ly known as the “Tokyo Round Codes”. In the ear­ly 1990s, the CM approach was used for the first ever trade agree­ment on trade in finan­cial ser­vices. Trade experts like the mem­bers of the War­wick Com­mis­sion on the future of WTO have long been attract­ed to the idea of ‘crit­i­cal mass’ agree­ments because they exploit the com­mer­cial log­ic that often defeats the the­o­ret­ic case for trade lib­er­al­iza­tion.

The logic of CM agreements

The pre­miss of a CM agree­ment is that elim­i­nat­ing trade bar­ri­ers won’t hurt any pro­duc­er active the mar­ket if every pro­duc­er active in the mar­ket aban­dons pro­tec­tion. The ‘play­ing field’ will still be lev­el and there’s a good chance that low­er, unpro­tect­ed, prices will see demand pick up. If a group of coun­tries account­ing for, say, 80% of world trade (imports + exports) agrees to elim­i­nate pro­tec­tion on a rec­i­p­ro­cal basis among them­selves, it real­ly doesn’t mat­ter what the oth­er 20% of small play­ers does.

In fact not includ­ing the small play­ers in the nego­ti­a­tion of the CM deal often means that it can be clean­er and quick­er, with broad­er cov­er­age and few­er excep­tions and spe­cial con­di­tions that the small­er play­ers are like­ly to demand. The ITA agree­ment attract­ed it’s tar­get of 90% of world trade in IT prod­ucts with­in four months of the launch of the nego­ti­a­tions in Decem­ber 1996. That’s record speed for the nego­ti­a­tion of a WTO trade agree­ment.

Although coun­tries that don’t join a CM agree­ment don’t have any say in the final deal, it is not unfair to them. They get all the ben­e­fits (low­er world mar­ket prices, open access to the mar­kets of the CM Agree­ment mem­bers) with­out hav­ing to make any changes to their own lev­els of pro­tec­tion. The ben­e­fits of a CM are non-dis­crim­i­na­to­ry (MFN) but the costs are dis­crim­i­na­to­ry: borne only by the par­ties to the CM agree­ment.

Application to agriculture


Wouldn’t it be great if agri­cul­tur­al mar­kets could open up as quick­ly and as clean­ly as the ITA opened up the infor­ma­tion tech­nol­o­gy sec­tor? Agri­cul­ture is the sec­tor of world trade most affect­ed by high dis­crim­i­na­to­ry trade bar­ri­ers and by pro­duc­tion and export sub­si­dies. These tax­es and sub­si­dies make no sense in the world’s rich­est coun­tries (Europe, Japan, Korea, the Unit­ed States) and lit­tle sense when they penal­ize the urban poor in devel­op­ing coun­tries. Bor­der bar­ri­ers to food trade—imports or exports—are almost always a bad idea.

Agri­cul­tur­al trade bar­ri­ers con­tributed to the rock­et­ing prices of grains, meat, dairy and oilseeds in 2007 that fed fears of a world ‘food cri­sis’. But, as the FAO points out, glob­al food suf­fi­cien­cy is high­er than ever. There is plen­ty of pro­duc­tion capac­i­ty and no rea­son for a ‘cri­sis’ except that bad poli­cies get in the way of effi­cient pro­duc­tion and dis­tri­b­u­tion. Open­ing up world mar­kets will reduce the impact of local food short­ages and cre­ate the incen­tives to ensure that sus­tain­able (in the eco­nom­ic and, prob­a­bly, eco­log­i­cal sense) pro­duc­tion grows to meet glob­al food needs.

Gov­ern­ments know this, of course. The main rea­son gov­ern­ments don’t just chuck the bar­ri­ers is that remov­ing them typ­i­cal­ly hurts some influ­en­tial groups a lot while help­ing many more by a lit­tle. Who gets hurt and who gets helped by a ‘crit­i­cal mass’ agree­ment in agri­cul­ture? That’s what I have been explor­ing with an eco­nom­ic mod­el of world agri­cul­tur­al trade.

Some of the impacts of lib­er­al­iz­ing world agri­cul­tur­al trade are well known. For exam­ple, con­sumers in high­ly pro­tect­ed economies such as Europe and Japan would pay a great deal less for food. Even in some devel­op­ing coun­tries where sta­ple foods like rice are high­ly pro­tect­ed (Indone­sia), con­sumers would make big gains. At the same time, world prices would go up, help­ing pro­duc­ers from rich and poor coun­tries alike earn more and cre­at­ing the incen­tive to pro­duce more (and high­er qual­i­ty) food.

Forthcoming posts on a model of global food trade

Glob­al­ized” food mar­kets are com­pli­cat­ed things, how­ev­er. There are many ques­tions to answer. What would be the over­all impact on con­sumers and pro­duc­ers togeth­er in poor countries—that is, to the econ­o­my as a whole? Would poor farm­ers be bet­ter off or worse off? In what coun­tries? Would the world econ­o­my grow or shrink if domes­tic prices fell but trad­ed prices rose?

In the next few posts, I’ll show you how I answered these ques­tions using the UNCTAD-FAO “Agri­cul­tur­al Trade Pol­i­cy Sim­u­la­tion Mod­el” (ATPSM).

  • First, I’ll show you the impact of a ‘crit­i­cal mass’ agree­ment among coun­tries account­ing for 80 per­cent of world trade in cere­als to abol­ish tar­iffs and to abol­ish both tar­iffs and sub­si­dies.
  • Next, I’ll show you the impact of an agree­ment to abol­ish tar­iffs on a broad group of prod­ucts includ­ing cere­als, meat, dairy, sug­ar and tem­per­ate oilseeds.
  • In a third post I’ll com­pare the pro­ject­ed impact of this broad ‘crit­i­cal mass’ agree­ment with my esti­mate of the impacts of the pro­posed Doha Round agree­ment.
  • Final­ly, I’ll show you how I built the Doha Round mod­el to illus­trate the tech­niques that you can use for your­self to mod­el agri­cul­tur­al trade poli­cies using the ATPSM mod­el.

No Comments

Leave a Reply

Your email is never shared.Required fields are marked *