Modeling full global trade policy reform and Doha scenarios

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Modeling full global trade policy reform and
Doha scenarios

• Dominique van der Mensbrugghe
• and Kym Anderson
• The World Bank
• Washington DC, 6 December 2005

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Three questions to be addressed

• Why have the World Banks estimates of the
  economic gains from full global trade reform
  changed over time?
• What is at stake currently?
• How do those gains from full global reform
  compare with the gains from partial reform
  commitments that might emerge out of the Doha
  Development Agenda?

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First question Why do the numbers change?

• I. New estimate of gains from full global
  merchandise trade reform reflect changes in
• Growth, structural changes and policy reforms
  between 1997 and 2001
• An improvement in the incorporation of
  preferences and specific tariffs
• And recent policy changes (Chinas WTO accession,
  phase-out of textile and clothing quotas, and EU
  expansion).
• II. New estimates of gains from Doha scenarios
  reflect
• Interpretation of WTOs July 2004 Framework
  Agreement
• Ability to utilize both bound and applied tariff
  rates.

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Key messages, however, remain the same

• Multilateral trade reform raises income and
  lowers poverty
• Major income gains come through agricultural
  reform
• For developing countries, South/South reform is
  as important as greater market access in the
  North
• Doha can lead to substantial income gains but
• Could be gutted by widespread use of exemptions
• Needs significant offers especially from
  developing countries to overcome binding overhang

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Comparison of GTAP5 and GTAP6 tariffs(Percent,
1997 for GTAP5, 2001 2005 for GTAP6)
Agriculture and food
Apparent significant reform between 1997 and 2001
Small aggregate impact of preferences, but more
important at regional/sectoral level
Move from 2001 to 2005 mainly impacts developing
countries, particularly Chinas WTO accession
commitments.
Source GTAP (release 5.4 and 6.0 and own
trade-weighted aggregation).
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Comparison of GTAP5 and GTAP6 tariffs(Percent,
1997 for GTAP5, 2001 2005 for GTAP6)
Agriculture and food
Non-agriculture (NAMA)
Source GTAP (release 5.4 and 6.0 and own
trade-weighted aggregation).
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Solid downward trend in applied tariffs(simple
average tariffs, percent)
Agriculture
Non-agriculture
Note Tariffs shown are simple averages across
countries and goods. Source UNCTAD Trains
database.
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Real income gains from full global trade
reform(Difference in real income from baseline
in 2015, billion)
Developing High-income
Source Linkage model simulations.
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Decomposition of baseline by region(Percent
difference in real income in 2015)
GTAP 6 w/ preferences (2001)
GTAP 6 w/o preferences (2001)
GTAP6 Baseline (2005)
Source Linkage model simulations.
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Why poverty impacts have changed(Decline in
number of poor (2/day) with global full
merchandise trade reform)
Note Though a large proportion of the change in
the poverty impact comes from the change in the
baseline, the poverty forecast for 2015 has also
changed from 2.3 billion to 2.0 billion. Source
Linkage model simulations.
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Second question What is at stake currently?

• What are the costs of current protection and
  agric subsidies, due to
• agriculture relative to manufacturing policies?
• developed relative to developing countries
  policies?
• and own- relative to other-countries policies?
• within agriculture, tariffs relative to export
  subsidies and domestic support?
• which farm commodity programs matter most?
• how are cotton markets affected?
• of relevance to the Cotton Initiative

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Cost of current protection policies by 2015

• Global cost of current tariffs on all goods plus
  agricultural subsidies 287 billion p.a.
• plus cost of services regulations (so times 2?)
• 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 are potential gains from
  liberalization

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Sources of cost to global economy
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Sources of cost to developing countries
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Relative importance of 3 agric pillars
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Intuition behind why agric market access
dominates subsidies in terms of welfare and trade

• 60 of PSE for OECD countries is due to market
  price support from tariffs and export subsidies
• Need to add non-OECD agric protection, which
  mostly comes from tariffs
• PSE only refers to primary agric cost of support
  for processed agric (even net of the inflated
  prices of protected farm products) is even bigger
  than for primary agric and all via trade
  measures
• Trade measures are roughly twice as costly as
  direct producer support, because they also
  distort the consumer side of market
• See Anderson, Martin and Valenzuela, The
  Relative Importance of Global Agricultural
  Subsidies and Market Access, Dec. 2005
  Download at www.worldbank.org/trade/wto

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Contribution of key products to global welfare
cost of agricultural protection,
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Share of global output exported,
percent(excluding intra-EU trade)
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Effects of full liberalization on real factor
rewards
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Impact of freeing markets on cotton(USbillion
per year)
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Take-away messages on costs of current policies

• Potential gains from further trade reform are
  large
• DCs, esp. SSA, would gain disproportionately,
  notwithstanding non-reciprocal tariff preferences
• But DCs would gain as much from DC reform,
  including own, as from rich-country reform
• Agricultural reforms are the highest priority for
  goods, from global, DC and SSA welfare viewpoints
• market access is the main area for agric reform
  gains

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Third question What gains to expect from Doha?

• I. Less aggressive reductions (than in GEP 04)
• Scenarios based on interpretation of July 2004
  Framework Agreement (AgBook)
• Huge improvements in ability to model scenarios
  due to new database that includes applied and
  bound tariffs
• II. New Doha scenarios we examine the importance
  of
• Binding overhang
• Sensitive and special products
• Special and differential treatment

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Big cuts in bound rates needed to reduce applied
agricultural tariffs, because of binding
overhang
av. tariff, trade-weighted
Source K. Anderson and W. Martin eds. 2006
Agricultural Trade Reform and the Doha
Development Agenda, New York Palgrave MacMillan
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Tiered formula cuts for bound tariffs in
agriculture
Formula cuts for bound tariffs in non-agriculture

• 50 for high-income
• 33 for developing, 0 for LDCs

Source Anderson, Martin and van der Mensbrugghe
(2006), Chapter 12 in Agricultural Trade Reform
the Doha Development Agenda, (AgBook).
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Also, big cuts needed to reduce binding overhang
in domestic support(Water in aggregate measure
of support)
US billion
Bound Applied
EU proposal US proposal G-20 proposal
Source de Gorter and Cook (2006), Chapter 7 in
Trade, Doha, and Development A Window into the
issues, edited by R. Newfarmer.
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Current ag proposals our books key scenarios
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Doha scenarios(Percent gain in real income from
Doha scenario as share of global trade reform)
High-income
Developing
AgNAMA-SDTNo exemptions, no caps, no SDT.
AgNAMASame as above but includes SDT.
Ag OnlyOnly agriculture, no exemptions, no caps,
includes SDT.
Ag-SSPCapSame as above plus exemptions (HIC-2,
LMY-4) and caps (200).
Ag-SSPSame as above but no caps.
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Implications if Doha negotiators are to deliver a
pro-development outcome

• Developing countries need to become more fully
  engaged by making more aggressive market access
  offers, in both agric and non-agric
• High-income countries need to find ways to
  contain the welfare-limiting effect of allowing
  less reform for sensitive products (SPs), such
  as
• Restricting the of tariff lines (e.g, 1?)
• Or defining the restriction in terms of imports
• Insisting on more than trivial cuts in SP tariffs
• Requiring large TRQ expansions for all SPs
• Imposing a cap (e.g. 100?) on all SP tariffs

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Unused slides
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Sources of cost to Sub-Saharan Africa
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Relative importance of own reform( gain in real
income)
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Effects of full liberalization on SSA agric food
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Effects of just OECD agric liberalization on SSA
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Effects of just OECD agric liberalization on SSA
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Doha scenariosnew evaluation(Average decline in
applied tariffs, percent)
Agriculture and food
Manufacturing
Source GEP2004, CEPII Doha scenarios and own
aggregations.
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Comparison of GEP04 and new AgBook
estimate(Percent gain in real income from Doha
scenario as share of full global trade reform)
AgBook
GEP04
Note AgBook represents aggressive reform in
agriculture and manufacturing (Anderson et al.)
Source Linkage model simulations.