The Global Impacts of Farm Policy Reforms in Organization for Economic Cooperation and Development Countries

Multilateral negotiations on agricultural trade liberalization will require World Trade Organization (WTO) members, including Organization for Cooperation and Development (OECD) countries, to improve market access and to reduce domestic support and export subsidies. In this paper, we analyze the effects of agricultural policy reform by three OECD members who are major economies in world agricultural trade–the United States, the European Union (EU), and Japan. We use a multi-country computable general equilibrium (CGE) model with detailed treatment of the agricultural trade and domestic policies in OECD countries. Our framework takes into account the differences in production impacts among traditional, commodity-linked production subsidies and other types of domestic subsidies that recently have become more important in countries’ farm support programs. We capture the operational features of farm support programs, allowing some domestic subsidies to insulate producers from market price changes while treating other payments as fixed, lump sum subsidies. When domestic policies insulate producers from market price signals, they dampen production responses to market access reforms in the domestic economy and to reforms in both partner countries. We find that this linkage leads to dramatic reductions in a country’s farm program costs when another country eliminates its support unilaterally. Given the links among domestic support programs in OECD countries, we also find that multilateral reform leads to smaller output adjustments than unilateral reform. In the next section, we describe agricultural trade and domestic policies in the three countries, differentiating them by their treatment or “color” under the global trade rules of the WTO. Next, we describe how crop-linked subsidies and other types of domestic support policies can affect production. We then simulate agricultural policy reforms by the three countries, and discuss the effects on their agricultural production, trade, and farm program expenditures.