Number crunchers disagree on gains from trade

By Stewart Fleming

Date: 08/12/05

Economists who have crunched the numbers through their computer models do not agree on the possible effects of trade liberalisation.

An economic model developed by the World Bank predicts benefits of EUR 243 billion a year to the world economy by 2015 from full trade liberalisation. The Carnegie Endowment for International Peace predicts smaller gains of EUR 142.5bn a year, by the same date. The UK Treasury says the figure is EUR 848.5bn a year.

The three models make different assumptions. The World Bank includes limited 'dynamic' assumptions about improvements in rates of investment and productivity growth as a result of lowering trade barriers, the UK Treasury makes optimistic assumptions and the Carnegie Endowment none.

The models also take account of different possible outcomes from the trade talks.

Under a 'plausible Doha scenario' the gains fall to EUR 82.5bn (World Bank) and EUR 50bn (Carnegie).

If there is protection for even a limited number of 'sensitive' products, which is what the EU's agricultural protectionists are fighting for, then the gains drop again. Under the World Bank study, with 2% of agricultural products protected as 'sensitive', they fall to only EUR 33.1bn a year. The EU actually wants 8% protected, which wipes out any benefits at all for developing countries, according to the World Bank.

Carnegie's model picks out Brazil, among developing countries, as the big beneficiary of agricultural trade liberalisation with a small but significant increase in market share in the world market for agriculture and food products, followed by the rest of Latin America and Argentina. Indonesia and sub-Saharan Africa are the losers.

When it comes to liberalisation of trade in manufactured goods, under the Carnegie model's Central Doha Scenario, the run-away winner among developing countries with an increased share of world export markets is China with a 0.5% rise, followed by India and Vietnam.

Sandra Polaski of the Carnegie Endowment concludes that developing countries' worries about the WTO agriculture talks are well founded because most are home to subsistence farmers who have few other employment opportunities. The models do not capture the costs to them of lowering trade barriers. Many subsistence farmers will not be able to compete with global crop prices. Without tariff protection, lower prices from trade liberalisation could drive many subsistence farmers off the land, she says.

On the other hand, she predicts that Brazilian sugar and orange producers, West African cotton farmers and Thai rice farmers would prosper in a tariff-free world because they are internationally competitive.

Crucial to the Doha agriculture talks, Polaski says, will be the extent to which developing countries will be able to designate (and protect) certain special products, based on food security, livelihood security and rural development needs and how the 'flexible treatment' for such products promised in the framework agreement of July 2004 is interpreted.

The French think-tank CEPII (Centre d'Etudes Prospectives et d'Informations Internationales) points out in a research paper it published in August that "a growing body of quantitative analyses has challenged the idea that cutting agricultural tariffs and ending farm subsidies would benefit developing countries as a whole".

But authors of the World Bank study are less pessimistic. They say that their model shows that in developing countries farm output, income and employment would all increase under a Doha agreement on their assumptions. They insist that gains from further global trade reform are large and that developing countries could gain disproportionately, not least because the benefits from increased South-South trade could be as much as from South-North trade.

Article reports on the divergence of quantitative analyses of trade liberalisation some of which challenged the idea that cutting agricultural tariffs and ending farm subsidies would benefit developing countries as a whole. Article is part of a European Voice Special Report: 'WTO negotiations'.

WTO: The WTO: Ministerial Conferences: The Sixth WTO Ministerial Conference, Hong Kong, China, 13-18 December 2005 http://www.wto.org/english/thewto_e/minist_e/min05_e/min05_e.htm

---