Market and welfare effects of Doha reform scenarios:

implications for Southeast Asia

Kym Anderson and Will Martin

Development Research GroupThe World Bank Washington DC

A new empirical study of the Doha Development Agenda

Part I: What’s at stake in the Doha Round?Part II: How far might Doha take the world towards global free trade?Part III: Lessons and implications, particularly for Southeast Asia

What differentiates our new study?Its point of departure is the WTO’s July 2004 Framework agreement It examines in detail each of the 3 agric pillars plus preferences, cotton subsidies, special and differential treatment, and NAMAAnd it ‘adds up’ the consequences of current policies and prospective Doha reforms using the new GTAP protection database for 2001

which includes, for the first time:• bound as well as applied tariffs• non-reciprocal as well as reciprocal preferential tariffs• key trade policy changes to the start of 2005

Why a strong focus on agriculture …

when the sector contributes <4% of global GDP and 9% of int’l merchandise trade?Because while OECD manufacturing tariffs have fallen by 9/10ths over the past 60 years to <4%, agric protection has risen and its applied (bound) tariffs now average nearly 5 (10) times manuf tariffs globally;And because the vast majority of the world’s poor rely on farming for a living

Why focus on agriculture (cont.)True, the harm to some DC farmers from OECD agric protection is reduced via non-reciprocal preference schemes such as ACP, EBA, CBI and AGOA But those schemes, like agric export subsidies, rely on undesirable exceptions to worthy WTO rulesAnd those schemes exclude some significant DCs (e.g. China, Vietnam) and so may harm more poor farmers (through trade diversion) than they help

Applied tariffs of importing regions, 2001(according to GTAP Version 6.05 database)

High-income countries

Developing countries

Agric & food 16 18

Textiles & apparel

8 17

Other merchandise

1 9

ALL MERCHANDISE

3 10

Applied tariffs of importing regions, 2001(according to GTAP Version 6.05 database)

Indonesia Thailand Vietnam Other Dev.

East Asia

Agric & food 5 30 37 14

Textiles & apparel

8 17 29 9

Other merchandise

4 8 12 4

ALL MERCHANDISE

5 10 17 5

Outline of presentationWhat’s at stake: what are the potential welfare gains from full global trade reform, by country/region, due to:

developed rel. to developing countries’ policies?agriculture relative to manufacturing policies?within agric, tariffs relative to export subsidies and domestic support?

How close could Doha get us to completely free merchandise trade, in welfare terms, based on July 2004 Framework agreement?Implications for ASEAN and other DCs

Modeling Doha reform packages using World Bank’s Linkage Model

Recursive dynamic CGE modelWe start with GTAP Version 6.05 protection and trade data for 2001 We project on-going reforms from 2001 to 2004 (Uruguay Round including ATC, EU25 enlargement, WTO accession for China etc.)Then we assume no further reform as global economy grows to 2015 (according to World Bank population, income, etc. projections), to get our global baseline scenario for 2015

Welfare cost of current protection policies by 2015

Larger than GTAP estimates as of 2001, because Linkage Model:

projects world economy to 2015includes some dynamicshas larger trade elasticities than GTAP model

Global cost of current tariffs and agric subsidies would be $278 billion p.a. by 2015

which is 0.7% of global income• Would be much higher if the model had a stronger trade-

growth linkage and included imperfect competition, economies of scale and an opening up of services markets

Contributions to welfare from removing all trade barriers and subsidies, post-UR, 2015

(per cent of global total)

Liberalizing Agriculture Textiles & Other All

Region: Benefitting

region: and food

processing clothing merchandise merchandise

High Income

High Income 35 0 2 38 Developing 9 5 2 16 Total 45 6 3 54

Developing High Income 5 5 19 29 Developing 9 3 2 16 Total 15 9 21 45

All Countries High Income 43 6 21 69 Developing 20 8 4 31 Total 62 14 24 100

Contributions to global welfare from removing the three agricultural pillars, post-UR, 2015

(per cent of global total gain from agric reform)

Liberalizing

Region: Benefitting

region: Market

access Export

subsidies Domestic

support TOTAL

High Income

High Income 60 4 5 69 Developing 20 -2 1 19 Total 80 2 6 88

Developing High Income 8 0 0 8 Developing 4 0 0 4 Total 12 0 0 12

All Countries High Income 68 4 5 77 Developing 14 -2 1 13 Total 92 2 6 100

Aside: Why not negotiate cuts in trade measures only and forget about agric domestic support?

Because the EU is the biggest export subsidizer, and it would insist on the US (the biggest domestic subsidizer) cutting its domestic support before agreeing to eliminate EU export subsidies (so as to share the political pain)?-- see next 2 two tables

Agric export subsidy rates, 2001 (%, as in GTAP database Version 6.05)

EU Norway

Switz US Japan

Sugar 73

Dairy 57 40 30 1

Rice 15 (?)

Beef 40 10

O. meat

10 7

C grain 11

Wheat 6

Share of PSE from domestic support (%, 2000-02, from OECD)

Share (%)

US 65

EU 43

Japan 10

Other OECD 25

Cost of current policies, by region (as % of GDP in 2015)

% %

Indonesia 0.8 Korea/Taiwan

3.5

Thailand 4.0 China 0.1

Vietnam 5.3 Other EA DCs

1.7

Singapore/HK

2.5 ALL DCs 0.9

ALL HICs 0.6

Factor price effects of current policies, by region (% in 2015)

Unskilled wages

Skilled wages

Capital

Indonesia 3.4 1.2 0.5Thailand 13.4 6.3 3.7Vietnam 23.3 15.1 8.8Korea/Taiwan

7.3 7.8 4.5

China 2.0 1.8 2.4Japan 1.5 2.4 1.2Other EA DCs

5.4 3.6 4.4

Key elements of the Doha Agenda as shown in the July 2004 Framework agreement

3 agricultural pillars (including cotton)Non-agricultural market accessServicesTrade facilitationSpecial and differential treatment (SDT) for developing and esp. least-developed countries (DCs and LDCs)

Prospective Doha packages

We focus on agric market access in particular

because it is by far the biggest potential contributor to global and DC welfare gains

So we assume no services reform, no new trade facilitation, but:

phase out of agricultural export subsidiesreduce agricultural domestic supportand cut agric and non-agric bound tariffs under various alternative market access packages

Agricultural market access

Tiered formula, as sought by Harbinson, for cutting bound tariffs (with SDT)

It yielded almost no gains to DCs• especially if 2% of products are exempted as ‘sensitive’

So we increased each cut by 10 percentage points

We compare it with a proportional cut of same average size for HICs and for DCsAnd we look at effects of imposing a tariff cap of 200%

Agricultural domestic support

Cut in bound AMS need not reduce applied support, because of binding overhang (with 1986-88 ref. prices)

and overhang can be increased by abolishing admin prices used to calculate market price support

We apply a tiered reduction in bound AMS

75% if AMS>20%, otherwise 60%• Leads to only 4 countries reducing support:

US 28%, Norway 18%, EU 16%, Australia 10%

Non-agric market access and SDT

50% cut in bound rates for high-income countries, 33% for DCs, 0% for LDCsWe also examine the effects of DCs (including LDCs) becoming full participants in Doha agric and NAMA cuts,

recalling from earlier Rounds that DCs only got what they gave, in terms of increased market access (see Finger 1974, 1976; Finger and Schuknecht 2001)

Services and trade facilitation

These areas offer great potential gains, especially for developing countries

See Hertel/Keeney chapter of our book

But few significant signs of commitment have been forthcoming yet

and quantification of their effects is problematic

Hence we assume zero changes for these items in our modeled Doha scenarios

Results from Doha agric reformTiered formula cut with SDT as per Harbinson gives the world $54 billion, but little goes to DCs

So we increased all cuts by 10 percentage points, which gave a $72 billion global gain

• Even then, only $7 billion go to DCs• & if HICs exempt just 2% sensitive products (DCs 4%),

global gain shrinks to $16 billion and DCs lose– although a 200% tariff cap reduces much of that shrinkage

If tiered formula is replaced by proportional one of same average cuts for HICs and for DCs, global gain is nearly as high ($64 billion)

Why bother to negotiate over a complex tiered formula?

Adding non-agric market accessAdding 50%/33%/0% cut to non-agric bound tariffs boosts global gain from agric tiered formula from $72 to $94 billion paThat $94 billion gets the world 1/3rd of the way to the potential gains from complete global free trade in merchandise (but that share is much smaller as % of gains

from removing also all services trade barriers, unless services markets are also opened up)

If DCs and LDCs forego SDT in market access, global gain goes up to $103 billion

Implications for DCs

Scenario 5 package would give DCs only 1/6th their potential gain from a move to global free trade ($14 b. out of $87 billion)Even if DCs incl. LDCs were to forego SDT, as in Scenario 6, their gain rises by only $1.7 b. To gain more, DCs with v. high tariff bindings such as Indonesia have to liberalize more

Isn’t it better to do that under Doha, so as to get reciprocity and/or more aid, than unilaterally?

DC welfare gains from Scenario 5

(percent change from baseline income in 2015)

-1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5

Rest of ECA

Mexico

Rest of Sub Saharan Africa

Bangladesh

Middle East and North Africa

Rest of East Asia

China

Rest of South Asia

Russia

Turkey

Rest of the World

India

Indonesia

SACU

Rest of LAC

Brazil

Thailand

DC welfare gains from Scenario 6(Percent change from baseline income in 2015)

-1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5

Rest of ECA

Mexico

Rest of Sub Saharan Africa

Bangladesh

Middle East and North Africa

Rest of East Asia

China

Rest of South Asia

Russia

Turkey

Rest of the World

India

Indonesia

SACU

Rest of LAC

Brazil

Thailand

DC gains from full liberalization(Percent change from baseline income in 2015)

-1.5 -0.5 0.5 1.5 2.5 3.5 4.5

Rest of ECA

Mexico

Rest of Sub Saharan Africa

Bangladesh

Middle East and North Africa

Rest of East Asia

China

Rest of South Asia

Russia

Turkey

Rest of the World

India

Indonesia

SACU

Rest of LAC

Brazil

Thailand

Other lessons and policy implications

Potential gains from further trade reform are hugeEven after UR and recent accessions to WTO and EU

Must find the political will for Doha success

DCs would gain disproportionately from reformNotwithstanding non-reciprocal tariff preferencesBut as much would come from South-South as South-North trade growth, hence imptc of DC lib’n too

After outlawing export subsidies, agric tariff cuts are the highest priority from a welfare viewpoint and if Doha is to be pro-development/pro-poor

Lessons and implications (cont)

Cuts in agric tariffs and domestic support bindings need to be large to get beyond binding overhangEven large cuts in agric tariffs do little if ‘sensitive’ and ‘special’ products are exempt

Unless a tariff cap of, say, 100% is enforced

DCs would have to make few cuts because of their huge binding overhang

So can afford to tone down their demands for SDT (and ‘special’ products) and trade it for greater access to HIC markets (& fewer HIC ‘sensitive’ product exemptions)

Lessons and implications (cont)Removal of cotton subsidies in US and EU would raise DC share of global cotton exports from 56% to 85%Adding non-agric market access to Doha package could double the welfare gains to DCs even with SDT, bringing global gains to 1/3rd of potential from full merchandise liberalization

And it helps balance the N-S exchange of ‘concessions’

Some LDCs lose slightly because they do not reform enough to get sufficient efficiency gains to offset their terms of trade losses