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Salvaging the Doha agricultural talks
As the sixth WTO ministerial conference to be held in Hong Kong during December 13-17, 2005 approaches, the European Union (EU), the US and the group of 20 mainly larger developing countries are deadlocked over the Doha negotiations on agriculture
Breaking the deadlock requires dispelling several myths spread by the press, international institutions and non-governmental organisations. Among the myths are: rich countries annually spend hundreds of billions of dollars on trade-distorting subsidies; agricultural protectionism is largely a rich country phenomenon; and the least developed countries (LDCs) are the worst victims of these subsidies and protection.
Twice recently the New York Times has editorialised that “developed world funnels nearly $1 billion a day in subsidies,” which “encourages overproduction” and drives down prices.
The World Bank president Paul Wolfowitz similarly referred to developed countries expending “$280 billion on support to agricultural producers” in a recent op-ed in the Financial Times. NGO Oxfam routinely accuses rich countries of giving more than $300 billion annually in subsidies to agribusiness.
Astonishingly, these estimates bear no relationship to the subsidies subject to Doha negotiations. Instead, they have originated in the Producer Support Estimate (PSE) devised and published by the Organisation for Economic Co-operation and Development (OECD). The PSE includes all measures that raise the producer price above the world price including border measures such as tariffs and quotas. Most economists would find the idea of identifying such a measure with subsidies laughable.
The economically correct measure of subsidies that drive down world prices must be confined to the subsidies contingent on exports or output. When this is done, the extent of subsidies turns out to be considerably smaller than $1 billion per day. Thus, rich country export subsidies that have been so much in news currently amount to less than $5 billion, perhaps as little as $3 billion.
Subsidies contingent on output (identified as “amber box” subsidies by the WTO) are larger but not enough to add up to $1 billion per day. Based on the latest data available from the WTO, these subsidies amounted to $44 billion in 2000 in the EU, $21 billion in 2001 in the US and less than $15 billion in 1998 in Japan, Switzerland, Norway and Canada combined.
Recognising that there have been no major cases of backsliding and the EU has made further progress in decoupling its subsidies from output, we can comfortably conclude that rich country domestic subsidies that encourage production and lower world prices currently are substantially below $100 billion.
By focusing exclusively on subsidies, the media has distracted attention from the critical fact that the most important obstacle to agricultural trade comes from border barriers, also called market access measures by the WTO.
And since the developing countries are not big offenders on the subsidy front, this focus has promoted the false impression that agricultural protection is an exclusively rich country problem. In reality, when it comes to border barriers, the developing countries more than match the developed countries.
Among the latter, in 2001, the trade-weighted average tariff was 36% in Japan, 29% in the European Free Trade Area, 12% in the EU and 3% in the US. Among the former, the rate was 94% in South Korea, 44% in India, 39% in China and 30% in Pakistan.
Interestingly, protection in the developing country members of the Cairns Group, which contains countries with greatest comparative advantage in agriculture, is not low: in 2001, trade-weighted average tariff was 13% in Argentina, and Brazil and 11% in Malaysia, Thailand and Indonesia.
Rich country subsidies and protection drive down the world prices. To the extent that LDCs import agricultural products, especially cereals, they benefit from these low prices. Rich country protection also raises their internal prices. Under its Everything But Arms initiative, the EU grants the LDCs duty free access to its market. This means the LDCs also benefit from the high internal EU prices they receive on their exports.
The widely cited contrary case of cotton exporters is an exception rather than the rule. The EU does not have any cotton producers to protect so that it has a zero tariff on cotton. The US subsidies drive down the world cotton prices as also the EU internal price.
Therefore, LDC cotton exporters receive the same low price whether they export to the EU or another country. Beyond cotton, the assertion that the removal of agricultural subsidies and protection by rich countries would benefit the LDCs is false
Even if it were true, telling rich countries that their trade policies hurt the LDCs would not produce the desired outcome. History offers few examples whereby countries choose trade policies to promote the interests of other countries rather than their own citizenry.
Therefore, dismantling protection would require reciprocal concessions from partner countries rather than exhortations.
The US has comparative advantage in agriculture. It therefore insists on within-agriculture reciprocity. To persuade its farmers to accept deep cuts in subsidies, it would need deep cuts in agricultural tariffs by the EU and G-20 including the Cairns Group of countries
The EU, on the other hand, lacks comparative advantage in agriculture. To mobilise support for deep cuts in its agricultural interventions, it would require cross-sector reciprocity. Offers in industrial goods and services will have to be put on the table.
As for the G-20, benefits to them will come from agricultural liberalisation and the end to tariff peaks on clothing and footwear by the rich countries and from improved access to each other’s markets. In return, they will have to offer access to their own goods and services markets. A bargain that benefits all those negotiating actively, thus, exists and can be forged.
Economic Times November 30, 2005.