jep.22.1

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DispellingSomeMisconceptionsaboutAgriculturalTradeLiberalization

StephenTokarick

Tosaythatmarketsforagriculturalcommoditiesarehighlydistortedwould

beanunderstatement.High-incomecountriesemployadizzyingarrayofpoliciestosupportfarmincome,suchasimporttariffs;tariff-ratequotas(inwhichimportsuptoacertainlevelaresubjecttoagiventariffrateandimportsabovethequotalimitaresubjecttoadifferent,usuallyhigher,tariffrate);subsidiesoninputs,outputs,andexports;anddirectpaymentstofarmers.NicholasStern(2002),pastchiefeconomistoftheWorldBank,hasarguedthat“OECDsubsidiesexceedingUS$300billionayeararenotonlyverycostlytoOECDtaxpayers,butmoreimportantly,imposeahighburdenonfarmersandruralhouseholdsindevelopingcountries.”StiglitzandCharleton(2005,p.120,note11;seealsop.50)state:“TotalOECDspendingonagriculturalsubsidiesismorethanUS$300billionperyear.”Manyothershaveechoedthisnumber(forotherexamples,seeGoldinandReinert,2006;StuartandFanjul,2005),oritsimplicationthatagriculturalsubsidiesfromhigh-incomecountriesamounttoabout$1billionperday.OneU.K.economistputthisestimateinvividperspective:“[Y]oucouldflyallthecowsinFrancearoundtheworld,businessclass,forthesamecostoftheEuropeanUnion’sagriculturalsubsidies”(Harcourt,2004).Agriculturaltradepoliciesinrichcountriesarecertainlycostlyandinefficient,butmanyofthecommonclaimsaboutthemagnitudesofthesupportandtheeconomiceffectsofthesepoliciesarenotgroundedinsolidfactorsoundeconom-ics.Thispaperbeginswithalookatthedataonpatternsofagriculturalsupportacrosscountries.Agriculturalsubsidieshavereceivednearlyallofthepublicattention,perhapsbecauseitisembarrassingtorevealhowmuchmoneyOECD

yStephenTokarickaSeniorEconomist,ResearchDepartment,InternationalMonetaryFund,Washington,D.C.Hise-mailaddressis͗stokarick@imf.org͘.

JournalofEconomicPerspectives—Volume22,Number1—Winter2008—Pages199–216countriesspendtosupportsuchasmallsectoroftheireconomies.Whileagricul-turalsubsidiesareinefficient,theirmagnitudehasoftenbeenexaggeratedinthepublicdiscussion.Whiletheaggregatevalueofallfarmproducersupportap-proaches$300billion,“subsidies”and“spending”directlylinkedtopricesandoutputareactuallylessthanhalfthattotal,whileotherformsofsupport,suchasimporttariffsand“decoupled”assistancethatisnotlinkedtolevelsoffarmproductionareactuallymoreimportant.Anopeningdiscussionofthemechanicsofagriculturalsupportwillsetthestageforthenextpartofthepaper,whichdiscussestheeconomiceffectsofagriculturaltradeliberalization,definedtobetheremovalofallformsofagricul-turalsupport.Theimplicitorexplicitargumentthatoftenfollowshardupontheheelsoftheinflatedestimatesofthesizeofhigh-incomecountryfarm“subsidies”isthatthesupporttofarmersinhigh-incomecountriesisextremelydamagingtopoor,developingcountries—evenmoredamagingthantariffsleviedagainstdeveloping-countryexports.However,theeffectsofliberalizingtradeinagricul-turalproductsislikelytobebothsmallerandmoreheterogeneousthansuchstatementssuggest.Somelow-incomecountriesarenetexportersofagriculturalproducts;othersarenetimporters.Thedegreeofsubstitutabilitybetweenforeignanddomesticagriculturalproductsalsovariessubstantially.Thosewhoopposeagriculturaltradeliberalizationhavetheirownfavoritemisstatements.OnecommonclaimoftenmadebyEuropeantradenegotiatorsisthatifhigh-incomecountriescutagriculturaltariffsworldwide,thisstepwoulderodethespecialtreatment—oftencalled“tradepreferences”—thathigh-incomecountriescurrentlymakeavailabletomanyofthelowest-incomecountries.Asaresult,theyarguethatthelowest-incomecountriescouldendupworseoffasaresultofagriculturaltradeliberalization.However,analysisshowsthatthemagni-tudeofthiseffect,ifitexistsatall,islikelytobeverysmall,andnotnearlyenoughtocounterbalancethemorepositivebenefitsofagriculturaltradeliberalization.Thispaperwilldiscusstheeconomicsofagriculturaltradeliberalization,andindoingso,itwillattempttodispelsomeofthemisconceptionsthathavebecomepartofthediscussiononhowtoreformagriculturaltradepolicies.Thediscussionoftheeconomiceffectsofdifferenttypesofagriculturalsupportraisesanumberofpolicyquestions:Whogainsandlosesfromliberalization?Whatisthebestwaytoreformagriculturalsupport?Whataretheeffectsofagriculturaltradeliberalizationonthepooresteconomies?Thispaperprovidesanswerstothesequestions.

WhatFormsofAgriculturalSupportDoCountriesUse?Eachyear,theOrganizationforEconomicCooperationandDevelopment(OECD)publishes“producersupportestimates”thatcapturealltransfersfromconsumersandtaxpayersthatsupportagriculturalproducers,bothinOECDcountriesandinanumberofnon-OECDcountries.Supporttoproducersis