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Thursday 17 Aug 2017 | 13:51 | SYDNEY
Thursday 17 Aug 2017 | 13:51 | SYDNEY

Winners and losers from free trade in agriculture



30 April 2008 15:29

Sam’s recent post drew attention to the important linkages between trade policy, agriculture and food security. Certainly, high food prices have propelled the issue of agricultural trade liberalisation back into the headlines, with many developing countries now forced to slash import barriers in order to lower prices for domestic consumers. This last development may well have delivered more agricultural liberalisation than the seven years (and counting) of Doha multilateral trade negotiations has so far achieved, although the international response, to date, hasn’t all been a good news story for freer trade in agriculture: in particular, a number of countries have imposed export bans on key food products, prompting the UN and the World Bank to warn of the adverse consequences. Still, how confident are we that free trade in agriculture would solve the food security problem for the world’s poorest people?

Disputes over liberalising trade in agriculture have, of course, been central to the Doha round of multilateral trade negotiations. This is hardly surprising given the agricultural sector remains one of the most distorted when it comes to world goods trade. The World Bank has estimated that almost two-thirds of the welfare gains that could accrue from dismantling all of the world’s merchandise trade barriers and agricultural subsidies would come from agriculture. And as this Bank report points out, agricultural development is particularly important for developing countries, since agriculture remains the largest employer, the largest source of GDP and the largest source of exports and foreign exchange earnings in many developing economies. 

About 75% of the world’s poor are reckoned to live in rural areas, with most of them dependent on agriculture. And although most studies tend to show that the bulk of global welfare gains from complete agricultural liberalisation in absolute terms would accrue to the developed world (think of those European and Japanese consumers who are now heavily subsidising their farmers), economists at the Bank have estimated that full liberalisation could raise perhaps 32 million of the world’s population out of poverty (defined as those earning less than $1 a day).

However, while there is relatively little debate between trade economists over the proposition that free trade in agriculture would be positive for global welfare, the impact of liberalisation on some of the world’s poorest economies is more contentious, at least when it comes to food security. This is because a lot of economic modelling suggests that the removal of all agricultural subsidies and protection could lead to significant price increases for most foodstuffs. One set of estimates suggests that liberalisation of the market for rice could raise average export prices by around 33%, for example. And higher food prices could be bad news for poor, food-importing developing countries.

Arvind Panagariya argues in this excellent paper on agricultural liberalisation and developing countries that agricultural output and export subsidies by the EU actually work to the benefit of those poor developing economies that are net food importers (see fallacy three out of Panagariya’s list of six). With liberalisation likely to lift the prices they pay, and so swell their import bills, the result of freer trade in agriculture for these economies, at least in the short run, would be a decline in real incomes.

Which developing countries could be losers from liberalisation? Panagariya’s answer is to point out that since many developing countries are net food importers, there are a significant number of potential losers, including in particular many Sub-Saharan African economies. On the other hand, economists at the World Bank have tended to be more optimistic about the likely gains from agricultural trade liberalisation. For example, this recent working paper argues that while it is true that most low income economies are net food importers, in many cases their food imports are negligible, and since these countries currently tend to be net exporters of non-food agricultural commodities, its likely that a change in the relative price of food would see them shift more resources into food production, so changing their trade profile, leaving the number of losers looking much lower than a simple estimate based on the current number of net food importers. And this paper presents some modelling suggesting that full-scale multilateral liberalisation would still benefit Sub-Saharan Africa, despite the Panagariya critique. 

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