Resolved: That the United States should substantially change its federal agricultural policy.

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Source: American Journal of Agricultural Economics, August 2000 v82 i3
p729.

Title: WHAT HAS THE GATT/WTO AGRICULTURAL AGREEMENT ACTUALLY DONE?:
DISCUSSION.
Author: WILL MARTIN

Full Text COPYRIGHT 2000 American Agricultural Economics Association

The two papers presented in this session address an extremely important question and make a substantial contribution to our knowledge. A great deal of ex-ante work was done on evaluating the impact of impacts of the Uruguay Round Agreement on Agriculture (URAA), and now, after more than five years, it is surely time that we began to assess what was actually achieved.

An important contribution of the papers is their discussion of the subtleties of the policy changes that were introduced as a consequence of the Round. They make clear that many of the provisions of the Uruguay Round have not had the consequences that might have been predicted for them on the basis of the professed objectives of the reforms, and highlight the need for care and sophistication in interpreting the consequences of trade agreements. Another contribution of the papers is initial attempts at ex-post quantification of the consequences of the reforms, a quantification that proves more difficult than might be expected given the nature of the policy reforms. After all, the policy reforms being considered are traditional reforms of the market-opening type, not the newer and more difficult reforms designed to restrict the use of standards as protection, or to ensure consistency between trade and environmental policies.

The case studies of rice and wheat provided in the two papers highlight a number of features of the URAA that both complicate its evaluation and reduce its effectiveness relative to a reform that improved economic efficiency and brought agriculture fully into consistency with GATT rules. This was, after all, a major reform which, at face value, reduced protection levels for agriculture by 36% in developed countries and 24% in developing countries. The authors of the two well-chosen case studies in this session highlight at least five weaknesses in the Uruguay Round agreements of relevance to agricultural trade:

1. Universal tariffication did not result in low and stable tariffs for agricultural products. Many tariff bindings agreed in the Uruguay Round are well above the levels that countries would choose to apply, leaving opportunities for countries to vary their tariff rates. This does not mean that the introduction of bindings is unimportant--but does make it much harder to evaluate the consequences of reform than in the textbook case of a fixed tariff (Martin and Francois).

2. Restraints on internal support measures do not limit spending by restraining support prices relative to the economic value of agricultural products (given by world market prices).

3. Tariff rate quotas introduced in the Round did not necessarily increase imports above levels that would otherwise have prevailed. In many cases, these imports have merely re-labelled imports that would previously have come in under other quotas. Rice imports to Japan and Korea are, however, solely a consequence of the URAA and the creation of sizeable imports to these markets was identified by Hathaway and Ingco as a key gain from the URAA.

4. The benefits of eliminating variable import levies were undermined by allowing continuing use of tariffs linked to domestic support prices.

5. The new rules on state trading have not greatly strengthened the disciplines on state trading enterprises. As Sumner and Lee point out, they allow Japan to buy rice but largely keep it isolated from the domestic market.

In addition, the case studies illustrate another problem both for policy and for evaluation -- the difficulty of knowing what is, in reality, a decoupled policy. Sumner and Lee conclude that procurement prices in Korea have essentially zero impact because they are infra-marginal. While these subsidies do not affect the marginal price received by a farmer, they are relevant to the marginal decision of staying in agriculture or leaving the sector and so can be expected to influence the long run supply of resources to the sector.

When they turn to formal testing, I feel that Sumner and Lee's t-test approach is too pessimistic in its assessment of the difficulties involved in identifying impacts of the Uruguay Round. Their numerical example is based on the unconditional variance of prices, when what is relevant for a what-if question of this type is the conditional variances. The unconditional variance of prices includes variation due to shocks to exogenous variables that can, in principle, be removed to allow an evaluation of the impacts of the Uruguay Round alone. Further, the prices of commodities are subject to secular changes resulting from changes in technology and changes in global factor endowments that could potentially make simple before-and-after price comparisons extremely misleading.

The empirical evaluation of impacts on rice prices provided by Sumner and Lee deals neatly with these concerns by focusing on the differential behavior of indica and japonica rice prices. Technological change in the production of these two types of rice seems likely to proceed at similar rates, and weather and other shocks to the two markets seem likely to affect them in similar ways. If this is indeed the case, then taking the ratio of their prices should help reduce the spurious variation and allow us to focus on changes in levels, and in variability, that are more directly conditional on the sizeable market change of interest.

[Graphic omitted]Deepening of the reforms begun in the Uruguay Round could clearly contribute substantially to policy transparency and our ability to identify the impacts of reform. If we view the political economy process that generates protection as generating a distribution of protection outcomes such as that presented in figure 1, then the introduction of a tariff binding can be shown to reduce both the mean and the variance of protection (Francois and Martin) by mapping the protection outcomes above the binding, B onto the point B, and reducing the mean tariff from [[mu].sub.0] to [[mu].sub.1]. If the Uruguay Round tariff bindings are reduced from their current high levels, both average protection rates and the variance of protection will fall. Eventually, reductions in tariff bindings will be effectively one for one with reductions in tariff bindings and protection levels will be effectively fixed. Clearly policy transparency is greater in this situation, and economists' ability to distinguish policy impacts is much gr eater.

The message is, of course, clear. The process of reform must be continued as quickly as possible both to yield real economic benefits to the world economy, and to save economists the embarrassment -- evident in this session -- of finding it difficult to evaluate the consequences of reforms even five years after the event.

Will Martin is acting research manager, trade, The World Bank, Washington, D.C.

References

Francois, J., and W. Martin. "Multilateral Trade Rules and the Expected Cost of Protection." Discussion paper 1214. London: Centre for Economic Policy Research, 1995.

Hathaway, D., and M. Ingco. "Agricultural liberalization and the Uruguay Round." The Uruguay Round and the Developing Countries. W. Martin and L. A. Winters, eds. Cambridge UK: Cambridge University Press, 1996.

Martin, W., and J. Francois. "Bindings and Rules as Trade Liberalization." Quiet Pioneering: Robert M. Stern and His International Economic Legacy. K. Maskus, P. Hooper, E. Leamer, and J. D. Richardson, eds. Ann Arbor MI: University of Michigan Press, 1997.

 
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