WTO’s Doha round in an era of high food prices

Kym AndersonUniversity of Adelaide, Australia

Review session for Ch. 3 of the Monterrey Consensus, on International Trade as an Engine for Development

United Nations, New York, 19 May 2008

Four key pointsCost of trade distortions, esp. in agriculture, is very high, and esp. for developing countries

including from DCs’ own policiesAgric under GATT has been difficult politically to reform, because of fluctuating and falling real world prices for food during past 60 years

To keep domestic food price stable, many govts. sought to insulate and increasingly protect farmers from international market forces

• which makes the int’l market even less attractive to other countries, who follow suit

Four key points (continued)

We have suddenly entered a new era of higher int’l food prices that may be prolonged

offering a fresh opportunity to reform agricultural policies under WTO’s DDA

But for there to be sustained benefits, DDA’s agric negotiations have to be both ambitious and with minimal exceptions

1. Cost of trade protection policies is very high

Global cost of 2004 tariffs on all goods plus agricultural subsidies: $287 billion per year

plus cost of services regulations (so >$600 billion?)

As % of GDP, cost to developing countries is 1/3rd higher than to high-income countries

and nearly twice as high for Sub-Saharan Africa

These costs (which are lower-bound estimates) are potential gains from trade liberalization

Sources of cost to global economy

$ billion due to policies in:

Agric & food

Textiles clothing

Other merch.

TOTAL

High-income countries

135 15 9 159(55%)

Developing countries

47 23 58 128 (45%)

All countries’ policies

182(63%)

38(14%)

67(23%)

287(100%)

Sources of cost to developing countries

$billion due to policies in:

Agric & food

Textiles &

clothing

Other merch.

TOTAL

High-income countries (50%)

Developing countries (50%)

All countries’ policies

(63%) (25%) (12%) (100%)

2. Real international food price trend and fluctuations, 1900-2005

20

40

60

80

100

120

140

160

180

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

Year

1900-2005: -0.8% p.a.

Int’l prices in Jan-Feb 2008 (current US$) compared with Jan-Dec 2006

Source: World Bank (2006 = 1.0)

Grains 1.7Vegetable oils 2.2Petroleum 1.4Coal 2.3Urea fertilizer 1.6Phosphate rock 4.3

IFPRI’s 2008 projection of international prices to 2050, real relative to 2000

Reference case: slight

slowdown in ag R&D growth

Alternative cases:

faster/slower ag R&D growth

Rice 1.3 0.7/2.6

Wheat 1.8 0.8/4.8

Maize 1.6 0.5/6.5

Soybean 1.2 0.8/1.8

IFPRI’s real price projection to 2050 (continued)

Reference case: slight

slowdown in ag R&D growth

Alternative cases:

faster/slower ag R&D growth

Beef 1.4 1.1/1.9

Sheepmeat 1.1 0.9/1.6

Pork 1.3 0.9/2.0

Poultry 1.2 0.8/1.9

3. Why is a new era of higher int’l food prices relevant to the DDA?

Because commitments to lower bound agric tariffs and subsidies at WTO will be politically painless for at least several years

Providing ample time for farmers and consumers to adjust

4. But care is needed if DDA benefits are to be sustained

DDA’s agric negotiations have to be both ambitious and with minimal exceptions

especially in increasing market access but also in domestic support in the case of cotton

Relative importance of 3 agric pillars Welfare effects

from:% for:

Agric market access

Agric domesti

c support

Agric export

subsidies

All agric

policies

Developing countries

109 1 -10 100

World 93 5 2 100

Relative importance of 3 agric pillars

just for cotton

Welfare effects

from:% loss for:

Agric market access

Agric domesti

c support

Agric export

subsidies

All agric

policies

Sub-Saharan Africa

2 77 1 100

World 10 89 1 100

Key agricultural elements of DDA negotiations to watch

Reductions in tariff and subsidy binding overhangTreatment of ‘sensitive’ & ‘special’ products (SSPs)Tariff cap, and whether it applies to SSPsExtent of Special and Differential Treatment (SDT) invoked by developing and least-developed countries in terms of their willingness to reform

Our modelled Doha scenarios

75% tiered cut to bound agric tariffs• without & with sensitive products• without & with a tariff cap of 200%• with & without Special and Differential Treatment (SDT)

75% tiered cut to domestic ag subsidy ceilingsAbolition of agric export subsidies50%/33%/0% cut in bound non-agric tariffsServices policies unchanged

Big cuts needed to reduce applied agric tariffs, because of “binding overhang”

Bound%

Applied%

High-income countries

27 14

Developing countries (excluding LDCs)

48 20

Least developed countries (LDCs)

78 13

Also big cuts in domestic support limits needed to reduce DS binding overhang

-

10

20

30

40

50

60

70

EU US Japan Korea Mexico Canada

US proposal

G-20 proposal

EU proposal

Overhang

Applied

0

10

20

30

40

50

Ag+NAMA-SDT Ag+NAMA Ag Only Ag-SSP+Cap Ag-SSP

Doha scenarios: Doha scenarios: Percent gain in real income Percent gain in real income from Doha scenario as share of global trade reformfrom Doha scenario as share of global trade reform

High-income

Developing

Ag+NAMA—Same as above but includes SDT.Ag Only—Only agriculture, no exemptions, no caps, includes SDT.

Ag-SSP—Same as above but no caps.Ag-SSP+Cap—Same as above plus exemptions (HIC-2%, LMY-4%) and caps (200%).

Ag+NAMA-SDT—No exemptions, no caps, no SDT.

Final point: why does tariff binding, and hence reducing binding overhang, matter?

Because in its absence governments can reverse reform and raise agric protection againWhere would Japan and Korea’s agric tariffs be today if GATT had disciplined them when they joined (in 1955 and 1967)?

Will China and India follow NEAsia in raising their assistance to farmers?

-50

05

01

00

150

NR

Aa

g (

%)

7 8 9 10Ln real GDP per capita

China Japan Korea Taiwan India

Thanks!

www.worldbank.org/trade/wtowww.worldbank.org/agdistortionswww.worldbank.org/WDR2008kym.anderson@adelaide.edu.au