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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