Reducing Agricultural Tariffs versus Domestic Support: What's More Important for Developing Countries?

Abstract

High levels of protection and domestic support for farmers in industrial countries significantly affect many developing countries, both directly and through the price-depressing effect of agricultural support policies. High tariffs - in both rich and poor countries - and domestic support may also lower the world price of agricultural products, benefiting net importers. Hoekman, Ng, and Olarreaga assess the impact of reducing tariffs and domestic support in a sample of 119 countries. Least developed countries (LDCs) are disproportionately affected by agricultural support policies. More than 18 percent of LDC exports are subject to domestic support in at least one World Trade Organization (WTO) member, as compared to only 9 percent of their imports. For other developing countries the figures are around 4 percent for both their exports and imports. So, the prevailing pattern of trade suggests the world price-reducing effect of agricultural domestic support policies may induce a welfare loss in LDCs. The authors develop a simple partial equilibrium model of global trade in commodities that benefit from domestic support in at least one WTO member. The simulation results suggest there will be large differences between LDCs and other developing economies in terms of the impact of a 50 percent cut in tariffs as compared to a 50 percent cut in domestic support. Developing countries as a group would suffer a welfare loss from a cut in support, while LDCs would experience a small gain. For both groups of countries, tariff reductions by WTO members - including own liberalization - will have a positive effect on welfare. The results show both the importance of focusing on tariffs as well as subsities, and the need for complementary actions to allow a domestic supply response to occur in developing countries if world prices rise. This paper - a product of Trade, Development Research Group - is part of a larger effort in the group to analyze the effects of trade-related policies on developing countries.

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