Reducing Agricultural Tariffs versus Domestic Support: What's More Important for Developing Countries?

Abstract

High levels of protection and domestic support for farmers in developed countries significantly affect many developing countries, both directly and through the price-depressing effect of agricultural support policies. High tariffs—in both rich and poor countries—and domestic support may also lower the world price of agricultural products, benefiting net importers. This paper assesses the impact of reducing tariffs and domestic support for a sample of 119 countries. Least developed countries (LDCs) are disproportionately affected by agricultural support policies. More than 18 per cent of LDC exports are subject to domestic support in at least one WTO member, as compared to only 9 percent of their imports. For other developing countries the figures are around 4 percent for both their exports and imports. Thus, the prevailing pattern of trade suggests the world price-reducing effect of agricultural domestic support policies may induce a welfare loss in LDCs. We develop a simple partial equilibrium model of global trade in commodities that benefit from domestic support in at least one WTO member. Our simulation results suggest there will be large differences between LDCs and other developing economies in terms of the impact of a 50 percent cut in tariffs as compared to a 50 percent cut in domestic support. Developing countries as a group would suffer a welfare loss from a cut in support, while LDCs would experience a small gain. For both groups of countries, tariff reductions by WTO members—including own liberalization—will have a positive effect on welfare. The results illustrate both the importance of focusing on tariffs as well as subsidies, and the need for complementary actions to allow a domestic supply response to occur in developing countries if world prices rise.