AGRICULTURALPOLICY REFORM

IN THE WTO

The Road Ahead

Xinshen Diao, Agapi Somwaru and Terry Roe

The objective was to provide the “big picture”

A Global Analysis Of Agricultural Reform In WTO Member Countries

Computable General Equilibrium (CGE) Model

Global Static and Dynamic (DYNAGEM)

Main Attributes of a Computable General Equilibrium (CGE): Basic Specification (Circular Flow)

Goods & Services

FirmsHouseholds

Factors

Demand

Demand

Supply

Expenditure

Income Rents

Final Goods:

Revenue

Final Goods: Supply

Intermediate Goods: SupplyIntermediate

Goods: Revenue

Government

Savings from ROW(Net Capital Inflow)

Govt. Savings(Budget Deficit)

Capital Account

InvestmentPrivate

Savings

Other countries/Rest of the World

ExportsImports

Govt Purchases

Basic CGE Model Structure

Transfers & Business

SubsidiesTaxes

Main Attributes of a Full CGE Model: Additional Institutions

Firms' Intertemporal Decisions

CONSUMPTION

OUTPUT

PRODUCTION INVESTMENT

LABOR, LAND CAPITAL

Consumers' Intertemporal Decisions

World Commodity Market

World Capital Market

IMPORTS &EXPORTS

FOREIGN ASSETS/DEBT

DIVIDENDS INTERESTS

ENDOWMENTINCOME CURRENT PROFIT

Domestic Commodity Market

SAVINGS

DYNAGEM ATTRIBUTES: Intertemporal Structure

CURRENT INCOME

The elliptical box represents exogenousvariables, the rectangular box representsendogenous variables. The dashed lineis for revenue flows and solid line is forcommodity flows.

More Features • Simulates policy changes in counterfactual or “what if”

comparisons

• Easily modified and flexible in the number of sectors and commodities

• Requires PC with high computational capacities

• Written in GAMS

• The model was developed in 1997 and published in the Journal of Economic Integration (2001), the Journal of Policy Modeling (2000), the International Economic Journal (1999)

• Based on the 1997 global economy (GTAP database version 5)

• For more information, contact: Xinshen Diao, IFPRI, or Agapi Somwaru, ERS

Commodity and Country Coveragefor the WTO study

Australia and New Zealand Japan and Korea United States Canada European Union European Free Trade Area China Other Asian countries Mexico Latin America South African countries Rest of the World

Paddy and processed rice, wheat Other grains (including corn) Vegetables, fruits and nuts Oilseeds, vegetable oil Sugar cane, sugar beets, processed sugar Plant-based fibers and other crops

Livestock and livestock products Beverages, tobacco, other processed food products Non-agricultural products Services

Road Map of the Analysis

Static Model• Elimination of import barriers throughout the world• Elimination of export subsidies throughout the world• Elimination of domestic support throughout the world• Combining all of the above

Dynamic Model• Elimination of all trade distortions without TFP growth• Elimination of all trade distortions with TFP growth of

developing countries

(0.02 annually only for the first 10 years of trade reform)

Major Findings

Ag. Policy Distortions Cause World Prices to be 12% Lower Than They Otherwise Would be

Economies Around the World Contribute to Ag. Price Distortions

U.S.15%

EU39%

Rest of world20%

Canada2%

Australia & New Zealand

0%

Japan & Korea13%

Latin America3%

Other Asian8%

Decomposition of Price Effects of Global Agricutlural Liberalization

-- Percentage change in world agricultural price index from the base year in the model

tariffs6.3

DCs all9.1

EU all4.4

DCs tariffs4.0

dom sub3.7

LDCs all2.4

US all1.8

LDCs tariffs2.3

export sub1.6

Japan&Korea all1.5

0

2

4

6

8

10

12

1

Scenarios

Estimated annual gain in purchasing power = $56 billion

Many Countries Would Share Consumer Purchasing Power Gains From Elimination

of Ag. Tariffs and Subsidies

U.S.24%

EU19%

Rest of world11%

Canada2%

Australia & New Zealand

6%

Japan & Korea11%

Latin America14%

Other Asian13%

Effects of Removing Domestic Support in the Developed Countries (with and without Land Based Payments Removal

Remove all domestic subsidies, no direct payment removalWorld ANZ JPK USA Canada EU EFTA

World Agricultural Price 3.55Returns to Farmland 4.11 -1.28 -1.38 1.93 -7.26 -21.43Total social welfare ($billion) 0.24 -3.66 0.97 0.28 6.06 0.82

Remove all domestic subsidies, with direct payment decoupled

World Agricultural Price 3.6Returns to Farmland 3.65 -1.3 -8.71 -1.52 -14.49 -32.58Total social welfare ($billion) 0.25 -3.89 1.04 0.31 5.92 0.83

Remove all domestic subsidies, with direct payment full coupled

World Agricultural Price 4.78Returns to Farmland 5.09 -0.63 -4.31 6.43 -7.2 -22Total social welfare ($billion) 0.37 -6.5 1.23 0.34 5.52 0.81

In sum• Eliminating global ag. policy distortions would:

• raise world welfare $56 billion annually• raise world agricultural prices 12 percent

• Roles of policies in reducing world prices:• Tariffs (52%)• Domestic subsidies (31%)• Export subsidies (13%)

• Developing countries can benefit from further WTO reforms

For more information….www.ers.usda.gov