Global Trade Reform Under The Doha Development Agenda:

Implication for Sub-Saharan AfricaKym Anderson and Will Martin

Development Research GroupThe World Bank, Washington DC

kanderson@worldbank.org

Why much of the focus in DDA must be on agriculture … … even though it provides less than 4% of global GDP and 9% of int’l merchandise tradeOECD manufacturing tariffs have fallen by 9/10ths over the past 60 years to <4%, while agricultural protection has risen

Agric. applied (bound) tariffs now average nearly 5 (10) times manufactures tariffs globally

Also, the vast majority of the world’s poor rely on farming for a living, and may be hurt by agric protection policies of rich countries

Why focus on agriculture (cont.)True, the harm to some DC farmers from rich-country agricultural protection is reduced via non-reciprocal preference schemes such as the ACP’s Lome Agreement, EBA and AGOA But those schemes contravene the core WTO rule of non-discriminationIn particular, they exclude some populous DCs (eg China, India, Indonesia, Pakistan, Vietnam)Hence they may harm more poor farmers (through trade diversion) than they help

Two new working papers and two forthcoming books

Anderson and Martin, ‘Agricultural Trade Reform and the Doha Development Agenda’, The World Economy September 2005 (forthcoming)Anderson, Martin and van der Mensbrugghe, ‘Would Multilateral Trade Reform Benefit Sub-Saharan Africans?’ WB Policy ResearchWorking Paper, April 2005Anderson and Martin (eds.), Agricultural Trade Reform and the Doha Development Agenda, Washington DC: World Bank, forthcoming mid-2005 but chapters now available on World Bank websiteHertel and Winters (eds.), Putting Development Back Into the Doha Agenda: Poverty Impacts of a WTO Agreement, Washington DC: World Bank, due fall 2005

What differentiates our new study?Its point of departure is the WTO’s July 2004 Framework agreement It examines in detail each of the 3 agricultural pillars plus preferences, cotton subsidies, non-agricultural tariffs, and S&DT for DCs’ reformAnd it ‘adds up’ the consequences of current policies and prospective Doha reforms using the new GTAP protection database which includes, for the first time:

• bound as well as applied tariffs• non-reciprocal as well as reciprocal preferential tariffs• key trade policy changes to the start of 2005

Outline of presentationWhat are the potential welfare gains from full goods trade reform, by country/region, due to:

developed relative to developing countries’ policies?agriculture relative to manufacturing policies?within agric., tariffs relative to export subsidies and domestic support?

How close could Doha get to completely freeing merchandise trade, in welfare and trade terms, based on July 2004 Framework agreement?Implications for southern and other Sub-Saharan Africa

Modeling Doha reform packages using World Bank’s Linkage Model

Recursive dynamic CGE modelWe start with GTAP Version 6.05 protection and trade data for 2001 We project on-going reforms from 2001 to end-2004 (Uruguay Round including ATC, EU25 enlargement, WTO accession for China, etc.)Then we assume no further reform as global economy grows to 2015 (according to World Bank population, income, etc. projections), to get our global baseline scenario for 2015, against which to compare reform scenarios

Comparison with earlier modelsWelfare effects are smaller than when GTAP Version 5 database for 1997 is used, because:

Much reform since 1997, incl. implementation of unilateral reforms and regional and UR agreementsNon-reciprocal preferences are now in databaseNew provider (CEPII/ITC) with different sources

Welfare effects are larger than from Hertel/Keeney’s GTAP-AGR estimates as of 2001, because Linkage Model:

projects world economy to 2015includes some dynamicshas larger trade elasticities than GTAP-AGR

Linkage model’s welfare cost of current protection policies by 2015

Global cost of current tariffs on all good plus agricultural subsidies would be $278 billion p.a. by 2015

2/3rds accrues to high-income countriesBut as % of GDP, the cost for DCs is twice that for developed countries

Full liberalization: global gain ($bn)

$ billion due to reform by:

Agric & food

Textiles clothing

Other manuf

TOTAL

High-income Countries

124 16 9 150(55%)

Developing countries

40 24 58 124 (45%)

All countries’ policies

173(61%)

39(15%)

67(24%)

278(100%)

Full lib’n: gains to developing countries$bn due to reform by:

Agric & food

Textiles &

clothing

Other manuf.

TOTAL

High-income countries

26 15 4 44(50%)

Developing countries

26 9 6 45(50%)

All countries’ policies

55(63%)

22(25%)

10(12%)

87(100%

)

Relative importance of 3 agric pillars Welfare

gains from:

% of gain to:

Agric market access

Agric domestic support

Agric export

subsidies

All agric policies

Developing countries

106 2 -8 100%

World 93 5 2 100%

Full Liberalization(percentage change from baseline income in 2015)

-1.5 -0.5 0.5 1.5 2.5 3.5 4.5

USABangladesh

ChinaMexicoCanada

IndiaRest of ECA

EU-EFTARussia

Rest of S AsiaIndonesia

JapanSouth Africa

Middle East & N AfricaOther Sub-Saharan Africa

Australia/ NZTurkey

Other Latin AmericaArgentina

BrazilRest of E Asia

Selected SSA countriesHK & SingaporeKorea & Taiwan

Thailand

Effects of full lib’n on SSA agric & food

% change in:

Real value of

agric and food

exports

Real net farm

income

South Africa 56 16

Other Southern Africa 50 11

Other SSA 45 8

Effects of full lib’n on SSA factor rewards

% change in:

Farm land

Unskilled wages

Skilled wages

South Africa 10.7 2.8 2.2

Other Southern Africa

5.3 6.4 1.2

Other SSA 6.4 8.4 5.7

Key elements of the Doha Agenda as shown in the July 2004 Framework agreement

3 agricultural pillars (including cotton)Non-agricultural market accessServicesTrade facilitationLesser tariff and subsidy cuts for developing countries (DCs) and zero cuts for least-developed countries (LDCs)

Prospective Doha packagesWe focus on agric market access in particular

because it is by far the biggest potential contributor to global and DC welfare gains

So we assume no services reform, no new trade facilitation, but:

phase out of agricultural export subsidiestiered cut to agricultural domestic supportAnd tiered cut to agric and non-agric bound tariffs under various alternative market access packages

Agricultural market accessTiered formula for cutting bound tariffs (with smaller cuts for DCs)

Formula sought by Harbinson yielded almost no gains to DCs• especially if lesser cuts for 2% of products

that are ‘sensitive’ and another 2% of DC products that are ‘special’

So we increased each cut by 10 percentage points more than Harbinson

Agricultural domestic supportCut in bound AMS need not reduce applied support, because of binding overhang (with 1986-88 ref. prices)

and overhang can be increased by abolishing admin prices used to calculate market price support

We apply a tiered reduction in bound AMS75% if AMS>20%, otherwise 60% for developed countries (40% for developing, zero for LDCs)

• Leads to only 4 members reducing support:US 28%, Norway 18%, EU 16%, Australia 10%

Non-agric market access, and extent of DC willingness to reform

50% cut in bound rates for high-income countries, 33% for DCs, 0% for LDCsWe also examine the effects of DCs (including LDCs) becoming full participants in Doha agric and NAMA cuts (Doha-All scenario)

recalling from earlier Rounds that DCs only got what they gave, in terms of increased market access (see Finger 1974, 1976; Finger and Schuknecht 2001)

Services and trade facilitationThese areas offer great potential gains, especially for developing countries

See Hertel/Keeney chapter of our bookBut few significant signs of commitment have been forthcoming yet

and quantification of their effects is problematic

Hence we assume zero changes for these items in our modeled Doha scenarios

Results from Doha agric reformTiered formula cut as per Harbinson gives the world $54 billion, but little goes to DCsSo we increased all cuts by 10 percentage points, which gave a $73 billion global gain

Even then, only $8 billion go to DCs& if HICs exempt just 2% ‘sensitive’ products (DCs 4%), global gain shrinks to $18 billion, and DCs’ gain disappears

• although a 200% tariff cap reduces much of that shrinkageSmall DC gains because of their (a) lesser cuts and (b) large tariff ‘binding overhang’

Binding overhang in agric tariffs, %Bound Applied

All DCs 48 21

South Africa 52 13

SSA LDCs 63 13

Other SSA 105 26

Adding non-agric market accessAdding 50%/33%/0% cuts to non-agric bound tariffs boosts global gain from agric tiered formula cut from $73 to $95 billion paThat $95 billion gets the world 1/3rd of the way to the potential gains from complete free trade in merchandise (but that share is smaller as % of gains from

removing also all services trade barriers, unless services markets also are opened up)

If DCs and LDCs fully participate in market access, global gain goes up to $119 billion

Effects of Doha lib’n on SSA applied tariffs

% applied tariff in:

Baseline 2015

Doha (with lesser

cuts by DCs)

Doha-All

South Africa 6.6 6.0 5.0Other Southern Africa

8.7 8.5 8.4

Other SSA 16.1 15.7 15.4

Effects of full & Doha lib’n on SSA welfare

% change in:

Full global lib’n

Doha (with lesser

cuts by DCs)

Doha-All

South Africa 1.0 0.25 0.49Other Southern Africa

1.7 0.19 0.26

Other SSA 1.2 -0.02 0.13

Effects of full & Doha lib’n on SSA exports

$ billion p.a. change in exports of:

Full global lib’n

Doha (exports

to all countrie

s)

Doha (exports to just SSA

countries)

Doha (exports to other

DCs)

Agriculture and food

18 2.6 0.4 0.8

Other goods 15 -1.4 -0.4 0.7

All merchandise

34 1.2 0.0 1.5

Effects of full & Doha lib’n on share of agric and food production that is exported

% in:

Baseline 2015

Doha (with lesser

cuts by DCs)

Full global lib’n

South Africa 12.7 13.5 20.2Other Southern Africa

18.0 19.2 25.8

Other SSA 15.8 16.5 23.7

Implications for southern AfricaDoha would give SSA only a small fraction of their potential gains from a move to global free tradeIf DCs (including LDCs) were to fully participate, their gain more than doubles To gain more, SSA DCs have to reduce bound tariffs further, so that applied tariffs fall more

Isn’t it better to do that under Doha, so as to get reciprocity and/or more aid, rather than unilaterally – especially as that would lead to less trade diversion when EPAs are signed with the EU?

Other lessons and policy implicationsPotential gains from further trade reform are huge

Even after UR and recent accessions to WTO and EUMust find the political will for Doha success

DCs would gain disproportionately from reformNotwithstanding non-reciprocal tariff preferencesBut as much would come from South-South as South-North trade growth, hence importance of DC lib’n too

After outlawing export subsidies, agric tariff cuts are the highest priority from a welfare viewpoint and if Doha is to be pro-development/pro-poor

Lessons and implications (cont)Cuts in agric tariffs and domestic support bindings need to be large to get beyond binding overhangEven large cuts in agric tariffs do little if ‘sensitive’ and ‘special’ products are subjected to lesser cuts

Unless a tariff cap of, say, 100% is enforcedDCs in SSA and elsewhere would have to make few cuts because of their huge binding overhang

So can afford to tone down their demands for lesser cuts (and ‘special’ products) and exchange it for greater access to HIC markets (& fewer HIC ‘sensitive’ product exemptions)

Lessons and implications (cont)Removal of cotton subsidies in US and EU would raise DC share of global cotton exports from 56% to 85%Adding non-agric market access to Doha package could double the welfare gains to DCs even with their lesser cuts, and it helps balance the North-South exchange of ‘concessions’Some LDCs could lose slightly, as could some households within DCs that gain, if they reform little – the focus of the following presentations

Working paper and web address for forthcoming book chapters

Anderson, K., W. Martin and D. van der Mensbrugghe, “Would Multilateral Trade Reform Benefit Sub-Saharan Africans?” World Bank Policy Research Working Paper, forthcoming April 2005 (request a copy from kanderson@worldbank.org)Anderson, Kym and Will Martin (eds.), Agricultural Trade Reform and the Doha Development Agenda, Washington DC: World Bank, forthcoming mid-2005 but chapters now available on World Bank website at: http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/TRADE/0,,contentMDK:20366035~pagePK:210058~piPK:210062~theSitePK:239071,00.html