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Agriculture and The World Trade Organisation

 | 
Gurdarshan Singh Bhalla
, 
Jean-Luc Racine
, 
Frédéric Landy

II. Market and regulation: the national scenarios

3. The Uruguay Round, Indian Agriculture and the WTO

Bibek Debroy

Texte intégral

Preliminaries

1As a founder member of the General Agreement on Tariffs and Trade (GATT) since 1947, India had participated in seven GATT negotiating rounds before the Uruguay Round. But these earlier GATT negotiations had almost passed unnoticed. In contrast, the debate on the pros and cons of the Uruguay Round agreement generated a lot of heat in India. In any process of negotiations, there is a quid pro quo. The obvious areas where India was expected to lose are the so-called new areas of TRIMs (trade-related investment measures), TRIPs (trade-related intellectual property rights) and services. In contrast, India was expected to gain in areas that concern the rules of GATT, since better multilateral rules always tend to benefit a relatively weaker country. India was also expected to gain in areas that concern market access and the agricultural sector is one example of market access.

  • 1 Effectively, textiles and garments and agriculture are also new areas, since prior to the Uruguay R (...)

2The Uruguay Round negotiations covered a wide range of issues and were far more ambitious than any MTNs carried out earlier. The traditional concern of such negotiations has generally been a liberalization of trade. The Uruguay Round went beyond that. It talked of the rules and disciplines of the trading system. It also involved discussions in new areas like trade in services, trade-related intellectual property rights (TRIPs) and trade-related investment measures (TRIMs)1. Originally, there were fifteen different areas earmarked for discussion, although eventually, some amount of reshuffling across these areas also took place. The original fifteen areas fall into three distinct thematic groups. The first is one of reducing specific trade barriers and improving market access for partner countries. Areas under this theme are tariffs, non-tariff measures, tropical products, natural resource-based products, textiles and clothing and agriculture. A second theme of the negotiations was one of strengthening GATT disciplines and improving the rules under which GATT operated. Areas under this theme are GATT articles, safeguards, MTN agreements and arrangements, subsidies and countervailing measures, dispute settlement and functioning of the GATT system (FOGS). The third and final theme is that of the new areas and includes TRIPs, TRIMs and services.

3The national schedules of concessions and commitments on tariffs and NTBs do not form part of the Final Uruguay Round text, but are available separately. Traditionally, there has been an argument that exports from developing countries are constrained by non-tariff barriers (NTBs) in developed countries. In fact, the argument is strangers - as NTBs facing developing country exports tend to be more severe than NTBs facing developed country exports. Such NTBs are particularly serious for food and live animals, agricultural materials, ferrous metals, mineral fuels, leather, textile yam and fabrics, clothing and footwear.

4It is therefore natural to ask, how has the Uruguay Round helped in easing these NTBs, both for agricultural and for non-agricultural products? The answer is not simple, as NTBs also cover agriculture and textiles and garments. One point to be noted for NTBs is that grey area measures like voluntary export restraints and orderly marketing arrangements have been prohibited in the Uruguay Round agreement. Grey area measures are measures whose legality under the old GATT was not clear. These have now been prohibited and have to be phased out over a period of four years. Developed countries can however resort to the safeguards agreement to circumvent this. Moreover, developed countries can resort to policy substitution. This means the substitution of prohibited NTBs by new measures that have not been banned. For instance, this is likely to happen for safeguards, anti-dumping and food and sanitation requirements.

5There are several problems in trying to quantify the impact of easing out of NTBs. Subject to this, some World Bank estimates show what is likely to happen to NTB coverage ratios because of the Uruguay Round agreement. The figures are based on 1992 imports and are coverage-ratios for imports by OECD countries. NTBs include all NTBs. That is, textiles and clothing are included, and so is agriculture, apart from NTBs covered by the Tokyo Round codes. In fact, the drop in coverage ratios is largely explained by what is going to happen to agriculture and textiles and garments. The phasing out of NTBs in the agricultural sector will be almost immediate. But the phasing out for textiles and garments will be staggered, spread out over a period of ten years, leading up to 2005. The figures are impressive. For example, before the Uruguay Round, the coverage ratio for all goods was 29.4% for India. After the Uruguay Round, the coverage ratio is going to decline to 5.1%. The gains are no less significant for other developing countries.

6A few studies have been undertaken to quantitatively assess the impact of the Uruguay Round agreement on global real income or on the incomes of individual countries. These are generally based on the assumption that implementation begins in 1995 and is completed within a period of ten years. The impact on real world income thus refers to the year 2005. The point that it is real income (in 1992 US dollars) and not nominal income, needs to be emphasized.

7It also needs to be emphasized that these studies tend to under-estimate the gains from the Uruguay Round liberalization. For example, they concentrate on the market access provisions, specifically tariffs. The gains from reductions in non-tariff barriers and liberalization in textiles and garments, agriculture and services are not that easy to quantify. Nor is it possible to quantify the gains from better rules, such as in anti-dumping, subsidies, safeguards, better standards of intellectual property protection and improved dispute settlement procedures. The studies also tend to assume perfect competition. This excludes gains from exploiting economies of scale because of imperfect competition. Gains from exploiting dynamic economies of scale, such as through increased cross-border flows of investments, are also excluded. Finally, the benchmark for making comparisons is taken to be the status quo prevailing in 1992. This is not relevant. The benchmark for making comparisons should instead be the counterfactual scenario of a deteriorating trading environment had the Uruguay Round negotiations indeed failed.

  • 2 In a recent GATT study (GATT, 1994), the figure given is as high as 510 billion US dollars.

8Subject to these caveats, what do the studies show? They suggest that real world income (in constant 1992 US dollars) will increase by between 212 billion and 274 billion in 2005. Further such annual increases will follow. This amounts to around 1% of world gross domestic product (GDP).2

9The increase in real income for the developing countries as a group is expected to be between 36 billion and 78 billion. Since developing countries are not important enough individually, very few studies quantify the gains for individual developing countries. Some figures are available on real income gains as a percent of GDP. These show gains of 2.5% for China, 0.5% for India, 0.6% for South Africa and 0.3% for Brazil. It must be remembered that some developing countries are expected to lose because of the Uruguay Round package. This includes net food importing developing countries, which are likely to lose because of higher world agricultural prices brought by the phasing out of agricultural subsidies. It is because of this that the Final Uruguay Round text includes a “decision on measures concerning the possible negative effects of the reform programme on least developed and net food-importing developing countries”. Other developing countries that are likely to lose are those who have trade preferences in their favour. The value of these trade preferences goes down because of the liberalization.

10Quantitative estimates of the increases in world trade are rarer. But since the Uruguay Round package is about direct trade liberalization, the increase in world trade is clearly going to be more than the increase in world income. Some GATT estimates (GATT, 1993) show that world trade will increase by 12% (on top of the normal growth rate), if the Uruguay Round package is completely implemented. In constant 1992 US dollars, this represents an increase of 745 billion. The value of world exports (including services) will increase by around 10%. The value of exports originating in North America will increase by 8%. And those originating in the European Union will increase by 10.3%. Some of the largest projected increases in world trade are in areas that are of interest to developing countries. For instance, world trade in textiles is projected to grow by 34%, that in clothing by 60% and that in agricultural, forestry and fishery products by 20%.

The agriculture agreement

11Agriculture is one aspect of the Uruguay Round agreement where myth has been persistently more pervasive than reality. The subsidies given to farmers will have to be eliminated because of the agreement. The public distribution system (PDS) will have to be discontinued. India will have to import agricultural products from abroad. Seeds will have to be patented. Farmers will not be able to sell or save seeds. All seeds will have to be bought from multinational firms. These are a few examples of the myths that abound.

12The agreement on agriculture has four main components: concessions and commitments on market access, domestic support and export subsidies, the agreement on sanitary and phytosanitary measures and a Ministerial Declaration concerning least developed and net food-importing developing countries.

13The agreement on agriculture seeks to liberalize world trade in agriculture and free it from governmental measures that distort trade and lead to inefficiency. For instance, in Western Europe, domestic cultivators are protected from foreign competition. Export subsidies are used to get rid of surplus agricultural commodities in world markets at prices below actual costs of production. Through the Common Agricultural Policy (CAP), internal prices are supported even if they are far above world prices.

14Broadly speaking, there are three ways of subsidizing farmers through government intervention. The first method is to have a set of domestic and external policies so that domestic cultivators receive higher prices for their outputs than would have been possible, were trade to become completely free. This can be done through domestic price support policies, tariffs, quotas, export enhancement programmes, price stabilization measures, import licensing and canalisation. This does not necessarily mean that agriculture will always be subsidized through such measures. These measures lead to distortions. And depending on what sort of measures are in place, it is also possible for agriculture to have a negative subsidy or a tax. Secondly, farmers can be subsidized by providing them inputs at prices below costs of supply or at prices that are lower than prices charged from other consumers of the same product. Examples are subsidies for electricity, credit, fertilizers, transport and irrigation, farm fuel, tax exemption, livestock feed and crop insurance. Here again, in principle, there can be a negative subsidy. The third method of subsidization is through direct cash payments to cultivators.

  • 3 “Domestic support measures for which exemption from the reduction commitments is claimed shall meet (...)

15Measures that distort agricultural policies can thus be both domestic policies and border measures. Since there can be several such measures, they need to be quantified and aggregated in some sense. This takes us to the notion of the AMS. The Aggregate Measurement of Support (AMS) is a quantification and aggregation of all domestic governments measures that impinge on agriculture. The method for calculating the AMS is set out in Annexe 3 to the agricultural text, with all calculations being done on an annual basis. Not all domestic support measures have to be included in the calculation of the AMS. These exemptions are listed out in Annexe 2 of the agricultural text. These are the so-called green box policies which have a minimal impact on trade and are therefore free from reduction commitments.3

16Some general services which offer services or benefits to agriculture or the rural community are accordingly exempted. This includes research, pest and disease control, training services, extension services, inspection services, marketing and promotion services and inffastructural services. The exemption on infrastructural services does not however cover “subsidies to inputs or operating costs, or preferential user charges” (Clause 2 g).

17Exemptions also extend to public stockholding for food security purposes and domestic food aid. Public stockholding for food security purposes covers “expenditures (or revenue foregone) in relation to the accumulation and holding of stocks of products which form an integral part of a food security programme identified in national legislation. This may include government aid to private storage of products as part of such a programme. The volume and accumulation of such stocks shall correspond to predetermined targets related solely to food security. The process of stock accumulation and disposal shall be financially transparent. Food purchases by the government shall be made at current market prices and sales from food security stocks shall be made at no less than the current domestic market price for the product and quality in question” (Clause 3).

18Domestic food aid covers “expenditures (or revenue foregone) in relation to the provision of domestic food aid to sections of the population in need. Eligibility to receive the aid shall be subject to clearly defined criteria related to nutritional objectives. Such aid shall be in the form of direct provision of food to those concerned or the provision of means to allow eligible recipients to buy food either at market or at subsidized prices. Food purchases by the government shall be made at current market prices and the financing and administration of the aid shall be transparent” (Clause 4).

19The public distribution system (PDS) is covered by the clause on domestic food aid and, to some extent, by the clause on public stockholding for food security purposes. Footnotes 5 and 6 of the text make it clearer still that the PDS need not be phased out.

20“Governmental stockholding programmes for food security purposes in developing countries whose operation is transparent and conducted in accordance with officially published objective criteria or guidelines shall be considered to be in conformity,.... including programmes under which stocks of foodstuffs for food security purposes are acquired and released at administered prices, provided that the difference between the acquisition price and the external reference price is accounted for in the AMS….. The provision of foodstuffs at subsidized prices with the objective of meeting food requirements of urban and rural poor in developing countries on a regular basis at reasonable prices shall be considered to be in conformity.....”.

21The argument that the PDS has to be phased out because of the Uruguay Round agreement is thus a myth. Neither the PDS nor the food procurement programme need be affected. Flowever, greater disciplines on the PDS are indicated. For example, the PDS must be transparent and directed at urban and rural poor on the basis of clearly defined nutritional criteria. It should not be across the board for everyone. Moreover, food purchases by the government for the PDS will have to be made at current market prices. These stipulations do not conflict with internal arguments that are advanced in India about the revamping of the PDS so that it is targeted better.

  • 4 On the latter, “eligibility for such payments shall be limited to producers in disadvantaged region (...)

22Exemptions also extend to governmental financial participation in income insurance and income safety-net programmes and to payments (made either directly or through governmental financial participation in crop insurance) for relief from natural disasters. There are also exemptions for structural adjustment assistance provided through producer retirement programmes, resource (such as land) retirement programmes and investment aids. In addition, there are exemptions for environmental programmes and payments under regional assistance programmes.4 Following the GATT accord, the European Union has been arguing that half of its agricultural land is backward, so that the annual farm subsidy can be justified by resorting to this clause.

23Provided the AMS is over a benchmark, it has to be brought down in accordance with the time frames that have been submitted to GATT/WTO by member countries. To give some idea about the magnitudes involved, the domestic support in developed countries is now estimated to be around 150 billion US dollars. In contrast, in developing countries, the figure is estimated to be around 19 billion dollars.

24The benchmark for product-specific support is 5% of the total value of production of the agricultural product (Article 6.4 a). In other words, if the product-specific support is less than 5%, there are no reduction commitments. For non-product-specific support, the benchmark is also 5% of the value of total agricultural production (Article 6.4 a). If the non-product-specific support is less than 5%, there are no reduction commitments. There is a special clause for developing countries. “For developing country Members, the de minimis percentage... shall be 10 per cent” (Article 6.4 b). The crucial question thus is, what is India’s AMS like? Is it over 10% or is it less than 10%?

25Several people have worked out these figures and they invariably show that India’s AMS (both product-specific and non-product-specific) was far below the 10% benchmark in the base period.

  • 5 One crore is equal to 10 million. We have used crore figures, as that is how the Ministry of Commer (...)

26The Ministry of Commerce’s calculations were something like the following, for the base period-of 1986-89. The total value of agricultural production (annual average) was Rs. 113,000 crore and 10% of this is Rs.11,300 crore5. The average-annual non-product-specific subsidy was Rs.5,300 crore. The average annual product-specific subsidy, calculated as the difference between the international reference price and the domestic support price multiplied by the volume of production, was not even positive. It was a negative subsidy to the extent of Rs.25,161 crore. The resultant aggregate measure of support thus has a negative value of Rs.l9,861 crore. Since the benchmark for subsidisation is a positive figure of Rs.11,300 crore, India has the leeway of jacking up agricultural subsidisation by Rs.31,161 crore without falling foul of the agricultural agreement.

27Although the precise figures differ, other computations also support the conclusion that the AMS in India is negative. For example, work done at the National Council of Applied Economic Research by Ashok Gulati and Anil Sharma show that the total AMS in India was - 27.24% of the total value of agricultural production, as opposed to the benchmark of + 10%. Figures on product-specific AMS also mirror the phenomenon of a negative subsidy on agriculture. The Ashok Gulati-Anil Sharma exercise calculated the product specific AMS for 22 agricultural products. For 17 of these, the AMS was negative. And in the remaining 5, the AMS was below the 10% benchmark.

28On domestic support, India thus has no reduction commitments. There is the Sharad Joshi type of argument that one wishes the AMS in India had been over the 10% benchmark. Had that been the case, required agricultural reforms would have been carried out thanks to the GATT agreement. However, as things stand, the compulsions for these reforms will have to be unilateral and internal.

29When the AMS has to be brought down, it has to be brought down by 20% over a period of 6 years, beginning in 1995 (Article 1 0). But in this as well, there is special and differential treatment for developing countries. Moreover, developing countries have to reduce domestic support by 13.3% and not by the 20% required for developed countries.

30Amongst border measures are requirements on binding and reduction of tariffs, other market access commitments and requirements on export subsidies.

31There are various export subsidies that are subject to reduction commitments. Budgetary outlays on such export subsidies must be brought down by 36% over a period of six years. The volume of agricultural exports that receive subsidies must be brought down by 21% also over a period of six years. However, these commitments are for developed countries. For developing countries, there is again special and differential treatment. That is, the time frame for reduction is ten years and not six years. For developing countries budgetary outlays on export subsidies must be brought down by 24% and the volume of exports that receive subsidies must be brought down by 14%. Least-developed countries have no reduction commitments on export subsidies. There is also a tariffication requirement. This means that quantitative import restrictions, variable import levies, minimum import prices, discretionary import licensing, nontariff measures maintained through state trading enterprises, voluntary export restraints and other such measures must be replaced by tariffs. Once this has been done, developed countries must reduce the tariffs by an average of 36% over a period of six years. And developing countries must reduce the tariffs by an average of 24% over a period of ten years. Minimum tariff reductions of 15% are also required for each tariff line, apart from the average reduction. In the case of developing countries, the minimum tariff reduction for each tariff line is 10%. These tariff reductions do not apply to least-developed countries.

32If the tariffs after tariffication are very high to start with, the reduction of 36% will not amount to very much. There is thus a minimum market access commitment. This means that countries which maintain quantitative restrictions on agricultural imports must provide for minimal imports at low customs duties. This minimal threshold is defined as 3% of domestic consumption, rising to 5% of domestic consumption at the end of six years. A lot has been made of this market access commitment in India and this is usually presented as requiring that India must import 3-5% of domestic consumption requirements. This is not quite correct, for two reasons. First, the market access stipulation only applies to countries that maintain quantitative restrictions that are inconsistent with GATT. As long as India has balance of payment problems, under Article XVIIIB, India’s quantitative restrictions are not GATT-inconsistent. The market access requirement does not therefore apply to India immediately. Second, assuming that India no longer has balance of payments problems, the minimum market access clause will indeed be relevant. But there is no compulsion that 3-5% of consumption needs must be imported. The requirement is that 3-5% of consumption needs must be opened up to imports. Stated differently, 3-5% of consumption cannot be on the negative list, but will have to be on the open general licence (OGL) list, subject to whatever tariffs exist. On agriculture, India has indicated tariffs of up to 100% on primary products, up to 150% on processed products and up to 300% on edible oils.

33There are of course special safeguard provisions if market access leads to an import surge (appropriately defined) or if imports take place at an extremely, low price (again appropriately defined). There are also disciplines on export prohibitions and restrictions, but these do not apply to developing countries (Article 12). Finally, none of the agricultural measures used by member countries, domestic or border, can be challenged before nine years, that is, before 2004.

The implications

34Table 1, based on GATT compilations from the Integrated Data Base (IDB), gives some idea about tariff bindings for agricultural products. Table 1 is based on data for 26 developing countries that account for around 80% of merchandise imports. As the table shows, all tariff lines for agricultural products will now be subject to bindings. The increase in the coverage of bindings is greatest for developing countries, particularly those in Asia and Latin America. The 100% binding for tariff lines of agricultural products is remarkable when one remembers that only, 83% of tariff lines for industrial products will be bound.

35Market access is not going to increase only through tariff bindings, it is also going to increase through reductions in tariffs. Some idea of the tariff reductions involved can be seen from Table 2. As the table shows some tariff lines are already bound duty-free. For other tariff lines, there exist duties at the moment. Some of these will now be bound without reductions others will be bound with reductions. The percentage of tariff lines on which there will actually be reductions is 79% for developed countries, 74% for developing countries and 84% for countries in transition.

TABLE 1: TARIFF BINDINGS (%) FOR AGRICULTURAL PRODUCTS

Country Group

Percentage of tariff

Percentage of imports

lines bound

under bound rates

Pre

Post

Pre

Post

Round

Round

Round

Round

Developed countries

58

100

81

100

Developing countries

18

100

25

100

Economies in transition

51

100

54

100

North America

92

100

96

100

Latin America

6

100

74

100

West Europe

45

100

87

100

Central Europe

45

100

50

100

Asia

17

100

40

100

Source: GATT

TABLE 2: BINDINGS WITH REDUCTIONS FOR AGRICULTURAL PRODUCTS (AS PERCENTAGE OF TARIFF LINES)

Country group

Already bound

Currently dutiable

duty-free

Bindings with reductions

Bindings without reductions

Developed countries

17

79

4

Developing countries

0

74

26

Economies in transition

18

84

2

North America

26

71

3

Latin America

0

72

28

West Europe

11

86

3

Central Europe

11

87

2

Asia

5

74

21

Sources: GATT

36Developed countries account for around two-thirds of world imports of agricultural products. These countries have offered to reduce tariffs on imports of agricultural products, including those that have been converted from non-tariff barriers to tariffs, by an average of 37%. It is not easy to figure out what has been the magnitude of tariff reductions in the course of the Uruguay Round since prior to the Uruguay Round, many agricultural products were subjected to quantitative restrictions rather than tariffs. In addition, existing tariffs were often specific and not ad valorem. Subject to this caveat, Table 3 gives some idea about the tariff reductions in developed countries for different product categories.

TABLE 3: TARIFF REDUCTIONS (%) IN DEVELOPED COUNTRIES FOR AGRICULTURAL PRODUCTS

Product category

Percentage reduction

All agricultural products

37

Coffee, tea, cocoa, sugar

34

Fruits and vegetables

36

Oilseeds, fats and oils

40

Other agricultural products

48

Animals products

32

Beverages and spirits

39

Flowers, plants, vegetables materials

48

Tobacco

36

Grains

39

Dairy products

26

All tropical products

43

Tropical beverages

46

Tropical nuts and fruits

37

Certain oilseeds and oils

41

Roots, rice, tobacco

40

Spices, flowers and plants

52

Source: GATT

37Export subsidies in developed countries are now estimated to be worth around 21 billion US dollars. That is, export subsidies amount to around 20% of developed country exports of agricultural products. In contrast, export subsidies in developing countries are estimated to amount to only 1.7 billion dollars. In the 1986-90 period, developed countries are annually estimated to have subsidized exports of 48.2 million tonnes of wheat, 19.5 million tonnes of coarse grains, 1.8 million tonnes of sugar, 1.2 million tonnes of beef and 1.2 million tonnes of cheese and butter. Table 4 shows the number of individual commitments that developed countries have made on export subsidization of agricultural products.

TABLE 4: AGRICULTURAL EXPORT SUBSIDIES AND QUANTITATIVE COMMITMENTS BY DEVELOPED COUNTRIES

Product category

Base period export subsidies (millions of US dollars)

Number of individual quantitative commitments

offered

Fruits and vegetables

241

15

Coffee, tea, cocoa, Sugar

1203

23

Grains

7140

17

Animals and their products

4473

32

Oilseeds, fats and oils

301

12

Flowers, plants

6

3

Beverages and spirits

303

8

Dairy products

5814

37

Tobacco

146

3

Other products

40

8

Total agricultural products

20998

158

Source: GATT

38We have earlier referred to the increase in world trade that is expected to occur because of the Uruguay Round agreement. This means around 300 billion US dollars worth of additional exports beyond the year 2005. Of this, 90% is expected to be because of the agricultural agreement alone, due to the removal of domestic subsidies and easing of border measures, particularly in developed countries. That means, around 270 billion US dollars worth of additional agricultural exports per year. Because of the liberalization, it is also expected that world agricultural prices will go up by an average of 10%, subject of course to the caveat that all these estimates tend to be somewhat arbitrary. This makes India’s agricultural exports even more price competitive - not only in the United States and Western Europe, but also in Eastern Europe, a region that earlier used to be catered to by agricultural exports from the West.

  • 6 The member countries of the Caims Group are Argentina, Australia, Brazil, Canada, Chile, Colombia, (...)

39Since agricultural protection was greater in developed countries, the primary beneficiaries of the liberalization are expected to be developing countries, of which India is one. The estimates however show that the major beneficiaries of agricultural trade liberalization are going to be the Cairns Group of countries, a group of agricultural exporters, not all of which are developing countries.6 The reason for this is not that India’s exports of agricultural products are price uncompetitive.

  • 7 Although mentioned earlier, perhaps it needs to be reiterated that in the Uruguay Round agreement, (...)
  • 8 Such as Anderson and Tyers (1990), Moreddu, Parris and Huff (1990), Krissoff, Sullivan and Wainio ( (...)
  • 9 For example, Valdes and Zietz (1980), UNCTAD/UNDP/WIDER (1990), SWOPSIM (1990).

40Most studies assessing the impact of farm liberalization policies7 on developing countries involve partial equilibrium models8. As most such models concentrate on the agricultural sector, leaving other sectors of the economy unaccounted for, they generally abstract from the spillover effects to, and feedback from, other parts of the economy. They are therefore open to the possibility of theoretical inconsistencies. Some multi-sectoral models are also available9. But they also consider one commodity market at a time, with an implicit adjustment for cross-price effects. Even when feedback from commodity markets to income growth or from agriculture to nonagricultural markets is incorporated, these models remain partial in the sense that they do not explicitly model factor markets, migration among sectors, and other possible interactions within the economy. Therefore, these studies understate the consequences of trade liberalization for resource movement out of (or into) agriculture, aggregate supply responses, relative prices and hence income distribution and welfare changes. In addition, since these studies deal with reduced form supply-demand elasticities, it becomes difficult to trace back specific assumptions relating to consumer preferences, production technology and factor mobility, on which they are based.

  • 10 The studies are: Burniaux, Martin, Delorme, Lienert and van der Mensbrugghe (1990), Burniaux, van d (...)
  • 11 In terms of the developed vis-à-vis developing dichotomy.
  • 12 Partial, as opposed to complete. The final Uruguay Round package only became available in December (...)
  • 13 Factor mobility being a case in point.

41General equilibrium models, on the other hand, take into account not only the working of the particular market under consideration, but also the inter-linkages of various markets or sectors of the economy. In doing so, such studies close the model with respect to all other goods and hence remove the possibilities of theoretical inconsistencies present in partial equilibrium models. All five CGE studies10 point out that agricultural trade liberalization will result in increases in world farm product prices, global GDP and trade volumes. The studies also indicate substantial factor reallocation and sectoral redistribution of GDP. However, the effect on individual countries is not uniform and depends on how fast industrialized countries liberalize relative to developing countries and how strong the supply response is, from various countries modelled. Although it is difficult to pinpoint the reasons for differences in the results among models, it appears that the choice of key elasticities plays a significant role. Apart from the choice of key elasticities, assumed levels of protection considered by the studies, formulae used for quantifying the levels of protection, reference periods, periods of analysis, choice of countries liberalizing11, extent of liberalization12, assumptions regarding micro13 and macro situations affect the results of the studies.

42The studies mentioned above were based on the anticipated outcome of the Final Uruguay Round package. The paper by Goldin and Mensburgghe (1995) presented in a World Bank conference on the Uruguay Round and the Developing Countries, on the other hand, offers an ex post evaluation of the tariffication process. In contrast to earlier studies, this paper draws on the available evidence regarding the Uruguay Round agreement and the reference scenario incorporates the latest estimates of global protection measures. Using the RUNS model, it evaluates the gains till the year 2002. The study is confined to tariffs in agriculture and manufacturing alone, and does not attempt to assess the impact of significant reforms in the area of non-tariff barriers. Simulation results of this study reiterate the results demonstrated in earlier studies. That is, the larger the reductions in protection levels, the higher the prices, world GNP, and TOT (terms of trade) for net exporting developing countries. And countries which liberalize the most, gain the most. The first simulation carried out in this study, for analysing the impact of liberalization, is based on a reference scenario that assumes that the future (1994-2000) levels of protection are the 1982-1993 average levels of protection and that against this base, countries undertake reforms according to their offers on reduction’s in tariffs as presented in the Uruguay Round submission. Such a long period for the average level of protection is justified on the ground that tariffs are inherently unstable reflecting world prices and domestic political considerations and an assumption that there has been no underlying trend in the level of tariffs.

43The results of this simulation exercise are compared with the earlier published results using the RUNS model. The exercise shows much more modest changes in prices (in no case greater than 1.7%). In contrast, in earlier studies using the same model, price changes varied from -8.2% for coffee to 8% for sugar. As this price change would occur over the period 1995-2002, simulation exercise I suggests that the Uruguay Round is unlikely to have any discernible impact on world prices.

44Simulation II, which expects the protection levels of recent years (1991-1993) to continue in the future, results in sharply higher gains. The average protection level was higher in the recent period, as compared to the historical (1982-1993) average level of protection. This implies that the application of the Uruguay Round submissions leads to greater liberalization in the second simulation exercise. On the other hand, for many developing countries which have engaged in fundamental trade reforms in the 1980’s, the 1991-1993 levels of protection are generally below the historical 1982-1993 average levels. Therefore, they record lower gains when a recent benchmark is used. As a result of modest reforms in the recent period in these developing countries, the supply response, accounting for declines in coffee, cocoa, tea, rice, sugar and other prices, is more muted. In the OECD countries in contrast, a greater reform leads to a sharper supply response. This is demonstrated in the higher rise in prices of cereals.

45In Simulation III, the effects indicated in Simulation II are further reinforced. Against the reference scenario of Simulation II, Simulation III analyses the impact of input subsidy reduction in addition to the application of tariff reduction. Compared to Simulation 11, the reduction in input subsidy further lowered production and exports of OECD countries. The associated changes in world prices, particularly for wheat (6.3%) and oils (3.9%), reflect the importance of input subsidies in OECD regions in these commodities. Food importing regions such as Africa suffer heavy losses in their terms of trade due to higher prices of coarse grains, oils, rice and sugar. However, net gains anticipated in this simulation amount to $68.4 billion. The results of this scenario indicate that the results are sensitive to assumptions regarding reductions in domestic distortions.

  • 14 The Dunkel Draft Text.

46Instead of applying the individual submissions documented in the Final Act of December 1993, simulation IV considers the implications of the formula for tariff reforms (reduction in tariffs of 36% in OECD countries and 24% in the non OECD countries) embodied in the December 1992 Draft Final Act of the Uruguay Round14. This more than doubles the gains anticipated in Simulation II. This simulation results in greater increases in world prices especially in the case of sugar, meat and dairy products, where tariffs have remained relatively untouched by the Uruguay Round agreement. As a result of this significant increase in world agricultural prices, the terms of trade effect for agricultural exporters improves and hence, except net food importing countries of Africa and Middle East developing countries benefit.

47Contrary to previous simulation exercises, Simulation V assumes the existence of unemployment. In all other respects, it is exactly like Simulation III. Rigidity of wage behaviour is introduced in this exercise. These rigidities and the potential for the expansion of employment alter the effects of trade reform. As trade reform lowers domestic consumer prices for liberalizing countries, the pressure on real wages is reduced and this leads to higher employment and higher overall urban and total welfare in this simulation.

48Though domestic consumer prices in OECD countries fall due to liberalization, world commodity prices rise. These higher prices are transmitted to higher domestic consumer prices of countries in Africa, Latin America, and other low-income regions, including China and India. This leads to upward pressure on wages and reduces competitiveness and employment in these countries.

49The impact of agricultural liberalization on world prices in different scenarios is summarized in Table 5.

  • 15 In terms of global GDP, sectoral production, reallocation of resources and hence, factor incomes an (...)

50A comparison of the simulation results forcefully demonstrates the extent to which the gains15 depend on the extent to which countries undertake reforms which go beyond the offers tabled in the Uruguay Round. These results imply that the benefits, in response to liberalization by developed industrialized countries, to developing countries will be minimal if these countries do not liberalize their agricultural sectors. However, changes in prices and production of various commodities, in the long run, are moderate when the impact of agricultural polices are analysed in a CGE framework. This is due to reallocation of resources between sectors in response to the initial price changes.

51Though these studies do not explicitly report the impact on the Indian economy, it can be deduced that India can benefit by removing the protection levels from its highly protected commodities as countries which liberalize the most, benefit the most. Agricultural liberalization results in higher prices for wheat, sugar, meat, and dairy products. India can benefit by reallocating its resources from tea, rice, etc., (products for which price changes rate either negative or minimal and have a higher share in India’s agricultural exports) to dairy products (products for which price changes are significant and have higher shares in India’s agricultural exports).

TABLE 5: CHANGES IN WORLD AGRICULTURAL PRICES (PERCENT DEVIATION FROM BENCHMARK LEVELS IN 2002)

Commodities

I

II

III

IV

V

Wheat

1.2

3.8

6.3

10.3

6.6

Rice

-1.5

-0.9

0.8

3.6

1.3

Coarse Grains

0.1

2.3

3.2

5.4

3.3

Sugar

-1.0

1.8

2.5

11.5

3.0

Beef, Veal, & Sheep Meat

0.2

0.6

1.4

6.0

2.3

Other Meats

-0.9

-0.6

-0.1

2.3

0.6

Coffee

-1.7

-1.5

-1.4

-0.7

-0.7

Cocoa

-1.3

-0.7

-0.6

0.3

-0.1

Tea

-1.6

-1.4

-1.2

0.9

-0.7

Oils

-0.6

-0.3

3.9

5.4

4.6

Dairy Products

-1.3

1.2

2.3

12.1

2.5

Other Food

-1.3

-1.4

-1.5

-0.7

-1.1

Products Wool

-1.1

-0.9

0.5

1.2

0.2

Cotton

-1.3

-1.2

-0.3

1.1

0.2

Other agriculture

-0.5

0.8

0.9

2.9

1.4

Source: Goldin and van der Mensbrugghe (1995).

Indian agriculture

52Although the share of agriculture has been declining over time, agriculture still remains the most important sector of the Indian economy. Agriculture contributes 33% of gross domestic product and provides direct employment to about 64% of the work force.

53India has a great variety of climatic and soil conditions. This results in diverse agro-climatic zones and makes it possible to grow a wide variety of agricultural products. For example, India ranks second only to Brazil in the production of fruits and second only to China in the production of vegetables. India also happens to be the second largest rice producer and the fifth largest wheat producer in the world. The green revolution has witnessed an increase in foodgrains production over the preceding 15-20 years at an average annual rate of 2.5%. From being a net importer of foodgrains, India has become self-sufficient in foodgrains and is today an occasional exporter of foodgrains. For agriculture as a whole, India also enjoys the advantage that agriculture is relatively less import intensive and relatively more labour intensive.

54India’s agricultural exports now account for around 18% of the export basket and the agricultural export basket has also become fairly diversified over the years. Included in agricultural exports are coffee, tea, oil cakes, tobacco, cashew kernels, spices, sugar and molasses, raw cotton, rice, fish and fish preparations, meat and meat products, fruits, vegetables and pulses and processed foods.

  • 16 Gulati, Sharma, Das and Chhabra (1994) is an example.

55Several studies on the export competitiveness of Indian agriculture have been done by Ashok Gulati and his colleagues16, competitiveness being defined solely in price-terms. These tend to show that India is extremely competitive in cereals like rice, moderately competitive in cereals like wheat and not that competitive in cereals like maize and sorghum. In fruits, India is extremely competitive in products like bananas, grapes, sapotas and lychees, moderately competitive in products like mangoes and relatively uncompetitive in products like apples. In vegetables, India is extremely competitive in onions and tomatoes and moderately competitive in potatoes. In processed fruits like mango pulp and apple juice, India is relatively uncompetitive. But India is extremely competitive in processed vegetables like mushrooms and moderately competitive in products like tomato paste.

56If that is the case, why doesn’t India gain much more from the agricultural trade liberalization? The answer again lies in supply-side constraints and the non-introduction of reforms in the domestic agricultural economy.

57Indian agriculture continues to be stifled by export controls and regulations like export quotas and minimum export prices. There is canalisation of exports and imports. There are levies and taxes. Industries like rice milling are reserved for the small-scale sector. There are all sorts of restrictions on inter-state movements and futures trading is generally not permitted. Excise and customs duties on capital goods and packaging also tend to be on the high side. In the food-processing sector, inadequate infrastructure and the lack of processing and refrigeration facilities are constraints. The land ceiling legislation does not permit exploitation of economies of scale. Both public and private investments in agriculture need to be stepped up and the traditional dichotomy between agriculture and industry broken down, with a greater corporate involvement in the industrialization of Indian agriculture.

58All of this is on the agenda for future agricultural reforms. Until that is done the Uruguay Round agreement on agriculture will merely represent an elusive potential that India is not in a position to tap.

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Notes

1 Effectively, textiles and garments and agriculture are also new areas, since prior to the Uruguay Round, they were outside the purview of GATT liberalization.

2 In a recent GATT study (GATT, 1994), the figure given is as high as 510 billion US dollars.

3 “Domestic support measures for which exemption from the reduction commitments is claimed shall meet the fundamental requirement that they have no, or at most minimal, trade-distorting effects or effects on production. Accordingly, all measures for which exemption is claimed shall conform to the following basic criteria: (a) the support in question shall be provided through a publicly-funded government programme (including government revenue foregone) not involving transfers from consumers; and, (b) the support in question shall not have the effect of providing price support to producers” (Clause 1).

4 On the latter, “eligibility for such payments shall be limited to producers in disadvantaged regions. Each such region must be a clearly designated contiguous geographical area with a definable economic and administrative entity, considered as disadvantaged on the basis of neutral and objective criteria clearly spelt out in law or regulation and indicating that the region’s difficulties arise out of more than temporary circumstances” (Clause 13 a).

5 One crore is equal to 10 million. We have used crore figures, as that is how the Ministry of Commerce figures are expressed.

6 The member countries of the Caims Group are Argentina, Australia, Brazil, Canada, Chile, Colombia, Fiji, Hungary, Indonesia, Malaysia, New Zeland, Philippines, Thailand and Uruguay.

7 Although mentioned earlier, perhaps it needs to be reiterated that in the Uruguay Round agreement, farm liberalization policies encompass border measures like tariffication of quantitative restrictions, reductions in tariffs, cutbacks in export subsidies and minimum market access commitments. There are also domestic reduction commitments.

8 Such as Anderson and Tyers (1990), Moreddu, Parris and Huff (1990), Krissoff, Sullivan and Wainio (SWOPSIM) (1990), UNCTAD/UNDP/WIDER (1990).

9 For example, Valdes and Zietz (1980), UNCTAD/UNDP/WIDER (1990), SWOPSIM (1990).

10 The studies are: Burniaux, Martin, Delorme, Lienert and van der Mensbrugghe (1990), Burniaux, van der Mensbrugghe and Waelbroeck (1990), Frohberg, Fisher and Parikh (1990), Goldin and van der Mensbrugghe (1995) and Kilkenny and Robinson (1990).

11 In terms of the developed vis-à-vis developing dichotomy.

12 Partial, as opposed to complete. The final Uruguay Round package only became available in December 1993. Studies conducted before this date, therefore, needed to assume the nature of agricultural liberalization, as opposed to the actual liberalization that is going to take place.

13 Factor mobility being a case in point.

14 The Dunkel Draft Text.

15 In terms of global GDP, sectoral production, reallocation of resources and hence, factor incomes and terms of trade.

16 Gulati, Sharma, Das and Chhabra (1994) is an example.

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