More Free Trade in Agriculture!

[Toro]

Summary: The authors provide estimates of the impact that removing all merchandise trade distortions (including agricultural subsidies) would have on food and agricultural production, trade, and incomes. Using the latest versions of the Global Trade Analysis Project (GTAP) database and the World Bank's LINKAGE model of the global economy (projected to 2015), their results suggest farm employment, the real value of agricultural output and exports, the real returns to farm land and unskilled labor, and real net farm incomes would all rise substantially in developing country regions with a move to free merchandise trade, thereby alleviating rural poverty-despite the decline in international terms of trade for developing countries that are net food importers or are enjoying preferential access to agricultural markets of high-income countries.

The Overview

The Paper

From the paper

The next step is to measure the prospective effects of removing all agricultural subsidies plus those tariffs summarized in Table 2 over the 2005-2010 period. ... Our LINKAGE model’s answer to that question is that it would lead to global gains by 2015 of $287 billion per year. The distribution across regions of that economic welfare (or equivalent variation in income) gain, reported in Table 3, suggests two-thirds would accrue to high-income countries. However, as a share of national income, developing countries would gain more, with an average increase of 0.8 percent compared with 0.6 percent for high-income countries. The results vary widely across developing countries, ranging from little impact in the case of Bangladesh and Mexico to 4 or 5 percent increases in parts of East Asia.

The impact of full trade reform on agricultural and food output and trade is shown for each country/region in Table 6, where it is clear that exports are enhanced much more than output. As a consequence, the global share of agricultural and food production exported rises, from 9.5 to 13.2 percent (or from 6.6 to 11.6 percent when intra-EU trade is excluded). The increase in exports of those goods from developing countries would be a huge $191 billion per year more.

Would freeing global merchandise trade lead to more trade gain for developing countries than for high-income countries, given the latter’s high protection rates in agriculture and textiles? This question is pertinent for trade negotiators, who often think more in terms of the boost to the value of trade than to changes in economic welfare. Table 8 suggests any imbalance of that sort is not likely to be a major problem, even with complete trade liberalization. Certainly in those 13

two protected sectors exports would increase more for developing than for high-income countries, but for other manufactures the trade growth for the two regions would have the opposite bias. Also, much of the developing countries’ trade growth is with other developing countries. Hence for merchandise trade as a whole, developing countries would sell an extra $318 billion to high-income countries under free trade whereas high-income countries would sell an extra $290 billion to developing countries. A small amount of services trade liberalization by developing countries would be sufficient to close that gap, if full reciprocity were sought.

Lessons, implications and areas for further research

The following are the key messages that emerge from our analysis:

• The potential gains from global trade reform are large, including for developing countries and especially when they participate in the reform, despite its adverse terms of tradeimpact on many developing countries;

• Agriculture is where the greatest gains from liberalization would occur;

• Liberalization would cause farm output and farm employment to be greater in developing countries relative to the baseline, except in South Asia;

• It is the poorest people that appear to be most likely to gain from global trade liberalization, namely farmers and unskilled laborers in developing countries; and, inparticular,

• Net farm income would be enhanced in all developing country regions other than South Asia (where job growth would be greater in non-farm activities).