Opening food markets in a CM agreement

In the first post in this series I described the ‘Critical Mass’ idea. In the second post, I showed you the projected impacts of a simulated CM agreement on cereals trade, which I used as an example to describe the ATPSM economic model I’ve employed for these simulations.

But the political economy of trade negotiations makes it rather unlikely that governments would ever agree to open up just one sector of world food trade. Although global welfare gains (taking consumer interests into account) are positive andbig enough to make everyone better-off, the ‘export wins’ would be located in a relatively small number of countries. Producers, who tend to be a much more effective lobby than consumers, would prevent broad participation. The time-honored way around this conundrum is to put more products into the mix to make sure that a larger number of countries find ‘export wins’ to ‘compensate’ for the ‘import losses’. Mercantilist nonsense, of course, but the political reality. Accordingly, in my project with Andrew Stoler we’re looking at a CM agreement among 38 WTO member countries on the 30 most-traded food products.1

Eliminating duties on imports

The CM Agreement countries account for 80 percent of world trade in these top-traded food products (shown here aggregated into six groups). That’s what makes it possible for them to find a ‘critical mass’ of benefits in a non-discriminatory agreement among only a quarter of the full WTO membership.

CMA countries’ initial trade and share of world trade
All CMA ProdCMA cerealsCMA dairyCMA meatCMA poultryCMA oilseedsCMA sugar
Share of world trade (%)80787986709463

If these countries agreed reciprocally to cut their import barriers to zero then the world will see an increase in ‘welfare’ (roughly, an increase in consumer buying power) of about $US10 billion (2006 dollars), even after taking account of small decreases in welfare in some regions.

As in most agricultural trade liberalization scenarios, the overall pattern of changes introduced by the elimination of duties on these product groups in the 38 CMA countries is an increase in developing exports to developed countries where moderate to high applied rates of duty are matched by relatively high levels of market consumption.

As market barriers fall, import prices fall for domestic consumers leading them to demand more from the world market. Demand on the world market rises pushing world market prices up by between 2% (temperate oilseeds—predominantly soybean) and 21% (butter). The projected price increases tend to reflect the level of protection in the largest CMA markets (especially developed country markets). The entire world market for these extensive product groups grows by almost 30% in value percent in value; the biggest increases occurring in Least Developed countries and North Africa and Middle East (both from a small base).

The following table shows the projected distribution of welfare benefits and growth in export sales.

Change in exports and welfare
RegionsChange in total welfare $ millionsChange in value of exports %
Cent. America & Carib.-27816
Central Asia2877
Central & E Europe-6252
Four Emerging-32530
East Asia Dvg82016
Least Developed-384255
North Africa & M East -158158
North America84518
South America 30424
South Asia166114
Sub-Sharan Africa-36682
Western Europe2,42134

The distribution of net changes in trade-balances (exports minus imports) shows a net expansion of exports in both Brazil (meat and sugar) and India (cereals) but higher net imports in China. Overall, developing coutnries see net exports rise by $4.8 billion and developed countries see net imports rise by almost $6 billion in this simulation.

CountryAll CMA ProdCMA cerealsCMA dairyCMA meatCMA poultryCMA oilseedsCMA sugar
Net change in trade balance, selected countries ($ millions)
United States3,6701,465-4871,613978664-565
New Zealand868-64723889-04
European Union-4,555-3,378414-48-338104-1,306

Eliminating both subsidies and duties

As I argued in the earlier post on a cereals CMA, it is very likely that governments that agreed to reciprocal cuts in duties would also want to agree to eliminate trade-distorting (‘amber-box’) production subsidies. If import barriers are eliminated, trade-distorting domestic supports that take the form of market subsidies—administered prices, for example, would no longer be feasible. Owning to the national-treatment obligation of GATT, any market supports offered to domestic producers would ‘leak’ immediately to imports, punching an un-stoppable hole in the support budget. It would make a lot more sense to agree to use only non-distorting (‘green-box’) subsidies that have no impact on prices and do not need the support of border barriers. In the simulations behind the following table, I have also assumed that the 2005 Agreement at the WTO Hong Kong Ministerial Conference to eliminate all forms of export subsidy has been implemented by the 38 CM Agreement participants

The projected global welfare benefits from a zero-duty, zero-subsidy agreement among the 38 CM Agreement countries are huge; at $19 billion they are double those from the elimination of duties alone. As we will see next time, they are comparable with the impacts projected for the WTO’s Doha Round agreement on agriculture.

Change in exports and welfare (zero duties, zero subsidies)
RegionsChange in total welfare $ millionsChange in value of exports %
Cent. America & Carib.-48125
Central Asia2188
Central & E Europe4967
Four Emerging-28642
East Asia Dvg1,78633
Least Developed-567298
North Africa & M East -552200
North America1,47321
South America 46729
South Asia193136
Sub-Sharan Africa-51899
Western Europe9,531-35

1. This simulation using the ATPSM model covers 25 of the products. There is insufficient global data to disaggregate trade in frozen cuts of beef, whole milk, eggs, whey and vegetable seeds in the model database.

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