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OECD Domestic Support and the Developing Countries

  • Dimaranan, Betina
  • Hertel, Thomas W.
  • Keeney, Roman

This paper aims to shed light on the potential interests of developing countries in reforms to domestic support for agriculture in the OECD economies. In order to accomplish this goal, we begin by reviewing the literature on the impacts of domestic support on key variables, including farm income, in the OECD economies themselves. We then proceed to revise the standard GTAP Model of global trade, based on recent work at the OECD, in order to permit it to better capture these impacts. A series of stylized simulations are subsequently offered to illustrate the differential impacts of alternative types of domestic support. These suggest the possibility of policy re-instrumentation, whereby farm income is stabilized in the face of cuts to overall support levels by shifting the mix of subsidies away from the more trade-distorting instruments which also tend to be ineffective tools for boosting farm incomes. We then explore in considerable detail the mechanisms by which OECD agricultural reforms affect developing country welfare. The primary channel for such effects works through the terms of trade which in turn depend in part on whether a country is a net exporter or a net importer of the affected OECD products. Long term support for agricultural program commodities in OECD countries, coupled with relative taxation in many developing countries, has left the latter increasingly dependent on imports of these subsidized products. This has, in turn, made them more vulnerable to agricultural reforms that raise these prices. As a result, we find that an across-the-board, 50% cut in all domestic support for OECD agriculture leads to welfare losses for most of the developing regions, as well as for the combined total group of developing countries. The 50% cut in domestic support also results in large declines in farm incomes in Europe, and, to a lesser degree, North America. This makes such a reform package an unlikely political event. An alternative approach to reforming agricultural policies in the OECD would be to focus on broad-based reductions in market price support. This has already been occurring in the EU, in particular, where domestic support has increasingly replaced border measures. As demonstrated in this paper, the basic economic principles of agricultural support policies suggest that a shift from market price support to land-based payments could generate a “win-win” outcome whereby farm incomes are maintained and world price distortions are reduced. This is the direction charted by the OECD in its recent “Positive Reform Agenda” for agriculture. We formally examine such an agricultural reform scenario, implementing a 50% cut in market price support for OECD agriculture, with a compensating set of land payments designed to maintain farm income in each of the member economies. This comprehensive reform scenario results in increased welfare for most developing countries, with gains on other commodities offsetting the terms of trade losses from higher program crop prices. We conclude that developing countries will be well advised to focus their efforts on improved market access to the OECD economies, while permitting these wealthy economies to continue – indeed even increase – domestic support payments. Provided these increased domestic support payments are not linked to output or variable inputs, the trade-distorting effects are likely to be small, and they can be a rather effective way of offsetting the potential losses that would otherwise be sustained by OECD farmers. This type of policy re-instrumentation will increase the probability that such reforms will be deemed politically acceptable in the OECD member economies, while simultaneously increasing the likelihood that such reforms will also be beneficial to the developing economies.

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Paper provided by Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University in its series GTAP Working Papers with number 1161.

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Date of creation: 2003
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Handle: RePEc:gta:workpp:1161
Note: GTAP Working Paper No. 19
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  1. Abler, David G & Shortle, James S, 1992. "Environmental and Farm Commodity Policy Linkages in the U.S. and the EC," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 19(2), pages 197-217.
  2. Harrison, Glenn W & Rutherford, Thomas F & Tarr, David G, 1997. "Quantifying the Uruguay Round," Economic Journal, Royal Economic Society, vol. 107(444), pages 1405-30, September.
  3. Joe Dewbre & Jes�s Ant�n & Wyatt Thompton, 2001. "The Transfer Efficiency and Trade Effects of Direct Payments," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 83(5), pages 1204-1214.
  4. Lewell F. Gunter & Ki Hong Jeong & Fred C. White, 1996. "Multiple Policy Goals in a Trade Model with Explicit Factor Markets," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 78(2), pages 313-330.
  5. Martin, W. & Winters, L.A., 1995. "The Uruguay Round and the Developing Countries," World Bank - Discussion Papers 307, World Bank.
  6. Ianchovichina, Elena & Martin, William, 2003. "Economic impacts of China's accession to the World Trade Organization," Policy Research Working Paper Series 3053, The World Bank.
  7. Rae, Allan N. & Strutt, Anna, 2003. "The Current Round of Agricultural Trade Negotiations: Should We Bother About Domestic Support? Technical Annex," Estey Centre Journal of International Law and Trade Policy, Estey Centre for Law and Economics in International Trade, vol. 4(2).
  8. Hertel, Thomas W. & Will Martin, 1999. "Would Developing Countries Gain from Inclusion of Manufactures in the WTO Negotiations?," GTAP Working Papers 397, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University.
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