Abstract

Proposals for agricultural trade reform put forward by the main protagonists remain far apart, with little sign of convergence. In an attempt to progress the negotiations towards a successful outcome, the chairman of the WTO Committee on Agriculture has proposed a compromise. The alternative proposals by the United States, the European Union and the WTO are analysed with the Agricultural Trade Policy Simulation Model, a static, multi-commodity, multi-region, partial equilibrium trade model. The estimated annual global welfare gains are $26 billion, $12 billion and $17 billion respectively. Developing countries, as a group, gain $6 billion from the US proposal but are made worse off under the WTO and EU proposals. Furthermore, in the best case many individual countries experience welfare losses. However, all countries enjoy increased export revenues and tariff revenues hold up quite well under the two less stringent proposals.

 

JEL classification: F13, Q17

Key words: agriculture, trade, modelling, negotiations

 

*       The ATPSM modelling framework was initially developed by UNCTAD and further refined by FAO and UNCTAD. The contribution of funding from DFID is gratefully acknowledged.

         The opinions expressed in this paper are those of the author and do not necessarily reflect the views of UNCTAD or its members. The designations and terminology employed are also those of the author.

          David Vanzetti, UNCTAD, Palais des Nations, CH-1211 Geneva.

1. Introduction

Proposals for further reform in the current ongoing negotiations on agriculture appear to be diverging rather than converging. At least, the proposals of the two major protagonists, the United States and the European Union, seem to be headed in different directions. The United States, supported by the Cairns Group of agricultural exporters, appears to be pressing for substantial liberalisation of agricultural trade. By contrast, the European Union, with support from Japan, Korea, Switzerland and Norway, is taking a more conservative approach. Under the programme adopted by the Special Session of the Committee on Agriculture, the WTO chairman, Harbinson, is required to prepare a draft of modalities for further commitments. Concerning the reduction in tariffs and export subsidies, his first draft in February 2003 was a compromise between the EU and the US proposals. However, the Harbinson proposal emphasized and described the special needs of developing countries in more detail. At this stage (March 2003), these countries proposals may be seen somewhat as ambit claims, with scope for convergence at a latter stage. Whether the proposals are good, bad, or merely inelegant is, of course, a matter of perspective. Nonetheless, it is useful to analyse the potential impacts of the various proposals, particularly on third countries.

 

Of particularly interest is the impact of negotiated outcomes on developing countries. Development issues have become more important within WTO negotiations in recent years following the absence of substantial benefits flowing to developing countries after the implementation of the Uruguay Round reforms. Indeed, developing country concerns may have contributed to the failure of the WTO Ministerial in Seattle in 1999. Recognition of their concerns was emphasised at the Doha Ministerial Meeting in November 2001, whereupon a work program focusing on development issues was initiated. Much of the work program involves technical cooperation, including assisting developing countries in formulating a negotiating position. This paper contributes to this objective by providing negotiators with a quantitative assessment of the potential impacts of the three proposals. UNCTAD’s  Agricultural Trade Policy Simulation Model (ATPSM), a deterministic, comparative static, partial equilibrium trade model is used to assess the potential impacts on developed, developing and least developed countries of the Harbinson, US and EU proposals, given that they are actually implemented as specified.

 

The paper is laid out as follows. The next section describes the negotiating context and the key proposals. Various modelling issues and scenarios are discussed in Section 3. Section 4 describes the results. The paper ends in Section 5 with policy implications, limitations and conclusions.

 

2. The state of play and the proposals for reform

The Uruguay Round Agreement on Agriculture led to tariffication of many non-tariff barriers and agreed reductions of 36 per cent from bound tariff rates (with a minimum of 15 per cent on each tariff line), plus additional reduction commitments on domestic support (20 per cent) and export subsidies (21 per cent in export volumes and 36 per cent in expenditure) to be implemented over six years. Developing countries agreed to commitments at two thirds of these levels to be implemented over ten years. Part of the agreement included a built-in agenda for further negotiations.

 

The current WTO negotiations on agriculture focus on five key issues. These are market access, domestic support, export subsidy, special and differential treatment for developing countries and non-trade concerns.

 

Market Access

WTO members have bound themselves to maximum tariffs on nearly all agricultural products. The issue market access is about reductions in tariffs and other issues concerning the improvement of the access to foreign markets. Tariffs are still significant. The average of negotiated out-of-quota bound tariff rates on agricultural products globally is 51 per cent and the average of applied rates is about 26 per cent.^[1] Developing country applied tariffs on agricultural products are sometimes as high as 100 (for example, in Kuwait, Congo Democratic Republic and Gambia) or even 200 per cent (Lesotho).^[2] Furthermore, a substantial gap between applied and bound tariffs in developing countries implies that negotiated reductions in bound tariffs will have little or no impact on trade flows in many instances. Finally, the higher tariffs tend to be at the higher stage of processing, limiting the scope for value added industries. Thus, there remains plenty about which to negotiate.

 

The Uruguay Round introduced several retrograde steps. The Agreement on Agriculture led to the establishment of a two-tier tariff system based on import quotas (the tariff rate quota system) for 1,370 tariff lines. Under this system imports are taxed at the relatively low inquota rate until the quota is filled, at which point the higher outquota rate applies. Two-tier tariffs tend to be used by developed countries with highly protected agriculture to shelter their sensitive products. Norway has 232 such TRQs, but the European Union (87), the United States (54) and Japan (20) are well represented.

 

The US proposal for addressing market access issues is to reduce applied tariffs according to a harmonising Swiss Formula by which higher tariffs are reduced more than proportionately (USDA 2002). Under this formula the maximum final tariff is proposed to be 25 per cent. This implies, for example, that a tariff of 100 per cent would be reduced according to (100*25/(100+25) =) 20 per cent while an initial tariff of 10 per cent would be reduced to 7 per cent. Other elements of the proposal include elimination of in-quota tariffs and a 20 per cent expansion in import quotas. This proposal has the merit of requiring substantial reform, of cutting the most distortionary tariffs by the largest amounts and eliminating the water in the tariff by focusing on applied rather than bound tariffs. However, a uniform approach based on a single harmonising formula has a significant drawback for developing countries, where agricultural tariffs are on average higher than in developed countries. Thus, developing countries would be making proportionally greater cuts. This is in contrast to the Uruguay Round where developing countries implemented lesser (two thirds) reductions over a longer implementation period. The approach doesn’t recognise special and differentiated treatment for developing countries as previously agreed in the Uruguay Round.

 

The EU proposal for market access reform is a continuation of the Uruguay Round approach, a 36 per cent average cut in bound tariffs with a minimum 15 per cent cut in each tariff line. The major attraction, and conversely, problem with this approach is the inherent flexibility. For example, a reduction in tariffs on a sensitive product from 100 to 85 per cent could be offset by reducing a ten per cent tariff to 4.3 per cent to give the required simple average cut of 36 per cent. The European Union has not suggested any increase in import quotas.

 

The Harbinson Proposal also applies to bound tariff rates. Out-of-quota tariffs shall be reduced by a simple average for all agriculture products subject to a minimum reduction per tariff line. The formula includes bands where depending on the initial tariff average and minimum reductions are different. Proposed reductions are higher for higher tariffs. For developed countries the proposed reduction is:

 

where x is the initial bound tariff.

For developing countries the bands are:

 

Least developed countries shall not be required to undertake any reduction commitments.^[3]

 

A further issue concerning market access is the special agricultural safeguard. Safeguards are contingency restrictions on imports taken temporarily to deal with special circumstances such as a sudden surge in imports. The US proposes to eliminate the existing special agricultural safeguard whereas the European Commission proposes to extend special safeguard instruments to facilitate the implementation of further tariff reductions and to meet the developing countries’ concerns on sensitive agricultural crops (“food security box”). This shows that this issue can also be considered under special and differential treatment of developing countries.

 

Domestic Support

Support levels are still significant despite declarations of intent. For example in the OECD countries total agricultural production in 2000 was valued at the farm gate at $632 billion, but to encourage this production, producers received support of $323 billion, over $300 per capita and nearly a $1 billion a day (OECD 2002). The major beneficiaries of this largesse are producers in the European Union (35 per cent of OECD receipts), the United States (27 per cent) and Japan. A third of every dollar received by OECD producers is attributed to assistance. Consumers contribute about half the cost, taxpayers the remainder.

 

Most developing countries cannot afford substantial domestic support, and such measures in developed countries appear to increase global production forcing down world prices. This benefits net food importers in developing countries at the expense of net exporters. Thus, developing countries are divided on this issue.

 

In WTO terminology, subsidies are classified by “boxes”. In agriculture there is a green, an amber and a blue box. Green box support must not distort trade. The blue box contains subsidies that are tied to production limits. Amber box support, defined by the Aggregate Measurement of Support (AMS), are trade distorting measures and subject to reduction commitments.

 

The US proposal for domestic support reductions is to reduce over five years the non-exempt support as (amber box) and production-limited (blue box) support to at most 5 per cent of the average value of agricultural production in the base period 1996-98. By some later date all non-exempt domestic support shall be eliminated. Developing countries would have special conditions to enable them to provide additional support to facilitate development and food security.

 

The EU proposal involves maintaining the amber, blue and green boxes essentially unchanged and reducing the (amber box) Aggregate Measurement of Support by 55 per cent. This is substantially more than the 20 per cent in the Uruguay Round. However, the green box criteria would be expanded to encompass so-called non-trade concerns such as rural development, the environment and animal welfare. For example, payments to compensate for the additional cost of meeting higher animal welfare standards would be exempt from reduction commitments under the proposal. This is in contrast to the US proposal whereupon the green box criteria would not be expanded. At present the EU’s AMS expenditure is not a binding constraint, but may become so. A flexible green box allows support to be switched from the non-exempt amber to the exempt green box, for example by increasing direct income support. Finally, the European Union proposes eliminating the de minimis provision in developed countries. The European Union makes less use of this provision than the United States and has less to lose from relinquishing it.

 

The Harbinson proposal on domestic support is to maintain green box support measures unchanged. Blue box payments shall be reduced by 50 per cent in developed and 33 per cent in developing countries. The amber box Aggregate Measurement of Supports shall be reduced by 60 per cent in developed and 40 per cent in developing countries. The de minimis level of 5 per cent shall be reduced to 2.5 per cent.

 

Export Subsidies

The majority of agricultural export subsidies are provided by the European Union. It is perhaps not surprising than that the United States proposes to eliminate export subsidies over five years whereas the European Union suggests a modest reduction of an average 45 per cent in expenditure. As with tariff cuts, averaging provides flexibility by permitting large cuts in lightly traded or lightly protected products. At present export subsidy expenditure in the European Union ($5.6 billion) is comfortably inside the total bound limit of $8.6 billion and could accommodate a reduction of 32 per cent in the total expenditure. However, several individual commodities are currently up against volume constraints, including beef, poultry, pigmeat, skim milk powder, wheat, coarse grains and rice. The EU proposes a ‘substantial’ but unspecified cut in export subsidy volumes. US expenditure is around $15 million, well within the limit.

 

The United States proposes, in addition to the elimination of export subsidies, that disciplines shall be placed on officially supported export credits, food aid and other forms of export support without specifying quantitative limits. Most of the export credits are provided by the US to their farmers. The EU proposes that the trade distorting elements of export credits for agricultural products should be identified and subjected to strict disciplines.

 

The Harbinson Proposal involves reduction of budgetary outlays and quantities to zero in developed countries within 6 years. For developing countries a much longer time period is proposed. Export credits shall be subject to disciplines.

 

Special and differential treatment

This issue is about a special and differential treatment of developing countries. In order to ensure that developing countries benefit from the expansion of world trade the proposals contain to a different extend more flexibility for developing countries.

 

The European Union proposal calls for developed countries to accept duty free all imports from least developing countries and 50 per cent of imports from developing countries. The European Union itself already meets this criterion. Among the major importers Japan would have the most difficulty meeting this standard as only a quarter of its imports from developing countries are duty free. Furthermore, the EU proposal calls for developing countries to be permitted reduced commitments if this is necessary for them to meet food security and other multifunctional objectives.

 

A further element adding to the complexity is the existence of preferential trade arrangements. Many developing countries, particularly those that were former colonies of current EU members, have preferential access to particular developed country markets. The superseded Lóme Convention between the European Union and the ACP countries is one well-known example. A general reduction in tariffs erodes these preferences, and countries holding such preferences may not see it in their interests to press for further tariff reductions.

 

The US proposal involves no concrete suggestion concerning special and differential treatment. The US has is open to consider the desirability of modifying the agreed terms and conditions regarding exports from developing countries and providing exception provisions to meet emergency situations.

 

The Harbinson Proposal involves special and differential treatment on every above mentioning issue. In addition to that, developed countries should provide duty- and quota-free access to their markets for all imports from least developed countries. Furthermore, the declaration of strategic products for which developing countries do not have to reduce tariffs is proposed.

 

Non-trade concerns

The agriculture negotiations provide scope for governments to pursue “non-trade” concerns such as the environment, rural development, labour standard and food security. However, not all countries are ready to negotiate these “non-trade” issues. The US does not mention this issue at all and favours a narrow round excluding these issues.

 

The European Commission proposes that measures that are aimed at achieving certain societal goals such as the protection of the environment, traditional landscapes, rural development and animal welfare should be accommodated in the agreement on Agriculture. The Harbinson Proposal acknowledges non-trade concerns such as structural adjustments and animal welfare. Payments should be time limited.

 

These issues cannot be modelled with the partial equilibrium model that is used to assess the economic effects of the three proposals. Thus, this analysis focuses on tariffs, domestic support and export subsidies.

 

3. Modelling agricultural reform

UNCTAD’s Agricultural Trade Policy Simulation Model (APTSM) is used to estimate the potential impacts of the EU and US proposals, assuming they were to be implemented as specified.^[4] ATPSM is able to estimate the economic effects of changes in within-quota, applied and out-quota tariffs, import quotas, export subsidies and domestic support on production, consumption, prices, trade flows, trade revenues, quota rents, producer and consumer surplus and welfare.

 

The Uruguay Round reforms raised several modelling issues. Quotas on imports and export subsidies generate quotas rents of an estimated $10 billion and the need to assess the magnitude of the rents and their allocation.^[5] It is assumed here that all the rent generated by the EU and US sugar policies is initially allocated to producers in exporting countries according to the distribution of trade.^[6] Rents on sugar are estimated to be worth an estimated $790 million, of which $658 million goes to developing and least developed countries. Global rents forgone equate with rents receivable. That is, it is assumed that none of the rent is dissipated through rent seeking activities or inefficient means of quota administration. Rents are diminished as out-of-quota bound tariffs are reduced but producers are assumed not to respond to changes in rents.

 

A further simplifying assumption is that quotas are filled, either explicitly or through administrative constraints. This implies that in the model the applied tariff or out-of-quota tariffs, rather than the inquota tariff, drives the domestic prices. This further implies that changes in inquota tariffs do not have price and quantity effects, as these instruments are not binding. (They do, however, change the distribution of rents.)

 

A second difficult modelling issue concerns the decoupling of domestic support, that is, the production effects of changes in support. This is a complex issue concerning the method of administration, perceptions of risk, the wealth effects of direct payments and the likelihood of changes in government policies. In addition, there are potential problems of double counting in that if border support is removed, reducing domestic prices, there may be no role for domestic support. The approach taken here is to assume that most of the domestic support is decoupled or is conflated with border support.^[7] Thus the additional effects of removing domestic support are minimal in most cases. This assumption may bias downwards the benefits from liberalisation.

 

A final observation relates to limitations modelling preferential access. Data on bilateral tariffs are not included in the database, although bilateral trade flows are available. Thus, it is not possible to liberalise on a bilateral basis and directly capture the effects of preference erosion as MFN rates are brought down closer to preferential rates held by many developing and all least developed countries. However, much of the effect of diminishing preferences is captured by the depletion of quota rents allocated initially to exporters. The model structure does not allow for trade diversion from changes in rents, but where the quotas are filled this effect will be minimal, at least for small changes in prices.

 

Country and commodity coverage

The present version of the model covers 160 individual countries plus one region, the European Union, which includes 15 countries (see appendix). Those countries not covered are mostly small island economies. Countries designated here as ‘developed’ are defined by the World Bank as high income countries with per capita GNP in excess of $9266 (World Bank 2001). A third group is the 49 least developed countries.

 

There are 36 commodities in the ATPSM data set. This includes many tropical commodities of interest to developing countries, although many of these have relatively little trade by comparison with some of the temperate products. Included commodities comprise meat, diary products, cereals, sugar, edible oils, vegetables, fruits, beverages, tobacco and cotton (see appendix).

 

Data

Volume data are from 2000 and are compiled from FAO supply utilisation accounts^[8]. The year 2000 represents the base year for the model. The price data are also from FAO. Parameters on elasticities and feedshares are from FAO's World Food Model. These are based on a trawling of the literature and are not econometrically estimated specifically for the model. Some of the elasticities were modified by the authors where this was necessary.. Inquota tariffs, outquota tariffs and global quotas, notified to the WTO, are obtained from the AMAD database where available and aggregated to the ATPSM commodity level.^[9] Export subsidy data are notified to the WTO. Bilateral trade flow data relate to 1995 and are from UNCTAD’s Comtrade database. These are used to allocate global quotas to individual countries. The UNCTAD TRAINS database is the source of information on applied tariffs.

 

An indicator of the degree of distortion is the revenue raised or government expenditure outlaid on each commodity. These are a combination of the rate of support plus annual flows and are shown in table 1. It is apparent that most of the global protection in agriculture is on temperate products, particularly beef, wheat, maize, dairy products, vegetables oils and oilseeds. According to the ATPSM database, tariff revenues and rents for the products in the model amount to around $45 billion, with export subsidies and production distorting domestic support accounting for an additional $13 billion. Among the products that can be grown in tropical regions tobacco, sugar and poultry attract substantial protection. These products can also be grown in temperate regions or are close substitutes. There is relatively little tariff revenue raised on tropical products such as beverages (except chocolate) and cotton. For the products listed in table 1, tariff revenues amount to 17 per cent of import costs.

 

The European Union and Japan raise the largest amounts of agricultural tariff revenue (over $4 billion each) but several other countries account for over $1 billion annually.  These are Mexico, Korea, United States, United Arab Emirates, Egypt and Turkey. Indeed 50 countries gather in excess of $100 million annually in agricultural tariff revenues. This illustrates the scope for global reform rather than focusing on the European Union, the United States and Japan. However, tariff revenue makes a significant contribution to government finances in some countries and this source would need to be replaced if revenues fall following liberalisation.

 

The major commodities attracting export subsidies are wheat, beef, dairy products and sugar. Of the $7 billion attributed to commodities in the database, $5.4 billion is paid by the European Union, with the United States at $600 million responsible for much of the remainder.

 

The European Union ($2.3 billion) and Japan ($1.9 billion) also provide most of the domestic support that is considered in the ATPSM database to be production distorting. Once again the United States accounts for most of the remainder. Tobacco leaf, cotton, fresh milk and beef account for the largest slices of domestic support.

 

 

 

 

Table 1: Initial global tariff revenue and rents by commodity

Commodity	Tariff revenue    ($m)	Export subsidy expenditure    ($m)	Domestic support expenditure    ($m)	Quota rent   ($m)
Bovine meat	3360	1335	688	604
Sheepmeat	241	10	24	589
Pigmeat	615	284	68	66
Poultry	2183	169	12	165
Milk, fresh	87	0	692	2
Milk, conc.	1093	504	1	419
Butter	534	413	0	169
Cheese	1057	668	2	360
Wheat	1882	2242	234	2315
Rice	705	138	912	955
Barley	439	0	226	583
Maize	2652	96	326	2120
Sorghum	74	0	10	17
Pulses	338	0	73	1
Tomatoes	184	0	73	35
Roots & tubers	103	0	77	0
Apples	1119	0	18	15
Citrus fruits	537	0	265