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Tariff Reform Could Deliver Annual Global Gains of $300 Billion by 2015, Says World Bank Study

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Press Release No:2006/147/DEC
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Contact:  Christopher Neal (202) 473-7229

Cneal1@worldbank.org

 

 

WASHINGTON D.C, November 9, 2005—Abolition of tariffs, subsidies and domestic support programs would boost global welfare by nearly $300 billion per year by 2015, says a new World Bank research study, Agricultural Trade Reform and the Doha Development Agenda. Close to two-thirds of these gains would come from agricultural trade reform, because agriculture is so much more distorted than other sectors.

           
“Within agriculture, market access barriers are the key. Deep reductions in agricultural tariffs would deliver 12 times the gains that would be achieved by abolishing export subsidies and trade-distorting domestic support to agriculture,” said Will Martin, Lead Economist in the Bank’s trade research group and the study’s co-editor. “Making agricultural markets more accessible is the most fundamental reform that needs to emerge from the Doha round of WTO negotiations.”

           
The study finds that developing countries would receive 45 percent of global gains from completely freeing all merchandise trade. As developing countries have a much smaller share of global wealth, their potential gains from trade liberalization are disproportionately large, amounting to more than twice their share of global gross domestic product.

           
Countries should resist the political temptation to exempt ‘sensitive and special’ products from tariff cuts,” warns Martin.If a few of these are unavoidable, tariff caps should be imposed on them. Otherwise, exemptions will simply derail the market access effort—however large the cuts in tariffs—and most of the potential welfare gains from global agricultural reform will simply not materialize.”

           
If just two percent of agricultural tariff lines in developed countries (and four percent in developing countries) are classified as “sensitive” or “special”, and thereby subject to only a 15-percent tariff cut, the welfare gains to developing countries from global agricultural reform would virtually disappear, the study finds.

           

The study also emphasizes that cuts to tariffs can be deceptive because the reductions are in bound tariffs, which are legal ceilings or limits, and not to the tariffs actually applied. ‘Binding overhang’—a common situation in which bound tariffs are much higher than actual tariffs—can often absorb even a very large cut in bound rates. To have an impact on actual applied tariffs, bound tariff reductions will need to be deep enough to affect the actual rates applied, the study says.

        
To bring the average global applied agricultural tariff down by one-third, the study recommends cuts of at least 75 percent in the highest bound tariffs.

           
The study includes a chapter by Daniel Sumner on the Cotton Initiative, which has been placed at the center of the Doha negotiations by four African countries. The study shows that removing cotton subsidies, as part of freeing all merchandise trade, would expand cotton exports from Sub-Saharan Africa by 75 percent. The developing countries’ share of global cotton exports, meanwhile, would rise from the current 56 percent to 85 percent by 2015.

           
In addition to cutting tariffs, the Bank study makes the case for developed countries to discipline their domestic agricultural support commitments. The already-promised 20 percent cut in the bound support rate is a start, but deeper reductions are needed before actual support begins to fall. The European Union (EU) has a ceiling on domestic support (aggregate measures of support or AMS) at Euros 67 billion, but provided subsidies of only Euros 13 billion in 2001. It could cut its subsidy ceiling by 80 percent before having to reduce direct subsidies.

           
Opening developed countries’ agricultural markets will have far-reaching effects,” says the other co-editor of the study, Kym Anderson.  Developing countries will be then more inclined to reciprocate by opening their own markets. That in turn will accelerate trade within the developing world, which is important because benefits to developing countries could be as much from South-South as from South-North trade reform.”

           
The study’s findings prompt a strong recommendation for trade reform by developing countries. These countries, it concludes, risk losing much of their potential gains if they fail to keep pace with reforms being made by their trading partners. While upper middle-income countries could consider giving least developed countries duty-free access to their markets, the study encourages them to reduce instead their tariffs on a Most Favored Nation (MFN) basis so as to avoid wasteful trade diversion.

           
While the study focuses on agricultural reform, it also recognizes the importance of improving market access for non-agricultural merchandise, especially in textiles and clothing. “Adding a 50 percent cut to non-agricultural tariffs by developed countries and 33 percent by developing countries to the cuts in agricultural tariffs would boost by 80 percent the gain from the Doha Round for developing countries,” says Anderson.

           
This is especially important for poverty reduction in Sub-Saharan Africa, where most of the world’s poorest people will live in 2015. The study projects that poverty could be reduced by six percent in this region with full merchandise liberalization, a step closer towards the first of the Millennium Development Goals, that is, to reduce poverty by half by 2015.

           
A major concern of the developing countries’ “G-90” group is that multilateral trade liberalization will erode preferences they enjoy through trade agreements with developed countries. A chapter by Bouet, Fontagne and Jean suggests that preference erosion might not be as large an issue as commonly assumed, if developing country commitments to greater trade reform are rewarded by increasing aid to support their trade expansion.

           
They conclude that “aid for trade” offers a path for developing countries seeking to trade their way out of poverty, as well as being a potentially more efficient way for developed countries to assist people in low-income countries than the current systems of tariff preferences—provided that governments spend this aid on pro-poor initiatives. Supporting the ability of the poorest countries to take advantage of new trade opportunities and to cope with any transitional adjustment costs from liberalization is also the rationale behind the major effort of the World Bank and others to increase aid for trade.

           
Finally, the study finds that with liberalization, farm output and employment will grow in all developing regions. It also shows that agriculture in developed countries will not be decimated, contrary to claims of vested farm interests in those countries.

 

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