AgDM newsletter article, January 2004
by Daryll E. Ray, Blasingame Chair of Excellence in Agricultural Policy, Institute of Agriculture, University of Tennessee, and director, UT Agricultural Policy Analysis Center, 865-974-7407; dray@utk.edu; http://agpolicy.org/
In the wake of the collapse of the World Trade Organization
(WTO) talks in Cancun in mid-September a number of news reports have referred
to a World Bank Report that estimates that “a deal to lower global trade barriers
could add more than $500 billion a year to global incomes by 2015, lifting
144 million people out of poverty.” These results are based on a “pro-poor”
scenario that is reported in 2003 Global Economic Prospects: Realizing the
Development Promise of the Doha Agenda.
The World Bank’s “pro-poor” scenario assumes that all developed nations reduce
their agricultural tariffs to a maximum of 10 percent and tariffs on other
goods to 5 percent while all developing nations reduce agricultural tariffs
to a maximum of 15 percent and other goods to 10 percent. In addition, payments
to producers would be decoupled from production. “The ‘decoupling’ part of
the scenario is achieved by removing all domestic support in agriculture input
and output subsidies and payments to land and capital. These would be replaced
by direct payments to farm households.”
The prospect of a $500 billion income gain, and the lifting of 144 million
people out of poverty got me to wondering how this feat would be accomplished
and what its impact would be on agricultural production in various countries
of the world. Because one of the main issues at Cancun was the Agreement on
Agriculture and the call for support reduction, I assumed that changes in
agriculture would be a significant component of the pro-poor scenario. Indeed,
$358 billion of the gain comes from agriculture of which $240 billion would
accrue to low and middle income countries.
For a change of this magnitude to occur, significant adjustments would need
to take place in the developed countries. The effect of this policy change
would be felt differently in various countries and regions around the world.
It appears that one of the areas that would experience the greatest change
under this trade liberalization scenario is the European Union (EU).
Right now, the EU is just barely a net exporter of major field crops. Aggregating
across corn, barley, wheat, soybean, rapeseed, sunflower seed, and rice, over
the last five years the EU annually consumed an average of 140 million metric
tons of these commodities. While she imports and exports various amounts of
individual crops, in total, EU exports averaged about 4 million tons of major
crops more than it imported.
The results of the study’s “pro-poor” scenario show a decline in total European
crop and livestock output of 30 percent below baseline projections for 2015.
Break-outs of individual commodities were not published in the World Bank
report but a study published by Iowa State University on a similar application
of the World Bank’s model does provide commodity detail.
Based on the more detailed information in the Iowa State study, we have estimated
the crop-output implications from the World Bank’s reported total drop in
EU agricultural output of 30 percent for the pro-poor scenario. The results
are staggering.
In the case of wheat, this estimation approach suggests that the “pro-poor”
trade liberalization agenda would result in the loss of 26.4 (60 percent)
million of Europe’s 44 million wheat acres by 2015. This would transform Europe
from a net wheat exporter to a significant importer.
In other grain production, Europe would lose 18.9 (70 percent) of its 27 million
acres devoted to the production of other grains. With oilseeds the corresponding
drop would be 6.2 million acres (59 percent) out of 10.5 million acres. In
both of these cases Europe would be a significant net importer. The imports
would come from lower cost producers elsewhere in the world.
According to our calculations, the World Bank study implies that the relatively
self-sufficient EU would become dependent on imports for two-thirds of its
grain and oilseeds. Europe would return to the same kind of ship-to-mouth
existence that it experienced following WWII. It was this ship-to-mouth to
existence that led to the establishment of the European Common Agricultural
Policy (CAP) in 1962.
Can this be? Do we really think that the EU will reduce its total acreage
of wheat, oilseeds, and other grains by 63 percent or 51.5 million acres in
the next decade under this or any other trade liberalization scenario?
As one who has worked with economic simulation models for over thirty-five
years, I can understand how the World Bank’s model, that views the world “as
one large field” to use ADM’s words, would produce these results. As a policy
analyst, however, I find it extremely hard to believe that the French and
other Europeans would be content to sit idly by while EU’s major field crop
production drops by nearly two-thirds.
Again, I ask, can this be? Are we missing something here? Can the real-world
adjustments that would be required to achieve a $358 billion agriculturally
based increase in global income from trade liberalization be reasonably expected
to occur? Perhaps, but what a gigantic departure from previous adjustment-experience
it would be.