Towards Free Trade in Agriculture

Parikh, K.S., Fischer, G., Frohberg, K.K., & Gulbrandsen, O. (1988). Towards Free Trade in Agriculture. Dordrecht: Martinus Nijhoff Publishers. ISBN 90-247-3632-3

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Abstract

Agriculture seems to be a difficult sector to manage for most governments. Developing countries face tough dilemmas in deciding on appropriate price policies to stimulate food production and maintain stable, preferably low, prices for poor consumers. Governments in developed countries face similar difficult decisions. They are called upon to give income guarantees to farmers whose incomes are unstable and relatively low when compared to those in the nonagricultural sector. These guarantees often lead to ever-increasing budgetary outlays and unwanted agricultural surpluses.

High prices make new investments and the application of new technologies more attractive than world prices warrant, and a process is set in motion where technological innovation attains a momentum of its own, in turn requiring price policies that maintain their rates of return.

Surpluses are disposed of with subsidies in domestic markets or in the international market. Price competition reduces the market share of other exporters, who may be efficient producers, unless they are willing to engage in subsidy competition. This lowers export earnings and farm incomes or depletes the public resources of developing countries that export competing products. Retaliatory measures have led to frictions and further distortions of world prices.

Every so often the major agricultural exporters -- the USA, the EC, Australia, or Canada -- accuse one another of unfair intervention. Though they have agreed to discuss agricultural trade liberalization under GATT negotiations, if anything, the expenditure on farm support has continued to increase in both the EC and the USA.

Some developing countries do benefit from the subsidized disposal of surplus cereals on the world market. This, however, might be only a short-term gain. Low prices are a disincentive to their own producers and lead, in the long run, to an unsustainable dependence on imports, as appears to be the case in many parts of Africa. Also, these benefits of cheap cereals may not offset the loss of markets, such as the sugar market, which is important to a large number of developing countries.

Against that background and in the light of the fact that many countries have agreed to discuss agricultural trade liberalization under GATT, it is important to assess the consequences of agricultural trade liberalization. It should increase efficiency at the global level as countries adjust their production more in line with their comparative advantages. However, in the absence of compensating transfers, some countries may lose under liberalization. An assessment of efficiency gains at the global level and gains and losses of countries can provide some insight into the degree to which their own production and trade have become distorted and how large the adjustment costs may be. Several questions are relevant here: what if the developed market economies remove border protection? But also: what consequences can be expected from the removal of border protection by developing countries only? (This is an issue that can be usefully analyzed as it belongs to the regular package of adjustment policies recommended by the World Bank and the IMF.) What would be the impact of simultaneous liberalization by all market economies? Who would gain and who would lose?

This book reports on a study that explored these questions using a system of empirically estimated national agricultural policy models linked together through trade and capital transfers. A general equilibrium approach is followed for both the national models and the international linkage. Thus, behavioral responses of consumers and producers, as well as the responses of government policies to changes in world market conditions, are accounted for.

We call this system of models the Basic Linked System (BLS). It consists of 18 national models, two models of regions -- namely, the EC and the Council for Mutual Economic Assistance (CMEA) -- and 14 somewhat similar models of groups of countries. Together these cover all the nations of the world. We believe that the BLS is particularly suited -- at least, better than any other existing analytic tool -- for the analysis of issues related to agricultural trade liberalization and self-sufficiency.

The present study differs from other available studies on trade liberalization in combining all the following features: a general equilibrium approach is applied to both the national and international levels; most of the parameters are empirically estimated; a number of agricultural commodities are distinguished; nations are distinguished; and a rich variety of policy instruments for national governments is permitted, including tariffs, trade, quotas, taxes, transfers, and stock operations. The existence of these features can significantly alter policy conclusions derived from the analysis.

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