ECONOMIC AND BUDGET ISSUE BRIEF

Agricultural Trade Liberalization

Over the past 50 years, the United States and many other 

countries have concluded a series of multilateral trade 

agreements that have improved the economic well-being 

of their residents. For the most part, the agreements have 

reduced tariffs and other policies that distort trade in 

manufactured products. Although removing the remaining barriers to such trade has the potential to produce additional benefits, trade barriers in agricultural products 

are higher than those for manufactured goods and present 

a greater opportunity for future gains. That opportunity 

motivated member countries of the World Trade Organization (WTO) to initiate the Doha Round of multilateral 

trade negotiations, and although those talks have been 

suspended, liberalizing trade in agricultural products is 

likely to be a priority in the future.

The Congressional Budget Office (CBO) has published 

several papers assessing current policies that distort world 

agricultural trade and surveying studies that examine the 

effects of reducing or eliminating such policies.1 This issue brief summarizes the conclusions of those papers.

CBO A series of issue summaries from

the Congressional Budget Office

NOVEMBER 20, 2006

Summary

Since the end of World War II, the United States and 

other countries have benefited from agreements reducing tariffs and subsidies that distort international trade 

in manufactured goods. Similar liberalization for agricultural products would provide additional benefits to 

U.S. consumers and producers and to taxpayers by 

reducing federal spending. 

U.S. policies that distort agricultural trade are modest 

by international standards: tariffs and export subsidy 

rates are quite low on average, while rates of tradedistorting domestic subsidies are somewhat higher. 

Those facts suggest that U.S. agriculture has more to 

gain from liberalization in terms of increased exports 

than it has to lose in terms of increased imports.

According to studies surveyed by the Congressional 

Budget Office, the United States and, to a lesser extent, its agricultural sector would benefit economically 

from reductions in agricultural tariffs and subsidies 

worldwide. Many other countries, including all 

major developed countries and most developing countries, would also see a net economic benefit.

If all policies worldwide that distort agricultural trade 

were phased out in this decade, the likely total annual 

economic benefit to the world by 2015 would be 

roughly $50 billion to $185 billion, which is about 3 

percent to 13 percent of the value added by world agriculture. Those estimates account for only the efficiency 

gains and increased investment resulting from liberalization. In studies that also incorporate effects on productivity growth rates, the benefits are 50 percent to 

more than 100 percent larger. 

Roughly 80 percent to 90 percent of the benefit from 

liberalization would come from eliminating tariffs 

and similar import restrictions. However, even relatively modest exceptions for selected tariffs could substantially reduce the benefits that would otherwise be 

realized.

1. See Congressional Budget Office, The Effects of Liberalizing World 

Agricultural Trade: A Review of Modeling Studies (June 2006); The 

Effects of Liberalizing World Agricultural Trade: A Survey (December 2005); and Policies That Distort World Agricultural Trade: Prevalence and Magnitude (August 2005).
2 CONGRESSIONAL BUDGET OFFICE

ECONOMIC AND BUDGET ISSUE BRIEF

Policies That Distort World

Agricultural Trade

In the rubric of international trade negotiations and the 

talks concerning liberalization, policies that distort agricultural trade fall into three major categories: market access, which refers to policies such as tariffs and tariff-rate 

quotas that regulate the access of imports into a country’s 

domestic market; domestic support, which refers to various forms of assistance to domestic producers, such as 

production subsidies and price supports that raise the 

price of agricultural products; and export subsidies 

(sometimes called export competition).

Market Access

Tariffs on agricultural goods remain substantially higher 

than those on manufactured goods almost everywhere 

around the world. According to a 2006 World Bank 

study, the average agricultural tariff for the world as a 

whole in 2001 was more than three times the average for 

all merchandise trade (16.7 percent versus 5.2 percent).2

For high-income countries, the ratio was even greater at 

5.5 (16 percent versus 2.9 percent). Middle- and lowincome countries had lower ratios at 1.9 and 1.4 (16.5 

percent versus 8.9 percent, and 22.2 percent versus 15.9 

percent), respectively. Only a few countries, most of them 

major agricultural exporters, had agricultural tariffs as 

low as their average tariffs for all merchandise trade. For 

the United States, tariffs protecting agriculture were, on 

average, 1.3 times those for all merchandise.

U.S. agricultural tariffs—along with those of Australia 

and New Zealand—are generally low in comparison with 

those of other countries (see Figure 1). According to that 

same World Bank study, the United States’ average rate 

for agriculture and processed foods in 2005 was 2.4 percent. Mexico’s and Canada’s averages were 10.3 percent 

and 9.0 percent, respectively. By comparison, the average 

for the 25 member countries of the European Union 

(EU) coupled with the four member countries of the 

European Free Trade Association (EFTA) was 13.9 percent.3

 Most developing countries had averages that were 

higher still.

Figure 1.

Average Tariff Rates for

Agriculture and Processed

Foods, 2005

(Percent)

Source: Kym Anderson, Will Martin, and Dominique van der 

Mensbrugghe, “Market and Welfare Implications of Doha 

Reform Scenarios,” in Kym Anderson and Will Martin, 

eds., Agricultural Trade Reform and the Doha Development Agenda (New York: Palgrave Macmillan and the 

World Bank, 2006), Table 12.3, p. 345.

Notes: Tariff-rate averages are weighted by imports. 

EFTA = European Free Trade Association.

In many countries, very high tariffs—much higher 

than the average for all agricultural products—and 

tariff-rate quotas (which generally have substantial tariffs 

for imports that exceed the quota) on a few selected products are a significant feature of agricultural protection. 

For example, according to another World Bank study, the

2. Kym Anderson, Will Martin, and Dominique van der Mensbrugghe, “Market and Welfare Implications of Doha Reform Scenarios,” in Kym Anderson and Will Martin, eds., Agricultural Trade 

Reform and the Doha Development Agenda (New York: Palgrave 

Macmillan and the World Bank, 2006).

3. The European Union is effectively one country for purposes of 

international trade. There is free trade among its members, its 

members have a common trade policy toward the rest of the 

world, and the union itself (rather than its individual member 

countries) is a member of the World Trade Organization. 

The European Free Trade Association consists of Iceland, Norway, 

Switzerland, and Liechtenstein.

United States

Australia and New Zealand

Indonesia

Brazil

Argentina

South Africa

Canada

Mexico

China

Rest of Latin America and Caribbean

Bangladesh

Middle East and North Africa

Russia

European Union and EFTA

Turkey

Thailand

Japan

Vietnam

India

Korea and Taiwan

0 10 20 30 40 50 60
ECONOMIC AND BUDGET ISSUE BRIEF

AGRICULTURAL TRADE LIBERALIZATION 3

highest agricultural tariff for the EU is 506 percent.4 For 

the United States, the comparable number is 350 percent; 

and for Korea, 917 percent. Less extreme but still significant are the figures for Japan and Brazil, which are 50 

percent and 55 percent, respectively. Although relatively 

few in number, very high tariffs and tariff-rate quotas insulate a substantial portion of agricultural production 

from international competition. Fifty percent of Eastern 

European production is protected by tariff-rate quotas, as 

is 39 percent of EU production and 26 percent of U.S. 

production. On average, 28 percent of agricultural production in the major industrialized countries of the world 

is protected in that way.5

Domestic Support

Domestic farm subsidies are pervasive around the world. 

Of the 80 countries reporting on their policies to the 

World Trade Organization, 68 indicated that they 

granted subsidies of some kind in at least one of the years 

from 1998 through 2005. Subsidies of all kinds reported 

to the WTO total more than $200 billion per year, or 

roughly one-sixth of the $1.2 trillion total value added in 

the agricultural sector worldwide.

A few countries dominate the total dollar value of subsidies granted. The EU and the United States grant about 

one-third of the world total each—the EU somewhat 

more than the United States because its agricultural sector is slightly larger—and Japan grants almost 12 percent. 

In contrast, Australia, a major agricultural producer, 

accounts for less than one-half of 1 percent of the world 

total.

The EU and the United States have such large subsidies 

in part because they and their agricultural sectors are 

large. Even a small subsidy rate can result in a large total 

subsidy when it is applied to a large output. Ranking 

countries by subsidy rates paints a somewhat different 

picture (see Figure 2). The EU, Japan, and the United 

States have had subsidies averaging 37 percent of their 

Figure 2.

Average Annual Rates of Reported 

Domestic Support, 1998 to 2005

(Percentage of the value of agricultural output)

Source: Congressional Budget Office based on subsidy data 

reported to the World Trade Organization (WTO) by the 

countries in question as of July 31, 2006, and dollardenominated value-of-production data from Producer and 

Consumer Support Estimates, OECD Database 1986-2003, 

on the Web site of the Organisation for Economic Cooperation and Development, and exchange-rate data from 

International Monetary Fund, International Financial Statistics.

Notes: “Support limited by reduction commitments” refers to the 

category of trade-distorting support that was limited and 

that countries made commitments to reduce in the Uruguay 

Round Agreement on Agriculture. It is often referred to as 

amber-box support.

Some countries’ most recent reports of their subsidies are 

for some year earlier than 2005. Of particular interest, the 

most recent reports by the European Union and the United 

States are for 2001. That year is before the European Union 

expanded from 15 member countries to 25.

Some small developed countries have substantially higher 

rates of domestic support for their agricultural sectors than 

any of the countries shown in the figure.

respective agricultural outputs since 1998. The rates for 

Mexico and Canada are 18 percent and 13 percent, 

respectively. Australia and New Zealand have averaged 

5 percent and 2 percent, respectively.

The Uruguay Round Agreement, which preceded the 

current Doha Round and created the WTO in 1995, 

4. World Bank, Global Economic Prospects: Realizing the Development 

Promise of the Doha Agenda, 2004 (Washington, D.C.: World 

Bank, 2003).

5. World Bank, Global Economic Prospects. The figure for the major 

industrialized countries is for the members of the Organisation for 

Economic Co-operation and Development (OECD), which consists primarily (although not exclusively) of the major industrialized countries of the world.

Turkey

Bangladesh

New Zealand

Chile

China

Australia

Mexico

South Africa

Taiwan

Canada

Korea

United States

Japan

European Union

0 5 10 15 20 25 30 35 40

Total Support

Support Limited by

Reduction Commitments
4 CONGRESSIONAL BUDGET OFFICE

ECONOMIC AND BUDGET ISSUE BRIEF

contained the first significant liberalization of agricultural 

trade. That agreement divided domestic agricultural subsidies into two broad categories depending on whether 

they were deemed by the negotiators to significantly distort trade. The subsidies deemed not to distort trade were 

exempted from controls under the agreement. In addition, certain of the trade-distorting subsidies—roughly 

one-third of them by dollar value worldwide—were exempted as well for various reasons. The rest of the tradedistorting subsidies had limits imposed, and countries 

made specific commitments to reduce them.6 Worldwide, about one-third of agricultural subsidies fall into 

that last category. Although the United States and the EU 

provide comparable amounts of subsidies in total, the 

United States provides only about one-third as much support in the trade-distorting category limited by reduction 

commitments. The EU provides well over half of the 

world total of such subsidies, the United States about 

one-fifth, Japan between 8 percent and 9 percent, and every other country substantially less.

As a percentage of agricultural output, U.S. subsidies in 

the category are high enough to significantly distort production and trade but much lower than those of some 

other countries, most notably the EU. The EU’s subsidies 

in the category have averaged 19 percent of the value of 

agricultural output since 1998 (but were a little lower, at 

15.9 percent, in 2001, the most recent year for which the 

EU has reported). The United States’ subsidy rate, at 7.7 

percent, has been less than half of the EU’s. Mexico has 

averaged just over 1 percent and Australia only 0.5 

percent.

Export Subsidies

Export subsidies are granted by substantially fewer countries than are domestic subsidies. Under current international trade rules, a WTO member country may provide 

such subsidies only if it has made a commitment to reduce them.7

 Twenty-five countries, accounting for over 

40 percent of agricultural exports worldwide, have made 

such commitments. The EU makes the greatest use of 

such subsidies, providing 85 percent to 90 percent of the 

export subsidies reported by the 25 countries. The 

United States has accounted for between 1 percent and 2 

percent. The EU’s export subsidies have averaged 6.6 percent of the value of its exports; the United States’, about 

0.05 percent.

The Effects of Liberalizing World

Agricultural Trade

Countries typically adopt trade-distorting agricultural 

policies to benefit their domestic agricultural producers. 

In doing so, however, they generally impose costs on their 

consumers, who as a result must pay more for agricultural 

products protected by tariffs; on their taxpayers, who 

must pay for any subsidies; and on competing foreign 

producers, who lose sales. The costs to domestic consumers and taxpayers alone are usually greater in dollar terms 

than the benefits to domestic producers. Therefore, eliminating those policies generally yields a net economic 

benefit, although the agricultural sector may be harmed.

The Effects of Full Liberalization

Almost all of the studies examined by CBO predict that 

the United States would gain from full liberalization of 

agriculture (that is, complete elimination of all tariffs and 

subsidies) by all countries. The one exception (which uses 

an alternative assumption about the workings of nonagricultural markets) nevertheless predicts that U.S. agriculture would benefit. Moreover, almost all of the studies 

predict that U.S. agriculture as a whole would benefit, although to a lesser extent than would the country as a 

whole. It is difficult to draw reliable conclusions from the 

studies’ estimates of the effects of liberalization on producers of individual agricultural products, some of whom 

would lose subsidies or tariff protection.

6. The net result of the provisions was five categories, or “boxes.” 

The green box is for subsidies that were deemed by the negotiators 

to have little or no distorting effect on trade. The blue box is for 

certain direct payments under production-limiting programs. 

Tying subsidies to requirements that recipients limit production 

is a means some countries use to reduce the distorting effect of 

their income-support programs. The special and differential box is 

for certain development subsidies granted by some developing 

countries. De minimis support consists of subsidies that are below 

specified percentages of the value of production that the negotiators deemed low enough so as not to be a cause for concern. 

Finally, the amber box is for all support not falling into any of the 

other four boxes. Such support, often called nonexempt tradedistorting support, was limited, and countries made commitments 

to reduce it.

7. The Uruguay Round Agreement made a temporary exception for 

developing countries without reduction commitments to provide 

certain kinds of export subsidies during the initial nine-year 

implementation period of the agreement. However, that period is 

now over.
ECONOMIC AND BUDGET ISSUE BRIEF

AGRICULTURAL TRADE LIBERALIZATION 5

The studies generally also find that all developed countries would benefit from a liberalization agreement and 

that most developing countries—including China, India, 

and Brazil—would gain as well. Countries whose agricultural sectors would probably benefit the most include 

Australia, New Zealand, Canada, Brazil, and Argentina. 

Countries whose agricultural sectors would probably be 

harmed the most include members of the European 

Union and the European Free Trade Association and 

high-income Asian countries. The United States is someplace in the middle—as are China and India, whose agricultural sectors are predicted to be little affected.

For the world as a whole, one can conclude on the basis 

of the studies CBO examined that if all policies distorting 

agricultural trade were phased out by the end of this decade, the likely total annual economic benefit by the middle of the next decade from resulting efficiency gains and 

investment growth would be in the range of $50 billion 

to $185 billion, or 0.1 percent to 0.4 percent of the value 

of world output of all goods and services, or roughly 3 

percent to 13 percent of the value added by world agriculture. In the studies that also include effects of liberalization on the rate of productivity growth, the benefits 

are 50 percent to more than 100 percent larger. If the 

other studies that CBO examined had also incorporated 

such effects and found them to be of similar magnitude, 

the range for the estimated total benefit from all three effects of liberalization—efficiency gains, investment 

growth, and productivity growth—would be roughly 0.2 

percent to more than 0.8 percent of global output, or 7 

percent to more than 25 percent of the value added by 

world agriculture.8

Agricultural trade liberalization would most likely increase the real wages of both skilled and unskilled workers 

and, to a slightly lesser extent, interest earnings and profits in almost all countries, with larger effects in percentage 

terms for less-developed countries. Whether the wages of 

unskilled workers increased by more than the wages of 

skilled workers or vice versa for a given country would 

most likely depend on whether the growth of the country’s agricultural output increased or decreased as a result 

of liberalization—with increased growth of output resulting in greater relative growth of unskilled workers’ wages.

Developing countries as a group would benefit more 

from the liberalization of their own policies, which directly affect both their exports and their imports, than 

they would benefit from the liberalization of developed 

countries’ policies, which directly affect only the exports 

of developing countries. To the extent that developing 

countries are harmed by developed countries’ policies 

that distort trade, the evidence suggests that the European Union and high-income Asian countries are much 

larger sources of harm than the United States.

Considerations Concerning Partial Liberalization

A multilateral trade agreement might not eliminate all 

policies that distort agricultural trade. Instead, it might 

eliminate some such policies, reduce others, and leave still 

others in place. The studies that CBO surveyed support 

several observations about the effects of such partial

liberalization.

The Significance of Tariffs. Tariffs and tariff-rate quotas 

are by far the most costly of the policies that distort world 

agricultural trade as they account for 80 percent to 90 

percent of the total cost. Moreover, extremely high tariffs 

on a few selected products cause a disproportionately 

large percentage of the economic burden of agricultural 

tariffs. Correspondingly, an agreement that does not ensure that many of those high tariffs are significantly reduced is not likely to have much beneficial effect. The 

plan in the Doha Round negotiations was to allow each 

country to choose a few sensitive products and each developing country to choose a few additional special products

whose protective tariffs would be cut less than others. 

The 2006 World Bank study modeled variations on a 

prototype scenario for agricultural liberalization in the 

general range of those under discussion in the Doha 

Round. That study found that allowing countries to designate as few as 2 percent of their tariff lines as protecting 

sensitive products and developing countries to designate 

an additional 2 percent as protecting special products 

could eliminate 80 percent of the economic gain that 

would otherwise result from the prototype liberalization 

scenario.

The Effects of Subsidies. Domestic subsidies are the second most costly of the policies distorting agricultural 

trade, followed by export subsidies. Unlike tariffs, which 

tend to harm all countries, subsidies tend to benefit the 

countries purchasing the subsidized products and to 

harm the countries granting the subsidies (although their 

agricultural sectors benefit) and the countries that are 

8. The latter range of estimates assumes that agricultural value added 

maintains the 3.5 percent share of world output that it had in 

2003—the most recent year of available data.
6 CONGRESSIONAL BUDGET OFFICE

ECONOMIC AND BUDGET ISSUE BRIEF

competing agricultural exporters. Because most subsidies 

are granted by developed countries, export subsidies tend 

to benefit developing countries and to harm developed 

countries; and, to a lesser extent, the same pattern is true 

for domestic subsidies.

Actual Tariffs and Subsidies and Their Allowable Values 

Under Agreements. Agreements to reduce tariffs will produce economic benefits only if they lower the tariffs actually in effect. Many agricultural tariffs currently in effect 

are substantially below their maximum allowable values 

that were agreed to in the Uruguay Round Agreement. 

For example, India’s actual tariff on cattle is 39 percent 

even though its allowable tariff is 100 percent.9

 Therefore, an agreement to reduce its allowable tariff by 50 percent would have no effect. For the world as a whole, the 

average agricultural tariff rate is less than one-half of the 

average allowable rate. Further, for least-developed countries, the average tariff is more than 80 percent below the 

average allowable tariff. Multilateral trade agreements 

usually specify reductions in allowable tariffs, not actual 

tariffs. Because of the substantial differences between the 

two, reductions in the allowable tariffs must be quite 

large to effect a meaningful reduction in actual tariffs.

Similar differences between trade-distorting subsidies and 

their allowable amounts mean that reductions in those 

limits also must be substantial to have much effect. For 

example, the EU=s most recently reported subsidies in 

that category were less than one-half of their allowable 

value, so a 50 percent reduction in the allowable value 

might have no effect. The United States’ most recently reported subsidies in the category were almost 25 percent 

below their allowable level, while Japan’s were 84 percent 

below theirs.

Special and Differential Treatment. In international trade 

negotiations, developing countries are often given special 

and differential treatment, under which their required cuts 

in tariffs and subsidies are smaller than those for developed countries. An irony is that such concessions won by 

developing countries are more costly to them than they 

are to developed countries. In the 2006 World Bank 

study, eliminating special and differential treatment from 

its prototype scenario increased the estimated benefits to 

high-income countries by 21 percent, to middle-income 

countries by 37 percent, and to lowincome countries by 64 percent.

Liberalization Beyond the Agricultural Sector

The effects of liberalization in the agricultural sector 

would be influenced by liberalization in other sectors 

such as manufacturing or services. Of particular interest, 

developing countries’ exports of agricultural products to 

developed countries would increase more if developing 

countries reduced their own barriers to imports of manufactured goods. Similarly, developed countries’ exports of 

manufactured goods to developing countries would increase if developed countries reduced their own agricultural tariffs and subsidies. The reason is that such liberalization would make it easier for countries with a 

comparative advantage in agriculture to export agricultural goods in exchange for imports of manufactured 

goods from countries with a comparative advantage in 

manufacturing. Moreover, the 2006 World Bank study 

found that adding liberalization of trade in manufactured 

goods to its prototype agricultural liberalization scenario 

increased the benefit for developing countries more in 

percentage terms than it did for developed countries.

9. Benjamin Buetre and others, “Agricultural Trade Liberalization: 

Effects on Developing Countries’ Output, Incomes, and Trade,” 

Australian Bureau of Agricultural and Resource Economics 

Project 110039 (paper presented to the Seventh Annual Conference on Global Economic Analysis, Trade, Poverty, and the Environment, Washington, D.C., June 17-19, 2004).
ECONOMIC AND BUDGET ISSUE BRIEF

AGRICULTURAL TRADE LIBERALIZATION 7

Bibliography

Some of the studies of agricultural liberalization that 

CBO surveyed for the papers summarized in this issue 

brief are the following:

Anderson, Kym, and Will Martin, eds., Agricultural Trade 

Reform and the Doha Development Agenda (New 

York: Palgrave Macmillan and the World Bank, 

2006).

Beghin, John C., David Roland-Holst, and Dominique 

van der Mensbrugghe, Global Agricultural Trade and 

the Doha Round: What Are the Implications for North 

and South? Working Paper 02-WP 308 (Ames, Iowa: 

Iowa State University, Center for Agricultural and 

Rural Development, June 2002).

Brown, Drusilla K., Alan V. Deardorff, and Robert M. 

Stern, Computational Analysis of Multilateral Trade 

Liberalization in the Uruguay Round and Doha Development Round, Discussion Paper No. 489 (Ann 

Arbor, Mich.: University of Michigan, School of 

Public Policy, Research Seminar in International Economics, December 8, 2002).

Buetre, Benjamin, and others, “Agricultural Trade Liberalization: Effects on Developing Countries’ Output, 

Incomes, and Trade,” Australian Bureau of Agricultural and Resource Economics Project 110039 (paper 

presented to the Seventh Annual Conference on Global Economic Analysis, Trade, Poverty, and the Environment, Washington, D.C., June 17–19, 2004).

Burfisher, Mary E., ed., Agricultural Policy Reform in the 

WTO—The Road Ahead, Agricultural Economic 

Report No. 802 (U.S. Department of Agriculture, 

Economic Research Service, Market Trade Economics Division, May 2001).

Fontagne, Lionel, Jean-Louis Guerin, and Sebastien Jean, 

Market Access Liberalisation in the Doha Round: Scenarios and Assessment, Working Paper No. 2003-12 

(Paris: Centre d’Etudes Prospectives et d’Informations Internationales, September 2003).

Roberts, Ivan, and others, Reforming World Agricultural 

Trade Policies, Australian Bureau of Agricultural and 

Resource Economics Research Report 99.12 and 

Rural Industries Research and Development Corporation Publication No. 99/96 (September 1999).

World Bank, “Envisioning Alternative Futures: Reshaping Global Trade Architecture for Development,” 

Chapter 6 in Global Economic Prospects and the Developing Countries, 2002 (Washington, D.C.: World 

Bank, 2002).

This brief was prepared by Bruce Arnold. It and 

other CBO publications are available at the agency’s 

Web site (www.cbo.gov).

Donald B. Marron

Acting Director