Peter Gallagher

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.

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.

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.

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.

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.