World Scientific Reference on Asia-Pacific Trade Policies

The following sections are included:

• Preface
• About the Editor
• Acknowledgements
• Contents

In the mid-1980s, the late Yujiro Hayami and I compiled a prize-winning book on the political economy of agricultural protection in Japan, South Korea and Taiwan. The book began by reporting that earlier analysts had noted that high-income countries tend to protect farmers more than producers of manufactures or other tradable goods, and that newly independent developing countries chose to protect their manufacturers and heavily tax production (often in-kind) and/or exports of agricultural goods. That evidence suggested countries might be expected to gradually transform from taxing to increasingly assisting farmers relative to manufacturers in the course of national economic growth. We therefore set out to test that hypothesis for those three rapidly industrializing economies of Northeast Asia, and found strong support for it over the period 1955–1980. We also reported rising rates of protection to farmers in European industrial countries over that same period…

The following sections are included:

• Preface
• Introduction (Kym Anderson and Yujiro Hayami)
• Economic Growth, Structural Change and the Political Economy of Protection (Kym Anderson)
• The Growth of Agricultural Protection (Kym Anderson, Yujiro Hayami, and Masayoshi Honma)
• The Roots of Agricultural Protectionism (Yujiro Hayami)
• The Determinants of Agricultural Protection Levels: An Econometric Analysis (Masayoshi Honma and Yujiro Hayami)
• The Price, Trade and Welfare Effects of Agricultural Protection (Rodney Tyers and Kym Anderson)
• Revealed Preference in Japan’s Rice Policy (Keijiro Otsuka and Yujiro Hayami)
• The Peculiar Rationality of Beef Import Quotas in Japan and Korea (Kym Anderson)
• The Politics of Agricultural Protection in Japan (Aurelia George and Eric Saxon)
• Lessons and Implications (Kym Anderson and Yujiro Hayami)
• Appendix 1: Details of Agricultural Protection Estimates, 1955–82 (Kym Anderson, Yujiro Hayami, Masayoshi Honma, Eric Saxon, and Shun-Yi Shei)
• Appendix 2: Explanatory Variables Used in the Regression Analysis of Chapter 4 (Masayoshi Honma and Yujiro Hayami)
• Appendix 3: Details of the Simulation Model of World Grain and Meat Markets (Rod Tyers)
• Bibliography

Notwithstanding the tariffication component of the Uruguay Round Agreement on Agriculture, import tariffs on farm products continue to provide an incomplete indication of the extent to which agricultural producer and consumer incentives are distorted in national markets. As well, in developing countries especially, nonagricultural policies indirectly impact on agricultural and food markets. Empirical analysis aimed at monitoring distortions to agricultural incentives thus need to examine both agricultural and non-agricultural policy measures including import or export taxes, subsidies, and quantitative restrictions plus domestic taxes or subsidies on farm outputs or inputs and consumer subsidies for food staples. This paper addresses the practical methodological issues that need to be faced when attempting to undertake such a measurement task in developing countries. The approach is illustrated in two ways: by presenting estimates of nominal and relative rates of assistance to farmers in China for the period 1981–2005; and by summarizing estimates from an economy-wide CGE model of the effects on agricultural versus non-agricultural markets of the project’s measured distortions globally as of 2004.

Despite recent reforms, world agricultural markets remain highly distorted by government policies. Traditional indicators of those price distortions such as producer and consumer support estimates (PSEs and CSEs) can be poor guides to the policies’ economic effects. Recent theoretical literature provides scalar index numbers of trade- and welfare-reducing effects of price and trade policies which this paper builds on to develop more-satisfactory indexes that can be generated using no more than the data used to generate PSEs and CSEs. We then exploit a new Agricultural Distortion database to provide time-series estimates of index numbers for 75 developing and high-income countries over the past half-century.

The following sections are included:

• Introduction
• Background
• Methodology for Measuring Price Distortions
• Estimated Rates of Assistance
• Prospects for Further Reform
• References

Purpose — The purpose of this paper is to document the pace and extent to which China’s policy regime has transitioned over the past four decades from explicitly and implicitly taxing to subsidizing its farmers relative to its producers of other tradable goods; to present projections of the world economy to 2030 that suggest China will continue to become more food import-dependent under current policies and productivity growth rates; and to explore alternative policy instruments for remaining food secure and ensuring that farmers are not losers from economic growth.

Design/methodology/approach — The data used to estimate the extent of distortions to producer incentives come from freely available World Bank and OECD sources that allow direct comparisons of China’s policy developments with those of more- and less-advanced economies.

Findings — The estimates of nominal and relative rates of assistance to farmers reveal that China has made the transition from negative to positive assistance to farmers far faster than an average developing country, and almost as fast as its Northeast Asian neighbors did in earlier decades at similar levels of real per capita incomes. That helped to ensure China remained food self-sufficient during the first two decades of reform; but self-sufficiency is now declining and is projected to continue to do so over the next decade under current policies.

Research limitations/implications — Preventing food self-sufficiency from declining further by increasing agricultural protection would be very costly, and is now unnecessary, thanks to the information and communication technology revolution that enables the government to directly support the well-being of poor farm households with conditional cash transfers.

Originality/value — This review of indicators of distortions to agricultural incentives in China is based on estimates of nominal and relative rates of assistance and consumer tax equivalents that are in the public domain. Its originality is in presenting the estimates for China in a comparative perspective, showing how they have evolved over time and as real per capita incomes have grown, and relating that to developments in China’s self-sufficiency in agricultural and food products. The paper also points to more-efficient ways of achieving societal objectives than using policy instruments that distort producer and consumer prices.

During the interwar period Japan achieved its stated objective of imperial self sufficiency in rice, but it involved the empire’s barriers to imports of foreign rice becoming increasingly protective. A model of the empire’s rice market is used to estimate the production, consumption, trade and welfare effects of that policy. It is shown that the policy was an extraordinarily ineffective means of transferring welfare to producers from consumers/taxpayers. The policy was especially harmful to poor consumers in the colonies of Korea and Taiwan because it raised the price and reduced the availability of less-preferred but potentially much cheaper Indica rice from Southeast Asia.

A dynamic, stochastic, multi-commodity model of world food markets is used to estimate the effects of liberalising agricultural policies in industrial countries. The effects on international and domestic prices, on trade volumes and on economic welfare of a phased liberalisation of industrial-country policies between 1988 and 1992 are compared with the effects of a similar hypothetical liberalisation in the early 1980s. The results suggest that, because of the dramatic increase in agricultural protection during the 1980s, the effects of a liberalisation under the Uruguay Round would be, in real terms, more than double those that would have resulted from a similar liberalisation a decade earlier. Major gainers are consumers in Western Europe and Japan and farmers in developing countries. But the cost to tax-payers in Western Europe is also escalating, not to mention the burden on non-agricultural producers in those countries whose competitiveness is reduced by farm policies. These domestic pressures from treasuries and from producers of non-farm products, together with greater international pressure for reform from agricultural-exporting countries, have raised the probability of at least some liberalisation during the Uruguay Round of multilateral trade negotiations.

Rapid industrialization in East Asia, particularly China, is raising questions about who will feed the region in the next century and how Asia will be able to pay for its food imports. The paper first reviews existing food sector projections and then takes an economy-wide perspective using projections to 2005, based on the global CGE model known as GTAP. After showing the impact of implementing the Uruguay Round, the paper explores several alternative scenarios. A slowdown in farm productivity growth is shown to be costly to the world economy, as is slower economic growth in China. Failure to honour Uruguay Round obligations to open textile and clothing markets in OECD countries would reduce East Asia’s industrialization and thereby slow its net imports of food. On the other hand, the trade reform that is likely to accompany China’s (and hence Taiwan’s) membership of the World Trade Organization (WTO) adds 30 per cent to estimated global gains from the Uruguay Round. Their WTO accession is projected to boost exports of manufactures and strengthen food import demand by not only China but also its densely populated neighbours with whom it trades intensively.

The LINKAGE model of the global economy and the latest Global Trade Analysis Project (GTAP) database (version 6.05) are used to examine the impact of current merchandise trade barriers and agricultural subsidies and possible reform outcomes of the World Trade Organization’s (WTO’s) Doha Development Agenda. The results suggest that moving to free global merchandise trade would boost real incomes in Sub-Saharan Africa proportionately more than in other developing countries or in high-income countries, despite the terms of trade loss in parts of that region. Particular attention is given to agriculture, as farmers constitute the poorest households in developing countries but the most assisted in rich countries. Net farm incomes would rise substantially in Sub-Saharan Africa and other developing country regions, alleviating rural poverty. Partial liberalization could move the world some way toward those desirable outcomes, the more so the more developing countries themselves cut applied tariffs, particularly on agricultural imports.

The following sections are included:

• Introduction
• Analytical Framework
• Synopsis of Empirical Findings: Global Model Results
• Synopsis of Empirical Findings: National Model Results
• What Have We Learned?
• Caveats
• Policy Implications
• References

The volatility of food prices has always concerned national governments, especially those of open developing economies, as it undermines their perceived national food security. A common policy approach has been to partially insulate their domestic market from international food price fluctuations by varying restrictions on their imports or exports. Unfortunately, such domestic stabilization measures amplify international price fluctuations. This article explains conceptually, and illustrates empirically, how insulation measures do little to advance national food security and collectively imperil global food security. Many countries also intervene to alter the trend level of domestic farm product prices, again most commonly with the use of trade restrictions. The latter policies have the unintended consequence of thinning international food markets, adding to their volatility. The article concludes by pointing to alternative ways for governments to boost food security for vulnerable households: such alternatives have become far more feasible in recent times, thanks to the information and communication technology revolution.

When prices spike in international grain markets, national governments often reduce the extent to which that spike affects their domestic food markets. Those actions exacerbate the price spike and international welfare transfer associated with that terms of trade change. Several recent analyses have assessed the extent to which those policies contributed to the 2006–08 international price rises but only by focusing on one commodity or by using a back-of-the envelope (BOTE) method. The present more comprehensive analysis uses a global, economy-wide model that is able to take account of the interactions between markets for farm products that are closely related in production and/or consumption and able to estimate the impacts of those insulating policies on grain prices and on the grain trade and economic welfare of the world’s various countries. Our results support the conclusion from earlier studies that there is a need for stronger WTO disciplines on export restrictions.

Many countries have responded to spikes in international food prices such as those of mid-2008, early 2011, and mid-2012 by adjusting their agricultural trade barriers in an attempt to partially insulate their domestic markets from the price rises. Even when it may appear to each individual country that it has been successful, in the sense that its domestic price rose less than the international price for its food staples, this success is frequently more illusion than reality. The reason is that these policy responses—reductions in import protection or increases in export restraints—exacerbate the initial increase in the international price. Indeed, if both exporting and importing country groups happened to insulate to the same extent, domestic prices in both country groups would rise just as much as if no country had insulated (Martin and Anderson 2012). In reality, however, countries intervened to different extents, so that the impact of price insulation depends on both the actions taken by the country itself and the collective impact of interventions by all other countries…

The following sections are included:

• Introduction
• Modeling the Distributional Effects of Price-distorting Policies
• Parameter Values and Simulation Results for Rich and Poor Economies
• Why Use Trade Policies Rather Than More Efficient Policy Instruments?
• Implications for Policy Reform
• Appendix: A Model of Income Distributional Effects of Price-distorting Policies

The agricultural and food sector is an ideal case for investigating the political economy of public policies. Many of the policy developments in this sector since the 1950s have been sudden and transformational, while others have been gradual but persistent. This article reviews and synthesizes the literature on trends and fluctuations in market distortions and the political-economy explanations that have been advanced. Based on a rich global data set covering a half-century of evidence on commodities, countries, and policy instruments, we identify hypotheses that have been explored in the literature on the extent of market distortions and the conditions under which reform may be feasible.

The following sections are included:

• Introduction
• What to Expect from Past Experience
• Modelling Approach
• Projections to 2030 Assuming No Policy Changes
• Alternative Growth Projections to 2030 with Policy Changes
• Caveats
• Policy Implications and Conclusions
• Appendix
• References

Multilateral trade reforms, such as may eventually emerge from the WTO’s Doha Development Agenda (DDA), tend to be phased in over a decade or so after agreement is reached. Given the DDA’s slow progress, that implementation may not be completed before the end of the next decade. Ex-ante analysis of the DDA’s possible effects thus requires first modelling the world economy to 2030 and, in that process, projecting what trade-related policies might be by then without a DDA. Typically, modellers assume the counterfactual policy regime to be a ‘business-as-usual’ projection assuming the status quo. Yet we know developing country governments tend to switch from taxing to assisting farmers in the course of economic development. This paper shows the difference made by including political economy-determined agricultural protection growth endogenously in the baseline projection. We reveal that difference by projecting the world economy to 2030 using the Global Trade Analysis Project (GTAP) model with those two alternative policy regimes and then simulating a move to global free trade (the maximum benefit from a multilateral trade reform) in each of those two cases. The welfare effects of removing the counterfactual price distortions in 2030 are shown to be much larger in the case where agricultural protection grows endogenously than in the case assuming no policy changes over the projection period. This suggests the traditional way of estimating effects of a multilateral agricultural trade agreement may considerably understate the potential welfare gains.

As China becomes more industrial and urbanized, it is likely to become more dependent over time on imports of (especially land-intensive) farm products, most notably livestock feedstuffs. If farmers are slow to adjust to their declining competitiveness, for example by obtaining off-farm employment, the farm–nonfarm household income gap may increase. A decline in food self-sufficiency may be perceived as undermining national food security, and a persistent farm–nonfarm income gap as contributing to social unrest. In these circumstances, what offsetting or compensating policy options should the government consider for ensuring adequate long-term food security and less income inequality? This paper evaluates China’s historical record since 1980 and then projects China’s economy to 2030, using the GTAP global economy-wide model. It draws on past policy experiences of both China and other economies to evaluate prospective interventions by government to address food security and income inequality concerns. The potential effects of some of those are estimated for 2030, again using the GTAP model. The paper concludes by suggesting alternative ways to achieve the fundamental objectives of national food security and less rural–urban inequality, namely via generic social safety nets and improved rural infrastructure.