assessing the implications of freer agricultural trade

The authors used an 11-region, 22- commodity world net trade model to study the economic implications of agricultural policy reform in industrial market economies. Their analysis shows that elimination of protectionist agricultural policies would drive up world prices for most commodities and that the increases would be related to the levels of government assistance. The results also indicate that consumers and taxpayers have had to bear the burden of agricultural support and that the costs to them outweigh benefits to producers by 30%. The EC, USA and Japan account for 80% of the income gains from multilateral liberalization.

The authors are economists at the Econo- mic Research Service, US Department of Agriculture, 1301 New York Avenue, NW, Room 624, Washington, DC 200054788, USA. Vernon Roningen is currently assigned to the office of US Senator Kent Conrad.

The views expressed in this article are those of the authors, and not necessarily those of either institution. The authors would like to acknowledge the helpful sug- gestions of Jerry Sharples and an anony- mous referee.

‘Timothy Josling, Developed Country Agri- cultural Policies and Developing Country Supplies: the Case of Wheat, Report 14, International Food Policy Research Insti- tute, Washington, DC, USA, 1980. *Vernon 0. Roningen, ‘A Static World Policy Simulation (SWOPSIM) modeling framework’, ERS Staff Report AGES- 860625, US Department of Agriculture, Washington, DC, USA, 1986.

Assessing the implications of freer agricultural trade

Vernon 0. Roningen and Praveen M. Dixit

Agriculture has come to the top of the economic policy agenda in the Uruguay Round of multilateral trade negotiations being held under the auspices of the General Agreement on Tariffs and Trade (GATT). This new emphasis upon the farm sector has generated a rapidly growing demand for information on the extent and effects of government intervention in agriculture. This article analyses the distortionary consequences of such intervention and documents the potential economic implications of agricultural policy reform in industrial market economies. It also provides a brief description of the modelling framework that was developed to study agricultural policy issues in a global context and furnishes empirical estimates of aggregate summary support measures known as producer subsidy equivalents (PSEs) and consumer subsidy equivalents (CSEs). PSEs and CSEs, developed originally by Tim Josling,’ are now being increasingly accepted not only as measures of government intervention but also as monitoring tools for agricultural negotiations.

The economic model: assumptions and features

The analysis of the global implications of agricultural policy reform in industrial market economies is done with the Static World Policy Simulation (SWOPSIM) modelling framework developed by Vernon Roningen.* A SWOPSIM model is characterized by three basic features: (i) it is a non-spatial price equilibrium model; (ii) it is an intermediate-run static model that represents world agricultural markets for a given year; and (iii) it is a multicommodity, multiregion partial equilibrium model. In order to use this static, non-spatial price equilibrium model to describe world agricultural trade, we make the following assumptions: (a) the world agricultural markets are competitive - countries operate as if they had no market power; (b) domestic and traded goods are perfect substitutes in consumption, and importers do not distinguish commodities by source of origin; and (c) a geographic ‘region’, possibly containing many countries, is one marketplace.

The economic structure of SWOPSIM models includes constant elasticity domestic supply and demand equations and summary policy measures (PSEs and CSEs). Supply quantities are functions of input

0306-9192/90/010067-09$3.00 0 1990 Butterworth 6 Co (Publishers) Ltd 67


and/or product prices. Demand quantities are functions of own- and cross-product prices and, in cases of feed demands, of supply quantities of animal products as well. Trade is the difference between domestic supply and total demand (absorption).

The policy structure is embedded in equations linking domestic and world prices, The standard policy structure is designed to allow flexibil- ity in characterizing policies that might affect production, consumption and trade. Policies are inserted as subsidy equivalents at the producer, consumer, export or import level. Details on the economic and policy structures are presented in Roningen, and Dixit and Roningen.’

The version of SWOPSIM that we use for this study (ST86) is based on 1986/X7 marketing year data. The world is divided into 11 regions - seven of which represent industrial market economies, three that characterize developing countries, and one that describes the centrally planned economies (CPEs) (see Appendix). Included in the model are 22 agricultural commodities representing mostly temperate zone products. Tropical products which account for a substantial proportion of agricultural trade of developing countries are not included.

The model constructed for this exercise contains summary support measures for all regions except the CPEs. However, the interactions of the CPEs’ domestic sectors with the world market are constrained by a price transmission elasticity which limits the passage of world price signals to their region. The CPEs are assumed to have a price transmission of 0.2, implying that only a fifth of the changes in world prices would be transmitted to their domestic economies. A price transmission of 0.5 is used for all developing countries.

Agricultural protection in industrial countries

The policies and programmes that support and protect agriculture are often complex and diverse across commodities and countries. A major practical step in understanding and quantifying agricultural policies has been the development and acceptance of a measurements methodology in the form of PSEs and CSEs. One benefit of such measures is that they can be used in modelling exercises as proxies for policies. Another is that they can be employed to compare agricultural protection across commodities and countries.

A PSE is the level of subsidy that would be necessary to compensate producers (in terms of income) for the removal of government programmes affecting a particular commodity. It measures the gross subsidy created by government programmes and includes all direct and indirect transfers which are made through the programmes. A CSE is the level of subsidy that would be necessary to compensate consumers for the removal of government programmes. It measures the explicit and implicit taxes paid by consumers to support agricultural producers.

PSEs and CSEs provide a common basis for ranking agricultural protection. When examined across countries they show the relative importance of government intervention in producer revenues and

%oningen, ibid; Praveen M. Dixit and Ver- consumer costs. The aggregate agricultural PSEs and CSEs for 1986/87

non 0. Roningen, ‘Modeling bilateral trade indicate that Japan supports its producers the most, followed by the

flows with the Static World Policy Simula- European Community (EC), Canada and the USA (Table 1). Australia tion (SWOPSIM) modeling framework’, ERS Staff Repot-l AGES861 124, US De-

and New Zealand have the lowest levels of overall producer support.

partment of Agriculture, Washington, DC, Although the figures vary considerably from year to year, these

USA, 1986. rankings have remained fairly stable during the current decade.

68 FOOD POLICY February 1990


Table 1. Percentage producer and consumer subsidy equivalents by country and commodity groups, 1966l87.

%uminant meats (beef, mutton, lamb); Non- ruminant meats (pork, poultry meat, eggs): Dairy (milk, butter, cheese, powder); Coarse grains (corn, other coarse grains): Oilseeds and products (soybeans, soymeal, soyoil, other oilseeds, other oilmeals, other oils); Other crops (cotton, tobacco). PSE and CSE averages are weighted by base production and consumption values, respectively.

Source: Compiled by Economic Research Ser- vice, US Department of Agriculture.

Commodity group” USA Canada

Producer subsidy equivalents

Ruminant meats Non-ruminant

meats Dairy Wheat Coarse grains Rice Oilseeds and

products Sugar Other crops

11 10

11 6 29 42 59 40 48 40 67 0

7 13 79 53 33 -21

Average 26 27

Consumer subsidy equivalents

Ruminant meats - 1 -1 Non-ruminant

meats -2 3 Dairy -15 -35 Wheat -14 -15 Coarse grains -12 -1 Rice -4 0 Oilseeds and

products 0 0 Sugar -47 -9 Other crops 0 7

EC

Other Western Europe

40 50

22 30 32 25 53 67 59 52 91 47 49 94 70 0 87

28 0 20 47 66 74 50 0 0

33 47 66

-20 -26 -33

-15 -23 -19 -14 -14 -42 -41 -45 -48 -42 -45 -15 -36 0 -72

1 -28

0

Average -8 -15 -17

0 -37

0

-20

0 -29

0

-35

Australia

4 8 29

0 0 20 29 12 32 15 0 55 2 0 47

13 0 85

0 0 14 14 0 56

1 0 35

12 10 35

Zealand Average

0 -14

0 -9 0 -17 0 -36 0 ~27 0 -69

0 0 0 -33 0 0

0 -17

Assistance to producers can also be compared across commodities. For industrial market economies as a whole, the rates of support are highest for cereals, followed by sugar and dairy. This pattern, however, does not hold consistently across countries. In the USA and Canada the percent PSEs are higher for sugar than for any other commodity. Moreover, unlike the country rankings, assistance across commodities can vary greatly between years. Whereas dairy PSEs were much higher than those for cereals in the early 198Os, the trend appears to have reversed in the last few years.

The costs of producer support have to be borne either directly by domestic consumers through higher food prices or by taxpayers through increased government budgets. The distribution of these costs differs considerably among countries. In Japan, the EC and Canada policies that artifically raise prices to consumers account for a large proportion of their support to agricultural commodities. Consequently the CSEs are relatively high in those three regions. In the USA, Australia and New Zealand, on the other hand, much less of the support is maintained through policies that tax consumers. Instead, they rely more on direct government budget support. The distortions in consumer prices - and hence the CSEs - are therefore much lower. Typically, distortions in trade would be greater with policies that raise consumer prices because such policies influence both production and consumption.

Eliminating agricultural protection in industrial countries

Using the model and aggregate measures of support discussed above, we studied the distortionary consequences of government intervention and analysed the economic implications of eliminating all support to agriculture in industrial market economies both unilaterally and multi-

FOOD POLICY February 1990 69


%ariation is measured as a weighted average of coefficients of variation of world commodity prices from 1960/61 to 1984/ 85. The secular decline in real prices is based on projections made by Vernon 0. Roningen, Praveen M. Dixit and Ralph Seeley in ‘Agricultural outlook for the year 2000: some alternatives’, invited paper, Plenary Session IV, International Confer- ence for Agricultural Economists, Buenos Aires, 24-31 August 1988.

70

laterally. Of particular interest to us were two issues: (i) How has agricultural protection in industrial market economies distorted international commodity prices? (ii) Who would benefit from an elimination of assistance to agriculture in industrial countries? We focus on policies of industrial economies because they are expected to provide leadership in any policy reform initiative under the GATT.

This study presents the results of experiments using the ST86 model in which new equilibrium solutions are obtained by removing PSEs and CSEs. The new solutions represent an approximation of the resulting adjustments in production, consumption and prices of agricultural commodities to be expected after about five years. with the important proviso that all other conditions remain the same as in the base year, 1986/87. This permits the analysis to isolate and identify the differences between the new solution and the initial or reference solution that are attributable to the removal of distortionary policies.

Effects on international commodity prices

International commodity prices would on average increase by 22% if industrial market economies eliminated all assistance to agriculture (Table 2). The rise in world price would be greatest for dairy products (65%) and sugar (53%) because government support to these commodities is high in industrial market economies and industrial country trade is a major part of world trade. World prices for cereals and ruminant meats would also increase noticeably, but not by as much. By contrast, world prices for oilseeds and products would increase only slightly (6%), indicating that agricultural policies pursued by industrial countries have only had modest price-depressing effects on those commod-

ities. How meaningful is the roughly 20% increase in world prices that

follows multilateral liberalization in terms of price behaviour on world agricultural markets? The price change is equal to the average deviation in world commodity prices over the past 20 years (22%) but is greater than the secular decline in real prices that could occur up to the year 2000 if long-term trends continue (4%).4 Thus, in historical terms, the price changes following liberalization would be significant but not

overwhelmingly so. The USA and the EC have been pointing fingers at each other for the

decline in international commodity prices in the recent past. Our results show that these two are by far the most important contributors to the world price effects. Unilateral liberalization of agricultural policies by

Table 2. Percentage world price impacts of liberalization, 1986/87.

Other Industrial Commodity Western New market groups USA Canada EC Europe Japan Australia Zealand economies

Ruminant meats 3.6 0.4 13.5 1.5 1 .fl 0.2 0.2 21 .o Non-ruminant

meats 3.0 0.5 5.8 1 .o 2.3 0.1 0.0 12.4 Dairy products 23.5 4.1 31.6 6.2 45 0.7 0.5 65.3 Wheat 10.6 4.1 19.1 1.6 2.5 1.6 00 36.7 Coarse grains 11.6 2.2 11.5 1.5 0.6 0.2 0.0 26.3 Rice 2.9 0.4 3.2 0.2 19.6 0.2 00 26.2 Oilseeds and

products -2.6 0.5 7.9 0.2 0.4 0.0 00 6.4 Sugar 22.8 0.4 16.6 3.3 6.4 1.4 0.0 52.7 Other products 4.0 0.0 3.3 0.1 0.7 -0.1 0.0 7.7

Aggregate 5.9 1.2 10.6 1.4 3.6 0.3 0.1 22.0

FOOD POLICY February 1990


the EC would raise international commodity prices an average of 11%. This is nearly half of the increase that would result if all industrial market economies simultaneously eliminated their support to agriculture. US unilateral liberalization would raise international prices by 6%) indicating that over 70% of the increases in prices following multilateral liberalization could be achieved if only the EC and the USA were to liberalize their trade. Little wonder then that much of the attention during the Uruguay Round has focused on the trade disputes between the two trading giants and the price-depressing implications of their policies.

In a previous issue of this journal, Robert Paarlberg pointed out that the trade conflict between the USA and the EC in recent years has revolved around support to grains. 5 An interesting inference from our results is that, despite similar rates of producer support, US policies have had far lesser effects in depressing world grains prices than have EC policies. One reason for this is that US consumer prices are not very distorted. Consequently, removal of support does not lead to increased demand. Another reason is that US set-aside programmes have res- tricted acreage expansion that would have otherwise taken place with high domestic producer prices.6 The elimination of US programmes would therefore have offsetting effects on production and trade, sug- gesting that US grains policy is relatively more trade neutral.

The policies of Japan and other western (non-EC) Europe individually do not have much influence on international prices, even though their agricultural support is high. These countries are not major participants in world agricultural markets. An exception is Japan in the rice market. Japan’s policies affect world rice price more than the effects of all other industrial countries combined. The policies of other industrial market economies - Canada, Australia and New Zealand - do not individually affect international prices very much because of their small trade. However, when taken together, these countries with Japan and non-EC Europe would account for nearly a third of the price increase from multilateral liberalization. %obert L. Paarlberg, ‘Responding to the

CAP: alternative strategies for the USA’, Food Policy, Vol 11, No 2, 1986, pp 157- 173. ‘Since PSEs reported by the US Depart- ment of Agriculture (‘Government intervention in aoriculture: measurement, evalua- tion, and implications for trade negotiations’. FAER No 229. USDA. Washinaton. DC, USA, 1987; and ‘Estimates of pr&luc- er and consumer subsidy equivalents: government intervention in agriculture, 1982- 86’, ERS Staff Report AGES880127, USDA, Washington, DC, USA, 1988) do not incorporate costs of required supply control associated with farm programmes, they in effect exclude some of the production offsetting elements of policies. Such policies, therefore, are incorporated directly as volume shifters when modelling the sector. Roningen and Dixit provide addi- tional details on supply management programmes and their treatment in the modelling framework: Vernon 0. Roningen and Praveen M. Dixit, ‘Impacts of removal of support to agriculture in developed countries’, paper presented to the International Agricultural Trade Research Consortium, Airlie House, VA, USA, 1987.

Effects on economic welfare

Agricultural support policies in industrial market economies have reduced national income by encouraging inefficient usage of resources. They have also transferred incomes from consumers/taxpayers to agricultural producers. Table 3 summarizes our estimates of the annual costs to taxpayers and consumers, the benefits to producers, and the efficiency losses - welfare costs - from distortionary policies pursued in 1986/87. Our results indicate that the costs to consumer and taxpayers of distortionary policies in individual industrial market economies are considerably more than the benefits to producers. For every dollar that producers in industrial market economies gain because of protectionist policies, consumers and taxpayers lose nearly $1.42. US consumers and taxpayers forfeit $1.38 in transfers for every dollar gained by producers. The transfer costs are higher for the EC ($1.45), Japan ($1.48) and Canada ($1.68).

Indeed, our study shows that only around 70% of the costs to consumers and taxpayers in industrial countries are transferred to producers; the rest represents income losses to society from misallo- cated resources. The annual income losses are greatest for the EC ($15 billion), followed by the USA and Japan ($9 billion each). Because



Table 3. Annual costs and benefits of unilaterial trade liberalization to producers, consumers and taxpayers in industrial market economies, 1966107.

Transfer benefits

Total net Ratio of 1 Producer welfare ($ billion)

welfare ($ billion)

Taxpayers’ savings ($ billion)

benefit0 ($ billion)

Per capita net economic benefit ($)

Per dollar lost by producers (S)

Producer share of transfers (“/)

to income loss

USA -26.30 6.04 30.25 9.18 38 1.38 72 3.95 Canada -3.66 2.28 3.75 2.35 92 1.68 61 2.57 EC -33.33 32.62 15.60 14.90 46 1.45 69 3.23 Other Western Europe -8.76 4.37 6.25 1.86 58 1.21 82 5.71 Japan -22.57 27.72 5.69 8.57 71 1.48 68 3.90 Australia -0.56 -0.46 1.11 0.09 6 1.16 86 7.22 New Zealand -0.22 -0.22 0.45 0.01 3 1.05 96 23.00

Industrial market Economies -95.40 72.35 63.10 36.90 49 1.42 71 3.65

a Net benefits include transfers to other groups, eg quota holders

Japan has a much smaller population than either the USA or the EC, the per capita costs to Japan ($71) are much bigger than those for the USA ($38) or the EC ($46).

The domestic costs of distortionary agricultural policies represent a part of the welfare costs of such policies. Individual country policies not only affect producers, consumers and taxpayers within the country but also those in other countries (Table 4). While US policies raise annual producer incomes by $26 billion, they cost producers in other countries nearly $17 billion. Similarly, the gains to EC producers from their policies ($33 billion) are not much greater than losses incurred by producers in other countries ($27 billion). Policies of other industrial countries benefit their own producers significantly but have little impact on producers of other countries.

One justification for the perpertation of high levels of farm support is the need to offset losses to domestic producers from policies of other countries. Our results suggest that in the USA over 40% of the support to farmers merely offsets the losses created by the policies of other industrial countries (Table 4). The compensation required to offset losses for producers in the EC and Japan would be much less.

Because protectionist agricultural policies of industrial countries have encouraged the inefficient use of resources, those economies in the aggregate would gain over $35 billion annually - about 10% of their combined agricultural GDP but less than 0.5% of their total GDP - from multilateral liberalization (Table 5). Global real income gains would be slightly less ($30 billion). The EC, the USA and Japan would be the largest gainers, accounting for over 80% of the gains to industrial

Table 4. The costs and benefits to producers (in $ billion) of agricultural support, 1986/87.

Centrallv Newly industrialized Developing Asia importers

0.0 -3.2 0.0 -0.6

a.2 -5.2

Total costs

-17.4 -3.8

-26.7

0.0 a.6 -4.8 4.2 -2.9 -10.3

0.0 -0.2 -0.9 0.0 0.0 -0.1

New Developing exporters

-1.1 -0.2 -2.4

-0.3 -1.3 -0.1

0.0

Policies of USA

USA 26.3 Canada -0.7 EC -6.1 Other Western

Europe -1.1 Japan -1.2 Australia -0.2 New Zealand a.1

Total costs of others’ policies -11.3

Canada EC Europe

a.7 -7.2 -0.8 3.7 -1.2 -0.2

-1.6 33.3 -1.2

a.5 -0.1 -0.8

Australia

-0.6 -0.1 -1.2

4.2 -1.7 8.8 Xl.1 -0.1 -0.1 -2.0 -0.2 22.6 -0.2 -0.1 -0.3 0.0 0.0 0.6

0.0 Xl.1 0.0 0.0 0.0

economies

-2.7 a.6 -4.9

a.7 -1.9 -0.1

0.0

-2.7 -12.5 -2.5 -1.5 -2.3 -2.0 -5.3 a.5 -12.6 -64.0

72 FOOD POLICY February 1990


Table 5. The welfare implications (in $ billion) of multilaterial trade liberalization by industrial market economies, 1966787.

USA Canada EC Other Western

Europe Japan Australia New Zealand Developing exporters Centrally planned

economies Newly industrialized

Asia Developing importers

Industrial market economies

Developing countries

Producer welfare

-16.18 -1.29

-22.74

Consumer welfare

-4.63 0.16

21.17

Taxpayers’ savings

30.25 3.75

15.60

Total Per capita net net benefits benefits’ (6)

8.63 36 2.60 101

13.98 43

-6.76 1.83 6.25 1.33 41 -21.81 24.69 5.69 6.29 52

1.55 -1.54 1.11 1.12 71 1.67 -0.82 0.45 1.3 396 5.05 -4.78 a.28 0.73 2

9.76 -10.25

0.53 a.94 11.82 -14.52

0.07

0.10 -0.12

-0.78

-0.91 -4.36

0

-13 -2

-65.56 40.86 63.10 35.30 51 17.40 -20.24 -0.30 A.54 -2

Centrally planned economies 9.76 -10.25 0.07 -0.78 0

a Net benefits include losses to other groups, Global -38.40 10.37 62.82 29.93 7 eg quota holders.

market economies. On a per capita basis, however, New Zealand would benefit the most.

Whether producers gain or lose from multilateral liberalization could be of considerable concern in the Uruguay Round of international trade negotiations. Our results indicate that producers in the EC, Japan and the USA could lose between $15 and $25 billion with multilateral trade liberalization. While these losses may appear large, such losses would be even greater if industrial market economies were to attempt unilateral policy reform (Tables 4 and 5). US producer losses would increase by over 60% under unilateral liberalization while those for the EC would be greater by a half. Producers in Japan, on the other hand, would lose about the same under either scenario. This evidence suggests there are much bigger incentives for the USA and the EC to enter into a multilateral agreement than for Japan.

Producers, consumers and taxpayers in developing countries would also be affected by agricultural trade liberalization by industrial market economies (Table 5). The impact is through changes in world market prices. It is easy to understand why food-importing developing countries like India, Nigeria or even Taiwan and South Korea would lose with higher world prices. The increases in costs of food and fibre to consumers would be more than the income gains to farmers. Developing countries who are agricultural exporters like Argentina and Brazil, on the other hand, would gain from multilateral industrial country liberalization because increases in incomes from agricultural exports would more than offset the higher food costs to consumers. Since developing countries as a whole are net importers of agricultural products included in our model, they would lose nearly $5 billion annually from multilateral trade liberalization by industrial market economies.

How robust are our assessments?

Can we conclude that our analysis provides an accurate indication of the economic effects of agricultural trade liberalization? Obviously, many conditions we assumed may not remain the same and several qualifica-



%oningen and Dixit, ibid. 8Bela Balassa, ‘Agricultural policies and international resource allocation’, Journal of Policy Modeling, Vol 10, No 2, 1988, pp 249263. - %ternational Aaricultural Trade Research Consortium, S&gins Agriculture into the GATT: Assessing the Benefifs of Trade Liberalization, summary report, IATRC, Annapolis, MD, USA, 1988. “Oraanization for Economic Cooperation and -Development, National PO/i&es and Agricultural Trade, OECD, Paris, France, 1987; Rod Tyers and Kym Anderson, ‘Liberalising agricultural policies in the Uruguay Round: effects on trade and welfare’, Journal of Agricultural Economics, Vol 30, No 2, 1988, pp 197-216.

74

tions of the results need to be noted. Since the forces influencing trade are constantly changing, the economic implications of trade liberalization are likely to be different depending upon the period under analysis. In comparing the results of this study with an earlier study that used the 1984185 marketing year as the base,’ we found that liberalization of policies by industrial market economies would have led to much larger increases in world agricultural prices under 1986/87 market conditions than under 1984/85 conditions. The price increases would be especially large for cereals because levels of protection on grains rose rapidly during the two periods relative to those for other products. Clearly, changes in the market conditions would affect the outcome of trade liberalization considerably.

Our model deals with only a subset of agricultural products. Tropical products which account for nearly half the value of global agricultural trade are omitted. Producers of these commodities tend to be taxed in developing countries but protected in industrial market economies. Given that developing countries are net exporters of these products, it is very likely that benefits to them would be greater if tropical products were included, as has been suggested by Balassa.x

The true benefits to a society from multilateral liberalization are likely to be underestimated in a model like ours. Our costs do not include the expenses incurred by farm groups lobbying to support farmers or other groups seeking to reduce food costs. In addition, the costs associated with the greater instability of international prices generated by distortionary policies are not taken into account. Both these costs, however, are likely to be very small.

We should keep in mind that our results are generated from a partial equilibrium model that assumes that the opportunity costs of land, capital and labour would not change. A general equilibrium model could examine resource shifts between agriculture and the rest of the economy and provide greater insights about the effects of agricultural liberalization on other sectors and factor markets. Empirical studies that have taken some of these interactions into account in a single-country framework suggest gains not much different than those shown by us.”

If some of these qualifications were taken into account, the magni- tudes of changes might alter slightly. The basic thrust of the results is likely to remain the same. The type of results we get from trade liberalization are intuitively appealing and are reinforced by similar conclusions from previous studies by the Organization for Economic Cooperation and Development and Tyers and Anderson. “’

Conclusion

There has been growing concern about the costs of protectionist agricultural policies in the recent past. Our results suggest that there are justifications for such concern. Current policies - especially those of the USA and the EC - have introduced substantial distortions in the

marketplace. Consumers and taxpayers have had to bear the burden of agricultural

support. The costs to them outweigh benefits to producers by nearly 30%. This suggests that policies used by industrial countries to support agriculture are inefficient and less wasteful alternatives could surely be devised to attain the same farm income objectives. Moreover, given that a large share of the support in industrial countries goes to large farmers,

FOOD POLICY February 1990


equity considerations can hardly be used to justify inefficiency. The incentives for liberalization vary across countries. Australia and

New Zealand would experience substantial per capita income gains. The incentives for the USA and the EC originate not necessarily from the potential real income gains, but rather from the need to curtail farm costs and reduce government expenditures. For Japan the incentive for liberalization rests on consumer well-being. But whether these are sufficient motivations remains to be seen.

The story for developing countries is complex. Developing exporters would benefit from world price increases. Yet, since a vast majority of developing countries are net importers of food products, liberalization could lead to declines in real incomes. This suggests that industrial market economy liberalization might be more acceptable to them if accompanied by increased development assistance.

Our study has pointed out the economic implications of trade liberalization under a rather extreme policy reform option. Such an option could require dramatic changes in domestic farm programmes. Indeed, any policy reform will generate both winners and losers. The challenge for the Uruguay Round is to devise alternatives that would achieve the goals of freer trade but not compromise domestic policy objectives.

Appendix Country and commodity coverage in ST86

Product aggregates

Ruminant meats Non-ruminant meats (and eggs) Dairy Dairy products Wheat Coarse grains Rice Oilseeds and products Sugar Other products Farm products

ST86 detailed product coverage (and ST86 mnemonic l-letter codes)

Beef (BF), mutton and Lamb (ML) Pork (PK), poultry meat (PM), eggs (PE) Milk (DM). butter (Da), cheese (DC), milk powder (DP) Butter (DB), cheese (DC), milk powder (DP) Wheat (WH) Corn (CN), other coarse grains (CG) Rice (RI) Soybeans (Se), soymeal (SM), soyoil (SO), otheroilseeds (OS), other meals (OM), other oils (00) Sugar (SU) Cotton (CT), tobacco (TB) Beef (BF), pork W), mutton and lamb (ML), poultry meat (PM), eggs (PE), Milk (DM), wheat (WH), corn (CN), other coarse grains (OG), soybeans (SB), other oilseeds (OS), cotton (CT), sugar (SU), tobacco (TB)

ST86 country/region Database country coverage (and TLIB mnemonic 24etter codes)

USA Canada EC Other Western Europe Japan Australia New Zealand Developing exporters Newly industrialized Asia Centrally planned economies Developing importers

United States (US) Canada (CN) European Community- 10 (EC), Spain (SP), Portugal (PT) Other Western Europe (WE) Japan (JP) Australia (AU) New Zealand (NZ) Brazil (BZ), Argentina (AR), Indonesia (DO), Thailand (TH), Malaysia (ML), Philippines (PH) South Korea (SK), Taiwan (TW), other East Asia (EA) Eastern Europe (EE), Soviet Union (SV), China (CH) South Africa (SF), Mexico (MX), Central America and Caribbean (CA), Venezuela (VE), other Latin America (LA), Nigeria (NG), other sub-Saharan Africa (AF), Egypt (EG), Middle East and North Africa-oil producers (MP), Middle East and North Africa-non-oil producers (MP). India (ND), other South Asia (OS), other Southeast Asia (SA), other Asia (OA), rest-of-world balancing world trade (RW)

Note: TLIB is a 22-commodity, 36-country/region database for 1984 and 1986 containing production, consumption, trade and support data. Data from the TLIB database were aggregated according to the above regional groupings to form the ST66 model used for this exercise.


assessing the implications of freer agricultural trade

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