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Economic SYNOPSES short essays and reports on the economic issues of the day 2003 ■ Number 4 Aid, Trade, and Agriculture Michael R. Pakko he current round of multilateral trade negotiations among product prices are depressed by farm-support programs in indusmembers of the World Trade Organization (WTO)— trial countries. launched in Doha, Qatar, in 2001—has been termed the Because the costs of farm-support programs are diffuse, the Doha Development Agenda, signifying the intention to focus on benefits of eliminating these programs would be dispersed widely development objectives in the world trading system. One of the around the world. A recent International Monetary Fund study most important and difficult issues in that agenda is the reform calculated the potential gains of eliminating all agricultural supof agricultural policies. Specific reform proposals and objectives port, in both industrial and developing countries: Worldwide, are due to the WTO’s Committee on Agriculture March 31, 2003, total potential benefits would be $128 billion, over 0.4 percent of and the topic is to be included in the agenda of the ministerial total world GDP.1 The accompanying chart shows that these gains meeting in Cancun, Mexico, this September. would accrue to residents of every part of the globe. Agricultural supports take several forms, and the levels of Reducing the level of trade-distorting agricultural support is support vary greatly across countries. They are most prevalent, a complex issue, and there are powerful interests in maintaining however, among the world’s industrialized economies. The subsidies. However, the magnitude of potential benefits from makOrganization for Economic Cooperation and Development estiing the world’s agricultural sector more efficient suggests that mates that direct and indirect transfers from consumers and taxreducing trade-distorting farm policies is well worth pursuing. ■ payers to farmers in member countries totaled over $230 billion 1 IMF. “How Do Industrial Country Agricultural Policies Affect Developing in 2001, comprising nearly a third of all farm receipts. Support Countries?” World Economic Outlook, September 2002. levels range from a low of 1 percent of farm receipts in New Zealand to a high of 69 percent for Switzerland. Japan, Korea, and Norway are also near the high end of the range, while support levels in Canada, the United States, and the European Welfare Eﬀects of Global Agricultural Liberalization Union fall somewhere between the two extremes at 17 percent, 21 percent and 35 percent, respectively. United States The costs of farm supports are borne primarily by conAustralia, Canada, and New Zealand sumers and taxpayers in the industrial countries, as well as Japan and Korea by farmers in the developing world. Protectionist agricultural European Union policies in industrial countries tend to keep domestic prices Other OECD high, so their elimination would enhance consumers’ purchasChina ing power. In addition, subsidies tend to increase the total India and rest of South Asia supply of farm products to world markets, driving down Other East Asia * international food prices and depressing the incomes of Brazil farmers in the developing world. More fundamentally, as Rest of Latin America with all protective trade policies, agricultural subsidies lead North Africa and Middle East to an inefficient allocation of resources: Countries are induced Sub-Saharan Africa to specialize in areas that are not necessarily to their comCommonwealth of Independent States parative advantage. Officials of major international organizations have emphaRest of World sized the importance of reducing agricultural supports as World part of an overall development agenda. It is often noted that 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 total transfers from consumers and taxpayers to farmers Percent of GDP amount to six times the total overseas development aid SOURCE: International Monetary Fund. offered by the industrial countries, and the vast majority of * Hong Kong, SAR, Taiwan Province of China, Singapore, and other ASEAN. the world’s poor are farmers in developing countries whose T Views expressed do not necessarily reflect official positions of the Federal Reserve System. research.stlouisfed.org