ECON 436: International Trade TRADE ESSAY FINAL DRAFT

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1 ECON 436: International Trade TRADE ESSAY FINAL DRAFT Question How have the recent developments within the Doha Development Agenda affect the multilateral trade negotiations amongst advance and developing economies? Abstract This paper focuses on multilateral trade negotiations, a term for the negotiations within the General Agreements on Tariffs and Trade (GATT), now the World Trade Organization (WTO). Though the World Trade Organization had success through their previous negotiations, policies proposed in the Doha Development Agenda has continued to create problems for the organization to move forward. Precisely, countries have not come to a compromise with regards to policies in the agricultural sector. The effect of a trade barrier in the form of a export subsidy will be explained using two different models through a home and foreign country with world prices being distorted. Name: Anson Chan ansonchan67@gmail.com Student ID: Course: Econ 436 Due Date: November 21 st, 2012 Professor: Barbara Bloemhof

2 Introduction Before the existence of multi-lateral trade negotiations, countries would engage in bilateral trading, which involved two countries exclusively trading amongst each other with regulations in reductions in trade barriers such as tariffs and quotas. The limitations of restricting policies within the scope of several countries resulted in the creation of the General Agreements of Tariffs and Trade, later the World Trade Organization (Krugman and Obstfeld 233). The General Agreements of Tariffs and Trade/ The World Trade Organization The General Agreements of Tariffs and Trade was established during 1947 where 23 countries gathered together in Geneva, Switzerland with a common goal to reduce trade barriers and liberalize trade (World Trade Organization, 2012). Originally, the plan was to form a group called the International Trade Organization (ITO) that merged the World Bank, International Monetary Funds and the Bretton Woods System, which governs international investments and policies (World Trade Organization, 2012). Though this organization never emerged due to many countries decision to boost up the economy after the end of World War II. The General Agreements of Tariffs and Trade eventually became the World Trade Organization in January 1, 1995, which act as a full-fledged organization that incorporates all the rules from the GATT and to also include rules from the General Agreement on Trade in Services and Agreement on Trade- Related Aspects of Intellectual Property (Krugman and Obstfeld 233). Since the creation of the General Agreements of Tariffs and Trade, there had been a total of nine rounds of negotiations amongst nations aimed to reduce trade barriers across different sectors including goods, services and intellectual property. Looking at Figure 1, each successive round since the creation of GATT has managed to decrease the tariff rates from 36% during 1947 to around 5% in

3 The failure of the Doha Development Agenda / Agriculture Subsidy The recent failure of the Doha negotiation rounds has caused problems for the World Trade Organization as they fear that prolonged negotiations will lead to a breakdown of the development round. The Doha Development Agenda was proposed to build upon the negotiations brought within the Uruguay Round. According to World Trade Organization s agenda, they hope to further liberalize trade policies in distorted markets including agriculture and textiles as these industries are still affected by trade barriers in export subsidies. Particular emphasis on assisting developing economies was also a priority for the World Trade Organization to give them an equal opportunity for growth and development. Figure 2 shows advanced economies with very high producer support upwards to 52% in Korea in comparison to smaller economies such as Mexico and New Zealand with a smaller percentage of support. The high rates for producer support means that there is still a high level of subsidization from the government to protect their industries. The problem with the current negotiations is the failure to propose a satisfying agreement for the advance and developing economies. For advance economies with high producer support such as the European Union, United States, Japan and South Korea, even a 36% reduction in tariffs proposed in the Uruguay Round had minimal effects on developing countries as the rates are still very high (Thamarajakshi 23). Another problem present in the Doha Development Agenda is the Agreement on Agriculture that coincides with the Aggregate Measure of Support (AMS). According to the information given by the World Trade Organization, the Agreement on Agriculture presented specific rules for domestic support, which are placed in either the Amber, Green or Blue Box. Where the amber box measures the level for distortion-support allowed, the green and blue box 2

4 refers to support with minimal distortions. Although the European Union agrees to cut down its Aggregate Measure of Support of up to 75% if the United States agreed to reduce theirs of up to 65%, these figures are trivial to the actual problem (Scott and Wilkinson 620). James Scott and Rorden Wilkinson adds that the problem of Aggregate Measure of Support only accounting for amber boxes and certain blue boxes are exemplified through policies which shift subsidies from the amber to green and blue boxes. As a result of the disputes between agricultural subsidies, emerging economies such as Brazil, China and India are not willing to continue negotiations until adjustments are made to the amount of distortions allowed in advanced economies. Countries such as Brazil argued that the $15 billion USD of proposed domestic support in United States is twice the amount of actual domestic support of $7 billion USD that was imposed back in 2007 (Khor 38). Classical Model of Supply and Demand Effects on Export Subsidy To explain how advance economies can affect foreign developing economies through export subsidization, a simple classical model of supply and demand by Krugman and Obstfeld can be constructed to explain the affects to the exporting and importing country. For this model, the exporting home country with the agricultural subsidy can be the European Union while the foreign country can be Brazil. Looking at Figure 3, assume that the price of grain is at P W. The European Union decides to place a subsidy on grain in order to increase their competitiveness in the agricultural industry. As a result of the subsidy, domestic prices rises from P W to P EX, which also decreases the prices Brazil pays from P W to P IM. As a result of the subsidy, producers from the home country gains at areas a + b + c, while consumers lose areas a + b. Brazilian producers also lose areas a + b due their inability to compete at lower prices. The government also loses, as they have to pay for the subsidy. This equates to a net loss 3

5 of areas b + d + e + f + g. The loss from home consumers and producers from abroad offset the gains from the farmers in the home country. Both the European s Common Agricultural Policy (CAP) and United State s Export Enhancement Program (EEP) are examples of export subsidies imposed on countries to protect their domestic producers. Though under new trade theory, assuming imperfect competition, an export subsidy may prove to be welfare improving, at least for the country imposing the policy (Anania, Bohman and Carter 535). A general-constrained model can also be used to measure the effects of a subsidy on prices built by Anania Bohman and Carter use to measure the Export Enhancement Program. This model has two components, the stock release effect and subsidy effect. Looking at Figure 4, the stock effect pivots the supply curve from S to S or S depending on the level of stock claimed through the commodity. The subsidy effect causes prices to fall from P to P in the world market. Looking at Country A, the fall in prices leads to an increase in imports from quantity D to D due to the increase in production from Q to Q. The subsidy has also increase the excess supply of the world market from ES to ES causing their units of exports to increase from X to X. Though this increase exports may be smaller than the amount of subsidy that is being use making loses larger than gains in the long run. Conclusion The creation of the General Agreements on Tariffs and Trade has led to numerous liberalizations across sectors. The problem that emerged during the Doha Development Round is the result of countries unwillingness to come to a compromise with their protectionist policies on agriculture. As shown through the negotiation rounds, developed economies such as the United States and the European Union have export subsidies imposed to protect their producers in the 4

6 competitive market. Through the creation of the two models, we can see that producer gains are offset by the loss of developing countries. It is easy to see why the World Trade Organization is actively trying to revive the efforts of negotiations to reduce the distortions present through the policies. Looking forward, both the developed and developing economies are hoping to come to a compromise in future negotiations of the Doha Round. 5

7 References "Agricultural Policies in OECD Countries: At a Glance." OECD. OECD 2012, n.d. Web. 3 Nov Anania, Giovanni., Bohman, James., and Carter, Colin A. United States Export Subsidies in Wheat: Strategic Trade Policy or Expensive Beggar-Thy-Neighbor Tactic? American Journal of Agricultural Economics 74.3 Aug (1992): JSTOR. Web. 10 Nov Baldwin, Richard. "21st Century Trade and the 21st Century WTO." Research Institute of Economy, Trade and Industry, IIA. RIETI, n.d. Web. 13 Nov James, Scott, and Rorden Wilkinson. "The Poverty of the Doha Round and the Least Developed Countries." Third World Quarterly 32.4 May (2011): Scholars Portal Journals. Web. 17 Oct Khor, Martin. Behind the July Failure of the WTO Talks on Doha. Economic and Political Weekly Aug (2008): JSTOR. Web. 4 Nov Krugman, Paul, and Maurice Obstfeld. International Economics Theory & Policy. 8th ed. Toronto: Addison Wesley, Print. Reinert, Kenneth A. "The European Union, the Doha Round, and Asia." Asia Europe Journal 5.3 Sept. (2007): Scholars Portal Journals. Web. 15 Oct Thamarajakshi, R. Doha Declaration and Agricultural in Developing Countries. Economic and Political Weekly 37.1 Jan (2002): JSTOR. Web. 6 Nov World Trade Organization. World Trade Oraganization 2012, n.d. Web. 19 Oct

8 Appendices FIGURE 1 Global Trade Liberalization Source: Baldwin, Richard. "21st Century Trade and the 21st Century WTO." Research Institute of Economy, Trade and Industry, IIA. RIETI, n.d. Web. 13 Nov FIGURE 2 Producer Support Estimates as % of gross farm receipts, average Sources: "Agricultural Policies in OECD Countries: At a Glance." OECD. OECD 2012, n.d. Web. 3 Nov

9 FIGURE 3 Effects on A Export Subsidy Source: Krugman, Paul, and Maurice Obstfeld. International Economics Theory & Policy. 8th ed. Toronto: Addison Wesley, Print. FIGURE 4 A General-constrained model, in-kind subsidy Sources: Anania, Giovanni., Bohman, James., and Carter, Colin A. United States Export Subsidies in Wheat: Strategic Trade Policy or Expensive Beggar-Thy-Neighbor Tactic? American Journal of Agricultural Economics 74.3 Aug (1992): JSTOR. Web. 10 Nov