Market access or subsidies

What matters most?

The Doha negotiating agenda is complex, comprising traditional tariffs, non-tariff barriers, trade and investment in services, agricultural subsidies and World Trade Organization (WTO) rules.

Agricultural subsidies have attracted a great deal of attention, because of their harmful effects and owing to the unfairness of developing country farmers having to compete against subsidised produce from rich countries. However, an excessive focus on subsidies may result in market access barriers receiving less attention in the Doha Round and in reducing its potential benefits.

Subsidies are damaging and can have major negative effects on developing country farmers. This is best illustrated by cotton, a product that is so heavily subsidised by the United States that intervention to it lowers world prices substantially (by an estimated 10-20 percent). This has hurt cotton-producing households severely in West Africa. However, recent research from the World Bank illustrates that for most developing countries traditional market access barriers do more damage than subsidies.

Industrialised countries transfer close to US$ 250 billion per year to their farmers. It is often not recognised that two-thirds of this amount involves transfers from consumers, through higher prices paid for food. The instrument used to raise prices is border protection: tariffs. The average agricultural tariff in rich countries is 23 percent. If the effects of non-tariff measures such as quotas and sanitary and phytosanitary measures are added, then agricultural protection reaches 42 percent: ten times higher than for manufacturing. Moreover, agricultural tariffs vary a lot, with some products benefiting from tariffs that are over 100 percent.

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Available research shows that market access barriers in both developed and other developing countries have a larger overall impact than production and export subsidies (see figure above). Policies that affect (lower) export prices for goods matter the most for developing country farmers. It is important to ensure that negotiators do not neglect the traditional market access agenda because open borders 'automatically' discipline governments' ability in subsidising domestic production. If domestic consumers are able to import at the world market price, the costs of supporting inefficient domestic farmers to produce for the world market will be higher.

Many agricultural subsidies are being 'decoupled' from production. This implies subsides are not conditional on production, but, for example, on the assets owned by the farmer. Such subsidies will continue to distort production as long as they benefit households that are engaged in farming. However, they are less likely to induce major trade distortions, especially if countries have agreed to maintain low trade barriers. Income support may also be an effective means of internally redistributing income to rural households, allowing governments to move forward to liberalise access to their markets.

A Doha Round that achieves significant cuts in agricultural domestic production subsidies, but little in terms of improved market access, will miss the point. For farmers in developing countries what matters is market access.

Marcelo Olarreaga
Development Research Group
The World Bank,
1818 H Street, NW
Washington DC
USA 20433
T +1 (0)202 458 802
F +1 (0)202 522 1159
molarreaga@worldbank.org

See also

Agricultural tariffs or subsidies: which are more important for developing countries, World Bank Economic Review 18 (2), 175-204, by Bernard Hoekman, Francis Ng and Marcelo Olarreaga, 2004

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