The impact of the Uruguay round on world trade and commodity prices

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FAO has attempted a quantitative assessment of the impact of the Uruguay Round agreement on agricultural markets and trade flows. (The methodology behind the assessment is illustrated in Box 12). The price effects of the Uruguay Round, according to this assessment, are summarized in Table 20. The figures shown represent forecast percentage price changes in the year 200() relative to historical prices in the base period 1987 to 1989. The overall price changes shown are the result of two effects: that which would have taken place even without the Uruguay Round (baseline run) and that which is clue to the Uruguay Round. The price c:hange attributable to the Uruguay Round turns out to he positive for all commodities and, with the exception of oilmeal proteins, is in the range of 4 to 11 percent. The effect, although small, is sufficient to reverse a projected price decline for some commodities, under the baseline run.

- Compared with the base period, both export and import prices in the developing countries increase in real terms. If carried hack to domestic producers and consumers, these increases should give a boost to the traded goods sector vis-Ó-vis the subsistence crope and domestic services sectors, neither of which tend to be traded to any significant extent. Both import and export volumes are therefore likely to he affected positively or negatively according to the trade balance of the main agricultural commodities.

TABLE 20
Change in world food prices by the year 2000 relative to 1987-89 levels

  Baseline Uruguay Round Total
  (...................%.....................)
Wheat - 3 + 7 + 4
Rice + 7 + 8 +15
Maize + 3 + 4 + 7
Millet/sorghum + 5 + 5 +10
Other grains - 2 + 7 + 5
Fats and oils - 4 + 4 0
Oilmeal proteins + 3 0 + 3
Bovine-meat + 6 + 8 +14
Sheep-meat + 3 + 10 + 13
Pigmeat +13 +11 +24
Poultry + 5 + 9 +14
Milk +33 + 8 +41

Source: FAO.

The effects of the Uruguay Round on the food import bills of developing countries are likely to cause a sizeable increase in these bills (Table 21, p. 263). For the low-income fooddeficit countries (LlFDCs) as a whole the food import hill is projected to be US$9.8 trillion (55 percent) higher in the year 2000. About $3.6 billion of this increase (14 percent) would be a result of the Uruguay Round.

The impact of the Uruguay Round on the poorest food importing countries causes particular concern. There will be cases where low-income developing countries have been recipients of targeted export subsidies that have allowed them to pay less than world market prices. With the reduction of these targeted subsidies these countries will increasingly have to pay world market prices at a time when world food prices are expected to increase. There is also some concern that, although the Uruguay Round agreement poses no limits on legitimate food aid, the volume of food aid, which historically has been linked closely to the level of surplus stocks, could be limited in the future as surplus stocks are run down. Clearly, some countries would be in need of assistance to improve consumption levels and, in particular, to compensate them for any increases in their food bills resulting from the Uruguay Round, especially when the country concerned has not gained in net terms in other sectors. With a view to these concerns, however, the Uruguay Round package contains special provisions for developing countries, contained in the Decision on Measures Concerning the Possible Negative Effects of the Reform Programme on Least-developed and Net Food Importing Countries. This decision recognizes the concerns of developing countries and provides for some redress via food aid, technical assistance to raise agricultural productivity and possibly short-term assistance to help in financing normal commercial imports.

BOX 12
FAO'S METHODOLOGY FOR ASSESSING THE IMPACT OF THE URUGUAY ROUND

FAO's assessment was based largely on the world food model (WFM) that covers all commodities in the cereals/livestock/oilseeds complex separated into 147 individual countries or country groups. For commodities outside WFM, single commodity models were developed. In all cases the models simultaneously determine production, consumption, imports, exports and world prices.

The approach to the assessment was to compare the outcome in the year 2000 in the absence of the Uruguay Round provisions (baseline)' with the outcome incorporating Uruguay Round provisions. Projections to the year 2000 are driven by income growth, productivity changes and demographic trends. Income is exogenous to the model. GATT has made a number of estimates of the effect of the entire Uruguay Round agreement on income growth and these predicted gains ranging from US$109 billion to $510 billion. The World Bank/OECD has estimated gains of around US$213 billion. For the purposes of the FAO study the World Bank/OECD figure was taken as the main scenario.

Prices in each country are linked to world market prices by tariffs and other policy effects. For the Uruguay Round scenario, the reduction in tariffs changes these price linkages. The modelling has been done in terms of the primary commodity (e.g. wheat) and the tariff changes for the derived products (e.g. wheat flour) have been aggregated into an average wheat-equivalent tariff. It has usually been assumed that applied tariff changes will reflect changes in the bound tariffs. The reduction in export subsidies has been reflected in an increase to the consumer price in the recipient country that is in addition to any change in world prices caused by trade liberalization. Minimum access has been introduced in those cases where the model did not generate a sufficient volume of imports to meet the national commitments. The value of trade has been calculated by multiplying the volume of trade by an estimated world average export unit price for the year 2000, itself projected as the product of the index of world prices and the base year export unit value. Adjustments were made to take into account the decline in export subsidies and, to some extent, the loss of preferential margins.

BOX 13
ALTERNATIVE ESTIMATES OF THE PRICE EFFECTS OF THE URUGUAY ROUND

Numerous studies have been made on the likely price effect of trade liberalization in the wake of the Uruguay Round. Results vary widely and are in some cases significantly different from those of FAO. In general, recent estimates based on the actual results of the Round show more cautious results in terms of prices than earlier estimates (see The State of Food and Agriculture 1994, Table 3, page 70). A recent World Bank study using the OECD model indicates in fact very modest price increases for most major traded commodities, as shown in the table below.

The study observed that, in the context of the instability and secular decline in world commodity prices, the predicted changes are barely significant. As a consequence, these changes would have a very minor impact on the welfare of the developing countries. For some commodities a modest price decline would be expected. Negative price changes would result from cross-elasticities between crops, with sugar, rice and cotton, which remain relatively more protected than other crops, occupying land previously devoted to less protected crops, such as the other cereals.

Effect of agricultural liberalization on agricultural prices to the year 2002 from benchmark levels

Commodity Change (....%...)
Wheat 3.8
Rice - 0 9
Coarse grains 2.3
Sugar 1.8
Beef, veal and mutton 0.6
Other meats - 0.6
Coffee - 1.5
Cocoa - 0.7
Tea - 1.4
Vegetable oils - 0.3
Dairy 1.2
Other food products - 1.4
Wool - 0.9
Cotton - 1.2
Other agriculture 0.8

Source: Goldin and van der Mensbrugghe 1995

TABLE 21
Food import bills of developing and low-income food-deficit countries (LlFDCs),╣ past and projected▓

  Number of Countries Actual (1987-89) Projected (2000) Size of increase Increase caused by Uruguay Round effect
  (....................US$ billion...................) (.........%........)
WORLD
All developing 137 40.0 64.7 24.7 3.6 15
LIFD 72 17.8 27.6 9.8 1.4 14
AFRICA
All developing 52 6.0 10.5 4.5 0.5 11
LIFD 43 3.5 6.3 2.8 0.2 7
LATIN AMERICA AND THE CARIBBEAN
All developing 46 8.0 12.7 4.7 0.3 6
LIFD 10 1.6 2.4 0.8 0.1 12
NEAR EAST
All developing 19 11.5 16.8 5.3 0.8 15
LIFD 6 3.7 4.7 1.0 0.1 10
FAR EAST
All developing 20 14.5 24.7 10.2 2.0 20
LIFD 13 9.0 14.2 5.2 1.0 19

1 LIFD countries include those with a net deficit in cereals (averaged over the past five years) and a per caput income in 1993 below the cut-off point of US$1 345 used by the World Bank to determine eligibility for International Development Association assistance.
▓ Food comprises cereals, oilseeds and products, meat and dairy products.

TABLE 22
Effect of crop shortfalls and bumper crops on cereal prices, with and without the Uruguay Round
1

  Wheat Rice Maize Millet/ sorghum Other Grains
NORMAL CROP (1987-1989 = 100)  
Baseline (2000) 97 107 103 105 98
Uruguay Round (2000) 104 115 108 110 105
CROP FAILURE (percentage change above normal crop prices)
Baseline (2000) +25.8 +50.5 +24.3 +29.5 +24.5
Uruguay Round (2000) +25.0 +50.4 +24.1 +29.5 +23.8
BUMPER CROP (percentage change below normal crop prices)
Baseline (2000) - 19.6 - 31.8 - 18.4 - 20.0 - 18.4
Uruguay Round (2000) - 19.2 - 31.3 - 18.5 - 20.0 - 18.1

╣ An across-the-board shortfall land bumper crops of 5 percent below (and above) normal levels is assumed for 1999 and its effect on prices in the year 2000 is measured.

An important consideration for food security is the impact of food production shortfalls, which occur quite often. In this connection, an important anticipated benefit of the Uruguay Round is the reduction of the impact of such shortfalls on price instability. The idea behind this view is that, by using tariffication and the reduction of tariffs to increase the number of countries that are open to world price signals, the shocks (arising, for example, from unexpected production shortfalls) will be absorbed by a greater number of markets and this will cushion the effect of such shocks on world prices.

Table 22 summarizes the result of a simulation of the impact a 5 percent production shortfall for cereals (and a 5 percent bumper crop production increase) in 1999 would have on the year 2000, with and without the Uruguay Round. As expected, such a major shock in global production has a dramatic impact on world market prices. Contrary to expectations, however, the simulation shows that the Uruguay Round appears to have almost no effect in stabilizing cereal market prices. One of the reasons for the large effect on prices is that global stocks are not expected to be large in 2000, at just around 17 percent of consumption compared with what was often over 20 percent in the 1980s and early 1990s. These results indicate that countries need to be aware of the risks of occasional sudden price surges of basic foods and that when stocks are inadequate, a shortfall in production will push up prices rapidly with the poorer countries suffering the most.

The continuing problem of international food price instability will need to be carefully monitored in the future and the role of private versus public stockholding will need to be assessed.

IV. The development of regional trade arrangements

The extent of regional trade associations
Rationale for RTAS
The treatment of agriculture in RTAS

The past few years have seen a growing interest in regional trade arrangements (RTAs) and a consequent concern with the prospect of a weakening of the multilateral trading system and the emergence of a small number of powerful regional trade blocs. Many have expressed the fear that these blocs would develop protectionist tendencies towards each other and (however inadvertently) towards third countries. Excluded countries would be forced to take shelter within other regional blocs. Many of the benefits of a broad multilateral trade system would inevitably be compromised, even if trade still stayed open within the blocs. Much agricultural trade flows among these blocs and could be affected by trade tensions arising from non-agricultural sectors and by general hostility in commercial policy attitudes.

However, such fears seem unfounded at present. The increased interest in regional trade pacts does not seem to have led to any marked regionalization of trade flows. It is true that intraregional trade has increased rapidly in recent decades and in Europe, for example, intraregional trade has outpaced trade with the rest of the world. However, the evidence shows that trade within many geographical areas is expanding no faster than that between such areas. It is also clear that regional trade expansion is not always caused by a swing towards regionalism in trade policy. The extent to which the proliferation of trade blocs has in fact led to regionalization of world trade is discussed fully by Lloyd, who concludes that the larger amount of world trade flowing within these blocs is chiefly a function of the expansion of membership. Trade relations are readjusting in part as a reflection of the end of the Cold War and of the declining importance of superpower rivalry and security considerations in trade relations; in part as a reflection of the continued globalization of manufacturing operations in certain sectors; and in part as a means of competing for the limited funds available for investment. Trade blocs are a reaction to these forces.

It is also not obvious that greater intraregional trade is the result of shortcomings in the global trade system. The passage of the Uruguay Round makes it difficult to argue that the growth of regionalism has caused any obvious weakening of the rules of the multilateral system. Regional trade blocs have gone out of their way to emphasize their commitment to a strong multilateral system. New trade blocs have generally been formed with a careful eye to consistency with GATT. In the past, GATT itself has often turned a blind eye towards inconsistencies and few of the existing RTAs have been through a rigorous examination as to their compatibility with Article XXIV. Of some 70 notifications to GATT of the formation of a free-trade area, only four were declared fully compatible with Article XXIV, although none were rejected on the basis of incompatibility. This rather casual application of the rules seems to be coming to an end and, as RTAs pursue more economic and less strategic motives, the examination of their compliance with trade rules will become more rigorous.

Countries in Asia and Latin America have recently emphasized that their integration plans conform to the concept of "open regionalism". This implies not only that regional trade arrangements contain no increase in trade barriers with outside countries (a condition that is relatively easy when the RTA is only a free-trade area) but also that they are undertaken along with a decrease in trade barriers to the outside world. Thus regional arrangements have often been included as part of a structural adjustment programme that includes trade liberalization. Trade diversion may or may not be avoided altogether in this way, hut it is likely to be minimized if third-country trade barriers come down at the same time. In addition, open regionalism usually implies a willingness to extend the RTA to include other interested countries.


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