The Congressional Budget Office (CBO) has just released a handy survey of economic research on The Effects of Liberalizing World Agricultural Trade: A Survey (Dec 2005, the author is Bruce Arnold).
Note this right off:
Countries typically adopt trade-distorting agricultural policies—tariffs, tariff-rate quotas, production-distorting subsidies, and export subsidies—to benefit their domestic agricultural producers. In doing so, however, they often impose costs on their consumers (who must pay more for agricultural products subject to tariffs and tariff-rate quotas), domestic taxpayers (who must pay for any subsidies), and competing foreign producers (who lose sales). The costs to domestic consumers and taxpayers alone are usually greater in dollar terms than the benefits to domestic producers. Therefore, eliminating those policies is generally beneficial.
The world stands to gain from agricultural liberalization:
The likely total annual economic benefit to the world in 2015 from efficiency gains and investment growth that would result from full agricultural liberalization from 2005 through 2010 is in the range of roughly $50 billion to $185 billion (measured in 2001 dollars), or 0.1 percent to 0.4 percent of the value of world output of all goods and services. Expanding the analysis to include the effects of liberalization on the rate of productivity growth can raise the estimates by amounts ranging from 50 percent to more than 100 percent, depending on the study.
These estimates are for a full reform. The actual reforms to which countries will agree won't come close to that.
The bulk of the gains come from tariff reform:
Of the policies that distort world agricultural trade, tariffs and tariff-rate quotas are by far the most costly—accounting for 80 percent to 90 percent of the cost—followed by domestic subsidies and then export subsidies.
But keep an eye on this when you see big percentage reductions bandied about:
The Doha Round tariff negotiations concern tariff bounds—that is, limits above which tariffs may not be raised. However, there is a significant gap between many tariffs and their current bounds. Because of that slack, the percentage reductions in applied rates will be much smaller than any negotiated percentage reductions in the bounds. For the world as a whole, the average rate of the tariffs actually applied is 55 percent lower than the average bound rate. The corresponding numbers for developed, developing, and leastdeveloped countries are 47 percent, 57 percent, and 83 percent, respectively.
Also, keep an eye out for "sensitive" products:
Extremely high tariffs on selected products, which are a common feature in agriculture, account for a disproportionately large percentage of the economic cost of agricultural tariffs and tariff-rate quotas. Allowing all countries to classify as little as 2 percent of their tariff lines as “sensitive products” and developing countries to classify an additional 2 percent of their tariff lines as “special products”—categories that allow smaller tariff cuts than are negotiated for agricultural tariffs generally—could eliminate 80 percent of the economic gain that would otherwise result from negotiated agricultural tariff cuts.
Who farmers win, and whose lose?
Countries whose agricultural sectors are likely to benefit most from liberalization include Australia, New Zealand, Canada, Brazil, and Argentina. Countries whose agricultural sectors are likely to be harmed include the members of the European Union and the European Free Trade Association and high-income Asian countries. The United States is someplace in the middle, with most modeling studies predicting that U.S. agriculture as a whole would moderately benefit and one predicting a reduction in the rate of growth of output. China and India are also in the middle, with little effect predicted for their agricultural sectors.
Liberalization will most likely increase the wages of both skilled and unskilled labor and, to a slightly lesser extent, the returns to capital (rates of interest and profit) in almost all countries, with larger effects for less-developed countries. Whether unskilled wages increase by more than skilled wages do or vice versa will most likely depend for each country on whether the growth of its agricultural output increases or decreases as a result of liberalization.
Developing countries as a group would benefit more from liberalization of their own policies, which directly affect both their exports and their imports, than they would from liberalization of developed countries’ policies, which directly affect only their exports. To the extent that developing countries are harmed by developed countries’ policies that distort trade, the evidence points to the European Union and high-income Asian countries as much larger sources of harm than the United States.
I saw an interesting data on the projection of world wide production and consumption of rice in the coming years. It says the world wide rice production will be surpassed by the consumption in 2007. I quoted the article (written in Korean) in my blog. Even if we admit the short term benefit from agricultural liberealization is $50 to $185 billion, long term benefit may not be positive especially when we consider the price elasticity of agricultural products.
Have you by any chance read a paper on the long term effect of agricultural liberalization? I'm looking here and there to no avail so far.
Posted by: Kai | January 10, 2006 at 02:31 AM