Overview

Andrew B. Stoeckel, David Vincent, and Sandy Cuthbertson

Summary

There is an acute and persistent agricultural trade problem. Everybody knows that. Large costs to national budgets, chronic dependence of export industries on subsidies, and agricultural products wasting away in stockpiles are the visible evidence of policy failure. Yet little reform has occurred. At the Uruguay Round of multilateral trade negotiations, which commenced at Punte del Este in September 1986, the various ministers said the right things—"to halt and reverse protection and to remove distortions to trade." But already these declarations appear to have been cosmetic: so far the words speak louder than the actions.

Why is there so little progress towards the patently better set of policies available to governments? In nearly every case, national objectives for agriculture, whatever they might be, could be achieved by other policies at lower cost. The reason for the lack of reform lies in governments' lack of political will to tackle the issue. Political will changes as the public's perception of the issues changes. But the evidence of the costs of agricultural policies has not yet convinced people to demand reform from their governments. The evidence available now is largely based on the assessment of the initial effects of agricultural policies, assessments which tend to focus on what happens in the agricultural sector alone. But protection from agricultural imports and subsidies to agricultural exports result in taxes on other sectors. Surprisingly, there has been little effort to measure these costs to other sectors in an economywide framework. There has been no attempt to identify the full economywide benefits and costs of agricultural policies.

The troubles with agricultural trade are not an outcome of some unfortunate configuration of world events. They are the consequences of domestic policies. Logically, it is these domestic policies that have to change. In turn, the best way to enhance domestic policy is to appeal to self-interest. This can be done through greater public awareness of the real economic benefits and costs of policies. While virtually all the expert commentators on trade agree on this need for greater policy transparency, only rarely is it provided. This is the starting point for our project.

The studies making up this project show something well known to economists but not to the public at large: just measuring and reporting only the initial effects of a policy can be very misleading. The second-round and indirect effects may be much different, even to the point of reversing initial impressions. Instead of jobs being saved by agricultural protection they are being lost; instead of countries losing from liberalization they would gain. It is only when the second-round and indirect effects are taken into account that protection from imports is shown to be a tax on exports. So large has the sum total of these trade distortions become, distortions which go well past agriculture, that the macroeconomic performance of countries has been greatly impaired.

Ten separate studies by researchers around the world—all adopting an economywide view of the effects of agricultural liberalization—are reported in this volume. These studies cover the three largest industrial groupings—the European Community (EC), Japan, and the United States; the developing world considered as six types of economies; Korea as an example of a rapidly industrializing country; and Australia as an example of a country where there are large trade restrictions on sectors other than agriculture. While the orientation of each of these studies is domestic, the possibility that one country's policy might affect the choices of another is examined in a final study of what appears to lead the United States and the EC to engage in an agricultural trade war (table 1.1).

Industrial countries' liberalization of agricultural trade could have a dramatic effect on developing countries. Real incomes could increase by $26 billion. Significantly, classifying the developing world into six representative economies (following definitions of the World Bank), the Loo and Tower study finds that agricultural importing countries could gain from agricultural trade liberalization. There would be terms of trade losses for agricultural importers but these would be more than offset by improved efficiency of domestic resource use and a reduction in distorting taxes made possible by the real income and revenue increases. These good things would happen largely because, on average, agriculture tends to be taxed in each of the six types of developing economies. The taxed sector uses resources relatively more efficiently than the heavily subsidized industrial sectors. Indeed, one dollar's worth of transfer to developing countries from agricultural liberalization is equal to or better than two dollars' worth of direct foreign aid. Trade in this case is two times better than aid.

The gain to developing countries from industrial country liberalization would allow a substantial reduction in their public external debt, which, at present levels, is a problem for the major world banks. Liberalization would allow the poorest countries to reduce their external debt by 5 percent per year.

Developing countries, exporters and importers alike, have a strong interest in full agricultural liberalization. They should therefore get behind the U.S. proposals in the Uruguay Round of trade talks. The results of studies reported here show that if the industrial world really intends to assist developing countries, it should liberalize agricultural trade. Not only would world incomes grow, but debt burdens could be significantly reduced. That is, there are other ways to address debt problems of the third world besides debt for equity swaps and the like. Agricultural liberalization by the industrial world would accomplish more now, and in the long run, and should be a point of discussion for bankers, industrialists, and governments. An assessment of the impact of liberalization on developing countries must involve a consideration of what liberalization would do for the efficiency of domestic resource use. Just looking at the terms of trade effects misses the...