Agriculture and Non-agricultural Liberalization in the Millennium Round

Abstract

Until the Uruguay Round, agricultural trade policies were subject to few multilateral disciplines. In this situation, the interplay of special-interest lobbying pressures resulted in this sector becoming heavily distorted. One of the great achievements of the Uruguay Round of trade negotiations was to bring agricultural policies under much greater discipline. The Agreement on Agriculture has altered the climate of farm policy making in both advanced and developing countries. Even though Uruguay Round commitments themselves will not result in large cuts in farm protection, attitudes have been irreversibly changed and the foundation has been laid for further reforms, including during the next WTO Round. Having said that, it needs to be recognised that little reduction in actual agricultural protection rates will have occurred by the end of this decade, when barriers to trade in agricultural products will still be several times higher than barriers to trade in manufactures. Hence much remains to be done before agricultural trade is as liberal as world trade in manufactures. But agriculture is distorted by more than agricultural policies. In developing countries especially, farming is discouraged not only by farm protection policies in high-income countries but also by those countries' own manufacturing policies and distortions to services markets. Farm lobby groups in developing countries therefore have an interest not only in the agricultural negotiations of the next WTO round, but also the non-agricultural ones. The purpose of this paper is to explore the extent to which multilateral liberalization of not only farm but also non-farm policies would affect the markets for farm products. This paper considers the patterns of production, consumption, trade and protection, as well as other structural features of the global economy that are likely to influence the welfare impacts of liberalizing agricultural and non-agricultural trade. It projects the global economy to 2005, when the Uruguay Round (UR) implementation will be complete, and assesses the potential impact of further cuts from that post-UR base. This is done using a modified version of the GTAP model of global trade, assuming 40% cuts in protection in agriculture, mining and manufacturing, and services. We find that agricultural liberalization in the wake of the Uruguay Round could still yield substantial benefits for the global economy in 2005. The total gains amount to about $70 billion from 40% cuts in both market price support and domestic producer subsidies. These gains shrink to $60 billion if domestic subsidies are left unaltered. Overall, these welfare improvements are comparable to the gains that could be obtained from similar cuts in manufacturing tariffs. This is so despite agriculture's much smaller size in the global economy, and reflects the much higher rates of protection for agriculture. However, the distributions of the gains from sectoral protection cuts are quite different. In the case of manufacturing tariffs, the developing countries make the biggest cuts in protection (because their initial tariffs are higher), but they also enjoy the lion?s share of the welfare gains. In the case of agricultural liberalization, the rates of protection are highest in the industrialized economies and they are the ones to capture the majority of the absolute gains from liberalization of food markets. However, when measured relative to initial income, developing countries are among the biggest winners from cuts in agricultural protection. We also examine the interaction between non-agricultural reforms and agricultural trade balances, by region. Overall, reductions in agricultural protection have the strongest impact on the regional food trade balances. However, for some regions, most notably Southeast Asia and parts of South Asia, non-agricultural reforms dominate and reverse the sign of the change in the food trade balance following liberalization. In particular, China's manufacturing tariff cuts are equally as important as agricultural liberalization in determining the change 0in China's food trade balance. Both sets of multilateral reforms lead to a substantial decline in China's aggregate food trade balance and, when combined, the total decline is approximately $6 billion in 2005. All of the estimates in this study are subject to revision as improved estimates of protection become available. Agricultural protection in non-OECD countries is very poorly documented at present. With regard to the OECD countries, more work is needed on the appropriate representation of decoupled policies in this type of quantitative framework, and explicit modeling of tariff rate quotas will be an important item for future analysis, since the distribution of the associated rents will become increasing important. Also, while we have reported on some innovative work aimed at coming to grips with services protection, much more research along these lines will be needed in order to understand the implications of services liberalization.