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

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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.

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