The relative importance of global agricultural subsidies and market access

The claim by global trade modelers that the potential contribution to global economic welfare of removing agricultural subsidies is less than one-tenth of that from removing agricultural tariffs puzzles many observers. To help explain that result, this paper first compares the OECD and model-based estimates of the extent of the producer distortions (leaving aside consumer distortions), and shows that 75% of total support is provided by market access barriers when account is taken of all forms of support to farmers and to agricultural processors globally, and only 19% to domestic farm subsidies. We then provide a back-of-the-envelope (BOTE) calculation of the welfare cost of those distortions. Assuming unitary supply and demand elasticities, that BOTE analysis suggests 86% of the welfare cost is due to tariffs and only 6% to domestic farm subsidies. When the higher costs associated with the greater variability of trade measures relative to domestic support are accounted for, the BOTE estimate of the latter’s share falls to 4%. This is close to the 5% generated by the most commonly used global model (GTAP) and reported in the paper’s final section. In the debate over the multilateral trade negotiations under the WTO’s Doha Development Agenda (DDA), there has been much confusion over numbers. This is especially so when referring to farm subsidies. Measures of the size of those subsidies in developed countries are published each year by the OECD Secretariat as part of its regular monitoring and evaluation of agricultural policies of its member countries. Initially they were called producer subsidy equivalents, but since they are expressed as a percentage of the support-inclusive (rather than undistorted) value of production, they are now referred to as producer support estimates, their common acronym being PSEs. * Kym Anderson, Development Research Group, The World Bank, Mailstop MC3-303, 1818 H Street NW, Washington DC 20433 USA. Email: [email protected] This is a product of the World Bank’s research projects on Agricultural Trade Reform and the Doha Development Agenda and Distortions to Agricultural Incentives. Thanks are due to anonymous referees and to Joe Dewbre, Martina Garcia, Luis Portugal, Wyatt Thompson and other participants for helpful comments at a seminar at the OECD, and to the UK’s Department for International Development for financial support. The views expressed are the authors’ alone and not necessarily those of the World Bank, its Executive Directors or the countries they represent, nor the funders of the project. World Trade Review (2006), 5 : 3, 357–376 Printed in the United Kingdom f Kym Anderson, Will Martin, and Ernesto Valenzuela doi:10.1017/S1474745606002916