We may be living in a high-tech world but agriculture remains the dominating sector in the Doha negotiations of the World Trade Organization (WTO). For almost a decade, trade diplomats and ministers have been striving for a comprehensive deal that would cut tariffs for all goods, discipline regulatory barriers to trade in services and liberalize agriculture. Over and again, the entire talks were delayed and even suspended due to inextricable conflicts on agriculture. Most strikingly, a key ministerial meeting in 2008 collapsed over technical details of an escape clause that would allow developing countries to renege on their agricultural tariff reductions in the case of import surges.
The influential Peterson Institute estimates the potential GDP gains from a Doha agreement to range between $300 billion and $700 billion annually – for the 22 leading trading nations alone. Such figures cannot capture the real boost that new market opportunities would give to the animal spirits of the ailing world economy. Nor do they account for the environmental benefits that would arise from the abolition of harmful subsidies, the exchange of environmentally preferable products and enhanced availability of cutting-edge services, for instance for waste-water treatment. If governments are prepared to risk these manifold gains over agriculture, the economic implications of the tabled liberalization in agriculture must be tremendous. Or so one might think.
The tariff cutting formula seems indeed ambitious at first sight: the higher the tariffs, the stronger the reductions – with tariffs in developed countries above 75% to be scaled back by 70%. This compares favorably with the Uruguay Round concluded in 1994 and so far the only multilateral discipline on agricultural tariffs. Back then, the average reduction expected from developed countries was a more modest 36%. But countries have the right to designate a share of their tariff lines as sensitive, allowing them to soften the impact of the tariff cutting formula on those products where trade volumes and tariffs are highest.
Developing countries managed to secure even gentler treatment. Their tariff cutting formula is less demanding and they can designate more tariff lines as sensitive. In addition, they can categorize products as special and exempt them from any tariff cut. For most developing countries, however, these exceptions are not even needed to shield existing policies: their tariff rates as bound in the WTO, which are the subject of the cutting formula, significantly exceed the rates they actually apply. Brazil’s average bound tariff amounts to about 40%, whereas its applied average is a mere 4%, and India’s bound tariffs tower applied levels by at least 70 percentage points. Only very steep multilateral cuts would create new market access in countries like these.
The subsidy disciplines outlined in the draft agreement are equally feeble. The would-be phase-out of export subsidies is celebrated as a major achievement. But the economic relevance of this instrument has long been declining. The EU paid less than € 1 billion of export subsidies in 2008. Domestic pressures are strong to do away with them altogether, regardless of any Doha deal, as they are criticized for wasting tax payers’ money and harming poor farmers abroad. The negotiating draft also stipulates reductions in other trade-distorting subsidies, such as payments for production or farm modernization. Again, these disciplines are too weak to trigger major policy reform in the US and the EU that are handing out the bulk of such payments.
The real driver of subsidy reform will not be any negotiations in far-away Geneva but fiscal and environmental imperatives at home. With public debts soaring in the wake of the financial and economic crisis, governments will find it ever harder to justify lavish farm subsidies. At the same time, rising concerns about water quality and availability, biodiversity and climate change will force governments to harness their shrinking agricultural budgets to promote sustainable farming. This puts a double squeeze on the traditional schemes that stimulated production and supported farm incomes.
The Doha negotiations are not the decisive determinant of future prices for agricultural products on the world market. Global food demand will be boosted by population and income growth. The supply side will benefit from renewed attention to agricultural research and innovation. Numerous initiatives attempt to spur production in developing countries through enhanced farm advisory services and better-functioning markets, especially for land. Climate change endangers farming in many regions – but it raises productivity in others. India might decide to follow the lead of other developing countries and open its vast market to imports, and Russia will develop into a major food exporter. Developments like these will drive future food and land prices and shape the profits of the agricultural supply chain, from fertilizer and seed producers to processors and traders.
Valentin Zahrnt - Research Associate at the European Centre for International Political Economy (ECIPE) sand Editor of www.reformthecap.eu
