Developing Countries and the World Trade Organization Negotiations

There are few clearer indications of the widely perceived benefits to developing countries of more open trade than the subtitling of the current Doha Round of trade negotiations as “The Development Round.” This claim is not disputed in this paper. Rather, we join a strong consensus among economists that developing countries, particularly the poorest, have a great deal to gain from trade liberalization. Development requires growth, and greater access to world markets is a powerful necessary condition for more rapid growth. Therefore, poor countries have the most to gain from a more freely functioning world market. Clear arguments on this point are succinctly summarized in McCalla.

The Doha Round, which is now ongoing, has an enhanced role for developing countries, and issues related to them, compared with earlier rounds. Therefore, it is important, particularly at this juncture of a mid-stage in negotiations, to underline what are the most important elements of the negotiations. We distinguish between those arguments and proposals that are strong and those that are not, regarding the interests of developing countries.

Few areas of trade negotiations are as important to developing countries as those dealing with the agricultural sector. There are several reasons for this. First of all, the largest proportion of developing country populations live in rural areas and work in the agricultural sector. The poorer the country, the larger the share of GDP that arises from the agricultural sector. In addition, most of the poor in developing countries live in rural areas. Therefore, there are substantial attractions to raising incomes and reducing poverty by trying to increase growth rates in agriculture. Although growth rates in the industrial sector of poor countries are often rapid, nearly as rapid rates of growth are attainable in the agricultural sector, which will have more direct effects on poverty and the incomes of large proportions of the population. In other words, the structure of poor countries' economies and their demographics should lead them to give serious attention to agriculture.

Second, it is very difficult to imagine a poor country succeeding in alleviating poverty and extending growth to the whole country unless it incorporates a rural or agriculture-led growth strategy and unless it can participate in fair, functioning international markets. The alternative strategy often espoused is to focus on the industrial sector, or, more narrowly, the manufacturing sector. This manufacturing sector, it is argued, can grow rapidly, often more rapidly than the agricultural sector, as country examples from East Asia and other regions have shown. But in a poor, predominantly agricultural country, which has yet to reach the demographic transition, the small industrial sector cannot create enough jobs to reverse growth in the rural labor force. This results in continued rise in rural poverty. Thus, to the extent that poverty alleviation is a priority, attention to rural areas and the agricultural sector is critical.

Such policy attention to the agricultural sector is necessary but not usually sufficient for equitable growth. It is also important for such a strategy to succeed for the country to have access to growing market opportunities, including access to fair, functioning international markets. The alternative of a narrower focus on agricultural technology improvement and domestic markets only is seldom successful. This import substitution or self-sufficiency approach often leads to inefficient and unproductive agricultural sectors, without the opportunity to exploit comparative advantage, potential economies of scale, and innovations. But if world markets are dominated by unilateral predatory actions of larger countries and big multinational firms or where prices are lowered and made more unstable by developed countries' protective agricultural policies, developing countries cannot fully benefit from global market participation. This behavior lowers the prices faced by developing country agricultural exporters and reduces the demand for their products.

Another reason why developing countries look to trade as an attractive option for their agricultural sectors is that they appear to have achieved considerably more political strength in current negotiations due to new developing-country bargaining coalitions. These, coupled with a greater willingness of developed countries to listen to the positions and concerns of developing countries, make the timing right for developing countries to pursue more accessible and fairly operating international markets.

Empirical Evidence from Various Models

More recent evidence strengthens and elaborates on these conclusions. Hoekman, Olarreaga, and Ng examine which kind of trade barriers are hurting developing countries the most. Their empirical work shows that both tariff peaks and agricultural support policies, of both developed and developing countries, disproportionately affect welfare levels in developing countries. The larger effect of the two, in terms of the impact on world prices, is from high tariffs. One conclusion the authors draw is that in the current multilateral trade negotiations, “the primary focus of attention should therefore be on reducing border protection in both OECD and developing countries” (p. 18). However, because removing their own border protections exposes developing countries to potentially damaging increased price risk, the reduction in domestic agricultural support by the developed countries becomes very important, not only for the direct benefits to net exporting developing countries but also to “create the political support to induce developing country governments to pursue welfare-improving domestic agricultural trade policy reforms” (p. 18).

A recent analysis of market access reforms by ABARE (Roberts, Buetre, and Jotzo) looks at the effects of five scenarios of different policy actions by both developed and developing countries to see how important developing country reform is relative to developed country reform. The scenarios are (a) tariff cuts for both developed and developing countries, as in the Uruguay Round Agreement of Agriculture, of 30% for developed countries and 20% for developing countries, (b) a 30% tariff cut in developed countries only, a kind of special and differential treatment for developing countries, (c) tariff cuts in developed countries while developing countries raise tariffs by 20%, (d) a failed agricultural trade agreement with no tariff cuts in developed countries, and developing countries raise tariffs by 20%, and (e) a worst-case scenario with both country groups raising tariffs by 20%. These scenarios are ordered from the most liberalized trade to the most protectionist. Country results are calculated for developed countries, middle-income developing countries, and low-income developing countries.

The results show that income (GNP) gains are highest in the first scenario, decreasing to lowest in the last scenario. This holds for all three country groupings. Developing countries still gain when they maintain the status quo but developed countries open their markets (scenario 2). This shows the strength of the gains to developing countries from increased market access in the developed countries. However, the losses that developing countries experience from their own increased protection more than offset the gains from developed countries opening their markets in scenario 3. All countries lose if the round fails (scenario 4) and the losses are that much more substantial for all if all countries become more protectionist (scenario 5). When these results are calculated as a share of the GNP, the developing country gains are larger, and so their losses under scenarios 3 through 5 are also greater.

Another intriguing test was performed with the ABARE model to ask what would happen if the developing countries reformed their own economies (tariff cuts of 20%) even though the developed countries do not reduce their barriers to trade. This would be counter to current special and differential treatment arrangements and to proposals that permit developing countries to undertake fewer trade reforms than the developed countries. The result of this simulation is that incomes in all three country groups increase. In fact, for the developing countries, the income gains from unilateral action are about two-thirds to three-quarters as large as the gains arising when the developed countries open their markets in conjunction with the 20% tariff cuts in developing countries. Many questions can be raised about the structure of and assumptions behind the model used to simulate these different scenarios, but it is an intriguing result to find that unilateral trade reforms in the developing countries can have such positive effects by themselves. This is consistent with the theoretical findings that unilateral liberalization pays.

Developing Country Trade Positions: Heterogeneity of Developing Countries

But is it appropriate to talk about “the interests of developing countries in trade negotiations” when these countries are so heterogeneous? The ABARE (2002) research described above tries to deal with this issue by separating developing countries into low- and middle-income groups. Kaukab goes further, on the basis of submissions and approaches to the WTO Round. His list includes seven groups: the Cairns Group, the Africa Group, Least Developed Countries, ACP (Asia, Caribbean, and Pacific), Regional Negotiating Mechanism (RNM) of Caribbean States, Friends of Development Box, and the Like-Minded Group of Developing Countries. Valdes and McCalla present another taxonomy based largely on whether the country is a net food or agricultural importer or exporter, and its income level. Their list includes Low-Income Food-Deficit Countries, Transition Markets, Small Island Developing Countries, Net Food Importing Countries, Net Food Exporting Countries, Net Agricultural Importing Countries, and Net Agricultural Exporting Countries.

The trade-negotiating positions held by developing countries can be better summarized if one looks at subgroups. There would seem to be three general groupings based on interests and their market situation. There are the food-exporting countries, many of whom belong to the Cairns Group. They seek, primarily from the developed countries, major improvements in market access, elimination of export subsidies, substantial reductions in trade-distorting domestic support, and an end to tariff escalation.

Second, there is a group of developing country food importers who share the above concerns but who argue in addition for more meaningful and effective special and differential treatment (S&D) for developing countries, primarily to give them the flexibility they wish for the protection of domestic food production capabilities. This desire for enlarged S&D treatment options leads them to propose the Development Box. This includes more than S&D, such as food security, which primarily means the freedom to enhance domestic production through a variety of policies, notwithstanding provisions in the Agreement on Agriculture that would otherwise restrict certain of those actions.

Third, there is a group of low-income, food-deficit countries, and those countries that receive preferences from the EU (ACP counties). These countries have mixed views on trade liberalization by the developed countries because, on balance, they may benefit from the depressed world prices that arise mostly from developed country protection and export subsidies (they are net food importers) or because they are the recipients of trade preferences from the EU, which has the same result.

The positions of developing countries outlined above can be said to have two main elements. One is offensive and export-oriented—the desire to discipline and alter trade policy decisions of the developed countries in ways that will open up trade opportunities and remove measures that sideswipe or harm them. The main positions in this category have been covered above, but there are other proposals. To give the flavor of these, we list only a selection of what has been suggested for one category, improving access to developed country markets: (a) developed countries should provide quota-free and tariff-free access to products from low-income resource-poor farmers in developing countries, (b) it must be made mandatory for developed countries to fill their tariff rate quotas (TRQs), (c) TRQs by developed countries should eventually be abolished, (d) in the interim, there should be a substantial expansion of TRQs administered by the developed countries, and (e) low-income developing countries should be given special preferential access to developed country TRQs (Roberts, Buetre, and Jotzo, p. 12).

The other element is defensive and import-oriented—to seek exemption for themselves from trade rules that would otherwise discipline or restrict their own options. This is the essence of S&D treatment and the Development Box of measures that are being proposed and which is discussed in more detail below. In this category, there are many proposals on the current negotiating table, some of which would have quite negative effects on the efficiency of domestic industries.

Special and Differential (S&D) Treatment

The most prominent element of the existing Agreement on Agriculture that is unique to developing countries is a set of provisions that is referred to as “special and differential” treatment. This treatment basically provides for exceptions for developing countries in how agreed-upon trade disciplines apply to the policies and decisions of these countries. For example, the Uruguay Round allowed developing countries to have smaller (two-thirds) reductions in tariff, export subsidy, and domestic support rates. Further, the phase-in period for these cuts, and for minimum access commitments, was ten years instead of six. There were additional special conditions for staple foods, for generally available investment subsidies and agricultural input subsidies, and for de minimis exemptions for domestic support. Finally, the forty-nine countries on the U.N. list of Least Developed Countries, were exempt from all these reduction commitments in tariffs and domestic support.

What does this extra flexibility mean for developing countries? Does it give them the much-needed time for the reduction of protection because they have less well-developed input and output markets, and incomplete market institutions that impede adjustments? Or does it simply allow the continuation of high levels of protection for an inefficient industry that needs to adjust? These issues are, of course, the same ones involved in the debate surrounding the merits of infant industry protection.

The case in favor of S&D runs as follows. First, it applies to that component of agriculture that is competing with imports, not the export sector. Tariff cuts will mean lower prices for that commodity and will lead to some reduction in incomes for families growing it but will benefit nonproducing consumers. How much it will hurt producers in the long run depends on their production alternatives. If there are no increased technical cost efficiencies available for that crop to offset the price fall, if there are no alternative crops available with similar net incomes, or if there are no reasonably priced sources of inputs (including credit) for investing in competing crops, then farm income will drop. If there are few employment options for farm family members, either within the rural area or in more distant urban areas, and there are no safety nets in developing countries, then family income will fall. This set of problems could be the most onerous in the least developed countries, but as the above discussion suggests, there are ways to offset short-term commodity price falls.

At the macro level, there will be productivity gains for the aggregate economy when global protection is reduced, particularity if S&D treatment is not offered. Furthermore, as ABARE has shown, unilateral liberalization pays. And S&D may reduce pressure for the needed and beneficial reforms that developing countries ought to undertake. As noted above, there are a number of situations that moderate the effects of a price fall for one crop. There are, in most ecologies, several diversification options from which poor farmers can choose. A part of a rural development strategy includes off-farm work, either in local villages or in more distant urban areas. Many farm families have well-established employment and migration patterns to access what are usually higher off-farm wage rates. Land prices will also adjust if no alternative crops can generate the same profit, cushioning the blow of lower output prices, at least for vulnerable tenant farmers. If all countries reduce protection, then world market prices for the commodity in question should rise, offsetting the price fall from one specific country's reduction in protection. Finally, if the price fall induces improved productivity that allows farmers to regain profitability, then everyone gains, particularly low-income nonproducers. Trade-induced adjustment is not necessarily bad for poor countries in the longer run.

There are also a number of programs governments can and do engage in to minimize the income loss from a reduction in protection. These include research programs to improve productivity and yields, or reduce costs, to provide farmers with options across several commodities to offset such price falls, including diversification. Credit programs, especially those that are unsubsidized, are policy initiatives that a number of governments have to deal with the vagaries of credit markets in low-income rural areas. And improved education programs for rural youth are a long-run response to enable them to compete successfully for better paying off-farm jobs.

When we turn to the empirical results of models, the ABARE results illustrate that the gains from reducing domestic protection are significant, even if done unilaterally without developed countries opening their markets. The issue is to compare these substantial gains for the country at large against the possible losses to a smaller number of producers. More open trade, with such gains, provides an option for governments to resist the political pressure of protectionist lobbyists, whether they be processors or farmer groups. While, on the surface, S&D seems beneficial to developing countries, in the long run, it may not be.

Conclusions

A focus on trade and international markets offers developing countries an option to avoid the economic mistakes of focusing on domestic protection, self-sufficiency, and rent seeking. Trade is a better option and it has two prongs. One is the focus on opening markets in developed countries and reducing their trade-distorting domestic supports. But the other is often more important than realized, and that is to improve domestic policies also. Many gains on the domestic market side arise from increasing the efficiency of domestic policies, in addition to the known gains from opening up foreign markets. This involves a change in approach by reducing the emphasis and scope of S&D provisions.