CONGRESS OF THE UNITED STATES

CONGRESSIONAL BUDGET OFFICE

A

PAPER

DECEMBER 2005

The Effects

of Liberalizing

World

Agricultural

Trade: A Survey

CBO

© Royalty-free/bxp31212/Brand X Pictures

The Congress of the United States O Congressional Budget Office

CBO

The Effects of Liberalizing 

World Agricultural Trade: 

A Survey

December 2005 

A

PAPER
Notes

Numbers may not add up to totals because of rounding. 

In this report, the word “country” includes the European Union. For purposes of international 

trade policy, the European Union is effectively one country. 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. 
Preface

A major issue on the agenda of the ongoing Doha Round of multilateral negotiations 

by members of the World Trade Organization concerns how and to what extent policies that 

affect agricultural trade should be liberalized. For most of the postwar period, the series of 

multilateral negotiating rounds under the auspices of the General Agreement on Tariffs and 

Trade allowed policies that distort agricultural trade to continue in large part while tariffs and 

other policies that distort trade in other sectors were progressively reduced or eliminated. The 

Uruguay Round, which took place from 1986 through 1994, began the liberalization of agricultural trade; yet tariffs remain much higher, and the use of subsidies remains much more 

prevalent, in agriculture than in other goods-producing industries.

In August of this year, in response to part of a request by the Chairman of the House Ways 

and Means Committee, the Congressional Budget Office (CBO) published a paper that presented statistics on policies around the world that distort agricultural trade. This paper, prepared in response to the same request, presents the results of studies that estimate the 

economic effects of liberalizing those policies. In keeping with CBO’s mandate to provide 

objective, impartial analysis, this paper makes no recommendations.

Bruce Arnold of CBO’s Microeconomic Studies Division prepared this paper under the supervision of Roger Hitchner, Joseph Kile, and David Moore. (Roger Hitchner has since left 

CBO.) Paul Burnham, Douglas Hamilton, Gregory Hitz, Arlene Holen, Donald Marron, and 

Tom Woodward provided comments on a draft of the paper. Outside of CBO, Ron Babula, 

William Deese, and Roger Corey of the U.S. International Trade Commission, Robert Stern 

of the University of Michigan, and Mary Burfisher of the U.S. Naval Academy provided comments on a lengthier and more detailed paper from which this paper was condensed. (The 

assistance of external reviewers implies no responsibility for the final product, which rests 

solely with CBO.)

Christine Bogusz edited the paper, and Leah Mazade proofread it. Allan Keaton prepared the 

paper for publication, and Maureen Costantino designed the cover. Lenny Skutnik printed 

copies of the paper, and Annette Kalicki and Simone Thomas produced the electronic version 

for CBO’s Web site (www.cbo.gov).

Douglas Holtz-Eakin

Director

December 2005 

Summary vii

Introduction 1

Background 1

Measuring the Effects of Liberalization 2

The Total Cost of Policies That Distort Agricultural Trade 3

The Total Cost to the World 3

Comparison with the Cost of Trade-Distorting Policies in 

Other Goods Sectors 5

Some Important Considerations Concerning Partial Liberalization 5

Breakdown of Costs by Type of Policy 5

Reductions in Bindings Versus Reductions in Actual 

Tariffs and Subsidies 7

Allowance for Sensitive and Special Products 9

The Effects of Liberalizing Other Goods Sectors 10

The Effects of Special and Differential Treatment 11

Distributional Issues 11

Which Countries Would Gain in Terms of Economic Welfare? 11

Which Countries Would Gain in Terms of Agricultural Output? 12

Which Components of U.S. Agriculture Would Gain? 14

What Would Be the Effects on Wages and the Returns to 

Capital and Land? 15

Which Countries’ Liberalization Would Help 

Developing Countries the Most? 15

Appendix: The Implications of Market-Price-Support Programs for 

Negotiated Reductions in Domestic Subsidies 17

Bibliography 19

Box

1. The Effect of the Gaps Between Tariff Bounds and Actual Tariffs 8

CONTENTS

Summary

This paper summarizes the results of a number of 

studies that address the question: What would be the economic effects of reducing or eliminating the policies that 

distort agricultural trade around the world? The question 

is of interest because agricultural trade liberalization is a 

major issue in the Doha Round of multilateral trade negotiations that is currently under way.

The Total Cost of Policies That Distort 

Agricultural Trade

Countries typically adopt trade-distorting agricultural 

policies—tariffs, tariff-rate quotas, production-distorting 

subsidies, and export subsidies—to benefit their domestic 

agricultural producers. In doing so, however, they often 

impose costs on their consumers (who must pay more for 

agricultural products subject to tariffs and tariff-rate quotas), domestic taxpayers (who must pay for any subsidies), 

and 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 is generally beneficial. The studies that the Congressional Budget 

Office (CBO) examined support two major conclusions 

about the economic benefits to the world from eliminating the policies or, alternatively, the cost—in terms of forgone benefits—of keeping those policies in place:

B The likely total annual economic benefit to the world 

in 2015 from efficiency gains and investment growth 

that would result from full agricultural liberalization 

from 2005 through 2010 is in the range of roughly 

$50 billion to $185 billion (measured in 2001 dollars), or 0.1 percent to 0.4 percent of the value of 

world output of all goods and services. Expanding the 

analysis to include the effects of liberalization on the 

rate of productivity growth can raise the estimates by 

amounts ranging from 50 percent to more than 100 

percent, depending on the study.

B The cost of policies that distort agricultural trade is 

roughly two-thirds of the total cost of all policies that 

distort trade in goods of any kind.

Partial Liberalization

Any agreement from the Doha Round is likely to allow 

countries to maintain some policies that distort agricultural trade. As a result, it is important to understand the 

more complicated effects of partial liberalization. The 

studies support the following conclusions about such 

effects:

B Of the policies that distort world agricultural trade, 

tariffs and tariff-rate quotas are by far the most 

costly—accounting for 80 percent to 90 percent of the 

cost—followed by domestic subsidies and then export 

subsidies.

B Subsidies tend to benefit countries purchasing the 

subsidized products and to harm countries granting 

the subsidies and countries that are competing agricultural exporters. Because most subsidies are granted by 

developed countries, export subsidies tend to benefit 

developing countries and harm developed countries. 

To a lesser extent, the same pattern is true of domestic 

subsidies.

B The Doha Round tariff negotiations concern tariff 

bounds—that is, limits above which tariffs may not be 

raised. However, there is a significant gap between 

many tariffs and their current bounds. Because of that 

slack, the percentage reductions in applied rates will 

be much smaller than any negotiated percentage reductions in the bounds. For the world as a whole, the 

average rate of the tariffs actually applied is 55 percent 

lower than the average bound rate. The corresponding 

numbers for developed, developing, and leastdeveloped countries are 47 percent, 57 percent, and 

83 percent, respectively.
viii THE EFFECTS OF LIBERALIZING WORLD AGRICULTURAL TRADE: A SURVEY

B Domestic subsidy-reduction negotiations in the Doha 

Round similarly concern reductions in bound values. 

As with tariffs, most countries’ domestic subsidies are 

significantly lower than their bounds, so the percentage reductions in actual domestic support for agriculture that result from negotiated reductions in the 

support bounds will be much smaller than the percentage reductions in the bounds themselves.

B Extremely high tariffs on selected products, which are 

a common feature in agriculture, account for a disproportionately large percentage of the economic cost of 

agricultural tariffs and tariff-rate quotas. Allowing all 

countries to classify as little as 2 percent of their tariff 

lines as “sensitive products” and developing countries 

to classify an additional 2 percent of their tariff lines as 

“special products”—categories that allow smaller tariff 

cuts than are negotiated for agricultural tariffs generally—could eliminate 80 percent of the economic gain 

that would otherwise result from negotiated agricultural tariff cuts.

B Special and differential treatment—according to 

which the cuts in tariffs and subsidies that developing 

countries are required to make are not as large as those 

required of developed countries—is economically detrimental to developing countries. According to one 

study, eliminating special and differential treatment 

from a realistic liberalization scenario would increase 

the benefit of that scenario to high-income countries 

by 21 percent, to middle-income countries by 37 percent, and to low-income countries by 64 percent.

Distributional Issues

The distribution among and within countries of the economic benefits from agricultural trade liberalization is 

also significant. The studies support the following conclusions relating to distributional issues:

B All except one of the studies predict that the United 

States would gain from full liberalization of agriculture. The one exception (which uses an alternative 

assumption about the workings of nonagricultural 

markets—see the discussion at the end of this summary) nevertheless predicts that U.S. agriculture 

would benefit. The studies generally agree that all developed countries would benefit and that most developing countries—including China, India, and 

Brazil—would gain as well. 

B Countries whose agricultural sectors are likely to benefit most from liberalization include Australia, New 

Zealand, Canada, Brazil, and Argentina. Countries 

whose agricultural sectors are likely to be harmed include the members of the European Union and the 

European Free Trade Association and high-income 

Asian countries. The United States is someplace in the 

middle, with most modeling studies predicting that 

U.S. agriculture as a whole would moderately benefit 

and one predicting a reduction in the rate of growth of 

output. China and India are also in the middle, with 

little effect predicted for their agricultural sectors.

B Predictions are uncertain regarding the effects of liberalization on narrow components of U.S. agriculture.

B Liberalization will most likely increase the wages of 

both skilled and unskilled labor and, to a slightly lesser 

extent, the returns to capital (rates of interest and 

profit) in almost all countries, with larger effects for 

less-developed countries. Whether unskilled wages increase by more than skilled wages do or vice versa will 

most likely depend for each country on whether the 

growth of its agricultural output increases or decreases 

as a result of liberalization.

B Developing countries as a group would benefit more 

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

they would from liberalization of developed countries’ 

policies, which directly affect only their exports. To 

the extent that developing countries are harmed by developed countries’ policies that distort trade, the evidence points to the European Union and high-income 

Asian countries as much larger sources of harm than 

the United States.

A Final Note

Studies of the effects of agricultural liberalization generally must consider the influence of nonagricultural markets as well as agricultural markets. With regard to nonagricultural markets, most studies assume that at typical 

scales of operations, the efficiency and productivity of 

firms are independent of their scale of operations and that 

the markets for their products are competitive. The con-
SUMMARY ix

clusions presented here are drawn from such studies. One 

of the studies that CBO surveyed assumes instead that at 

typical scales of operations, the efficiency and productivity of firms increase with their scale of operations and 

that the markets for their products are therefore less competitive. At least in part because of that difference in assumptions, the results of that study are at odds with some 

of the conclusions presented here.

The Effects of Liberalizing World Agricultural Trade: 

A Survey

Introduction

A central objective of the Doha Round of multilateral 

trade negotiations under the auspices of the World Trade 

Organization (WTO) is to liberalize world agricultural 

markets. To illuminate that issue, the Congressional Budget Office (CBO) published in August of this year Policies 

That Distort World Agricultural Trade: Prevalence and 

Magnitude, which presented statistics on agricultural tariffs, domestic subsidies, and export subsidies around the 

world. This paper follows up on that analysis by summarizing research that addresses the question: What would 

be the economic effects of reducing or eliminating those

policies?

Background

Tariffs, quotas, subsidies, and other policies distorting 

trade in nonagricultural goods have been progressively 

reduced, and in some cases eliminated, by agreements 

reached in a succession of multilateral trade negotiations 

over the post-World War II period. However, policies distorting agricultural trade were largely left alone until the 

Uruguay Round Agreement, the provisions of which have 

been phased in over the past decade.

The Uruguay Round Agreement required that each country’s nontariff barriers to agricultural imports be converted to tariff-rate quotas providing equivalent protection for imports and equivalent access to the country’s 

market. It further required that upper limits (or bounds) 

be set on all agricultural tariffs, above which the tariffs 

cannot be raised. Developing and least-developed countries were allowed to set many of their bounds at levels 

substantially higher than the tariffs they actually imposed 

at the time. A schedule for each country listed the country’s tariff bounds as well as the specifics of its tariff-rate 

quotas. The agreement required that developed countries’ 

bounds be reduced by 36 percent, on average, over six 

years with a minimum cut of 15 percent for each product, and that developing countries’ bounds be reduced by 

24 percent, on average, over 10 years with a minimum 

cut of 10 percent for each product. Least-developed 

countries were not required to make any reductions.

The agreement grouped domestic support measures into 

five categories, or boxes: the green box, the blue box, the 

special and differential box, de minimis support, and the 

amber box. The green box is for measures (defined in 

some detail in the agreement) that were deemed to have 

little or no distorting effects on trade or production. The 

blue box is for certain subsidies that distort production 

but are coupled with production-limiting programs that 

offset to a greater or lesser extent the distortions that 

would otherwise occur. The special and differential box is 

for certain subsidies by developing countries that are part 

of programs for agricultural and rural development. De 

minimis support consists of subsidies below specified levels deemed sufficiently small that any distortion of trade 

and production they might cause is not large enough to 

merit further limitation of the subsidies. The amber box 

is for the remaining subsidies—those considered the most 

distorting to trade. Amber-box subsidies are the only ones 

that the agreement limited and reduced.

The total value of a country’s amber-box support is called 

its total aggregate measure of support, or total AMS. The 

agreement required that each developed country reduce 

its total AMS by 20 percent over six years from its value 

in a base period defined as 1986 to 1988; each developing 

country was required to reduce its total AMS by 13 percent over 10 years. The resulting limits on amber-box 

subsidies are called bound values or bindings, and they are 

listed for each country on its schedule.

The agreement lists the export subsidies to which it applies. The list includes most of the subsidy practices that 

were prevalent in the agricultural sector at the time the 

agreement was negotiated. Although international food 
2 THE EFFECTS OF LIBERALIZING WORLD AGRICULTURAL TRADE: A SURVEY

aid is not on the list, the agreement contains a separate 

provision designed to ensure that food aid is not used as 

an export subsidy. Countries were required to agree to 

reduction commitments for their export subsidies on a 

product-specific basis. In particular, developed countries 

were required to commit to reductions, to occur in equal 

annual steps over six years, of 21 percent in the baseperiod volumes of their subsidized exports and 36 percent 

in their budgetary outlays for the subsidies. Developing 

countries were required to reduce volumes by 14 percent 

and budgetary outlays by 24 percent over 10 years.

Each country’s commitments, also called bound values or 

bindings, are listed on its schedule. In general, no export 

subsidies are allowed without corresponding reduction 

commitments. A temporary exception was made for developing countries to grant certain subsidies related to 

marketing costs and internal transport during the implementation period, which extended for nine years from 

the date the agreement took effect in 1995. The implementation period is now over, so the only export subsidies allowed are those for which the countries granting 

them have made reduction commitments.

Notwithstanding the reductions required by the Uruguay 

Round Agreement, CBO’s August 2005 paper on the 

current status of policies that distort agricultural trade 

drew the following broad conclusions:

B Policies that distort agricultural trade remain much 

more pervasive and substantial around the world than 

policies that distort trade in other goods.

B High agricultural tariffs are most prevalent in East 

Asian countries. The United States has a low average 

agricultural tariff, and the European Union’s (EU’s) 

average is in the middle.

B The European Union provides the largest amount of 

amber-box subsidies as measured by dollar value, with 

the United States a distant second and Japan a distant 

third. The highest rates of such subsidies, measured 

as a percentage of total agricultural output value, 

are those of the members of the European Free 

Trade Association, or EFTA (Iceland, Norway, and 

Switzerland-Liechtenstein), followed by the European 

Union. The United States is further down the list.

B The EU is by far the dominant provider of export subsidies, providing 85 percent to 90 percent of the 

world’s total.

A major goal of the Doha Round is to significantly reduce, or liberalize, the remaining agricultural tariffs and 

subsidies. The task of this paper is to survey the results of 

a number of studies that attempt to estimate the likely 

economic effects of such liberalization.

Measuring the Effects of Liberalization

For an assessment of the overall benefit or harm to countries from liberalization, most studies present estimates of 

welfare effects—technically, a dollar value of the net effect 

of liberalization. Specifically, the studies estimate the additional dollars that would be needed to make countries 

as well off without liberalization as they would be under 

the liberalization scenario at issue.

Liberalization can be expected to have two different kinds 

of effects: static and dynamic. Static effects are those related to reducing the misallocation of each country’s current resources—its capital, labor, land, and natural resources—toward industries favored by current policies 

and away from industries that compete on the basis of 

economic fundamentals. Although such effects may take 

many years to completely phase in, they are “one-time” in 

the sense that the economy shifts from the configuration 

prior to liberalization to the more efficient use of resources afterward—hence, the term static effects.

Over the period of time that the static effects phase in, 

some industries contract (or grow more slowly than they 

would otherwise) while other industries expand (or grow 

more rapidly than they would otherwise).

Dynamic effects of trade liberalization refer to effects on 

and through rates of investment and productivity growth. 

Trade liberalization in general can be expected to increase 

the rate of capital investment. Even if the rate of saving 

remained constant, reductions in tariffs on capital goods 

would decrease their price so that the constant rate of saving would purchase more of those goods. The resulting 

increase in investment would boost the rate of growth of 

the aggregate capital stock of each country for a period of 

time. Eventually, depreciation of the increasing capital 

stock would start to increase as well until net investment 

—investment minus depreciation—returned to what it 

was before liberalization.
THE EFFECTS OF LIBERALIZING WORLD AGRICULTURAL TRADE: A SURVEY 3

Some analysts argue that liberalization can also be expected to increase the rate of productivity growth. Thus, 

one study contends that productivity growth is linked to 

the ratio of exports to output.1

 The study argues that as 

producers’ “exports grow and they increase their penetration of world markets, they learn new technologies 

(through comparison with their competitors’ products); 

they improve production processes to match international standards (such as safety, health, packaging, style, 

and others); and they can benefit from scale economies as 

they produce for a larger market.”2 Unlike in the case of 

investment, any increases that might occur in the rate of 

productivity growth would not eventually be choked off 

by anything analogous to increased depreciation. Hence, 

the effect on output would continue to increase over time 

indefinitely.

Estimates of dynamic effects—particularly effects on productivity growth rates—are subject to greater uncertainty 

than are estimates of static effects, and various studies undertake a mixture of estimates. Some of the studies that 

CBO surveyed incorporate only static effects, others incorporate static and investment effects but not productivity effects, and still others incorporate all three.

Finally, the studies predict the effects of liberalization 

only. They do not forecast changes in the economy stemming from other factors, such as fluctuations of the business cycle. They generally assume that the economy is in 

equilibrium—neither in recession nor in expansion. Were 

a recession to occur by happenstance at the same time 

that liberalization were to occur, that would not necessarily mean that a study’s prediction of gains from liberalization is wrong. Quite possibly the recession would be 

worse in the absence of liberalization.

The Total Cost of Policies That Distort 

Agricultural Trade 

Estimates from a number of studies are generally consistent with an annual welfare benefit to the world of 

roughly $50 billion to $185 billion (measured in 2001 

dollars) by 2015, or 0.1 percent to 0.4 percent of the 

value of world output of all goods and services, from the 

static and investment effects of full global agricultural liberalization phased in from 2005 through 2010. Depending on the study, including the effects of liberalization on 

productivity growth rates can raise the estimate by 

amounts ranging from 50 percent to more than 100 percent. Studies that focus on static effects alone find lower 

gains. The benefits from liberalization can be thought of 

as the cost of keeping in place current policies that distort 

agricultural trade. By some estimates, the cost of those 

policies is roughly two-thirds of the total cost of all policies that distort trade in goods of any kind.

The Total Cost to the World

Eight of the studies that CBO surveyed present estimates 

of the worldwide welfare cost of policies that distort agricultural trade.3 The estimates vary considerably from 

study to study; however, that variance results partly from 

differences in what is measured in the studies and not 

simply from differences in the estimated significance of 

liberalization. First, some of the models incorporate only 

the static effects of liberalization, whereas others include 

static and investment effects, and still others include 

those effects and effects on productivity growth rates 

(hereafter referred to as productivity effects).

Second, the studies have different base years for their economic data and for the trade-distorting policies that they 

analyze. All else being the same, a study with an earlier 

base year for economic data is likely to predict smaller 

welfare effects because studies usually (although not always) apply their liberalization scenarios to the economies described by the base-year data without any allow1. World Bank, “Envisioning Alternative Futures: Reshaping Global ance for growth that has occurred since then. That, in 

Trade Architecture for Development,” Chapter 6 in Global Economic Prospects and the Developing Countries 2002 (Washington, 

D.C.: World Bank, 2002), p. 167.

2. Some of the reasons presented in this quote are more relevant to 

manufacturing than to agriculture. The study in question allows 

for effects of trade on productivity growth in both manufacturing 

and agriculture. Another study allows for such effects only in 

manufacturing. Even changes in the manufacturing sector, however, affect agricultural trade since some countries export manufactured goods in exchange for imports of agricultural products. 

3. The studies are the dynamic analysis in the 2005 World Bank 

study (Anderson, Martin, and van der Mensbrugghe in the bibliography); the static analysis in that same study (Hertel and 

Keeney in the bibliography); the 2002 World Bank study; the 

Economic Research Service study (the Burfisher “Overview” 

and Diao, Somwaru, and Roe in the bibliography); the Brown, 

Deardorff, and Stern study; the study by Roberts and others; the 

study by Buetre and others; and the study by Beghin, RolandHolst, and van der Mensbrugghe.
4 THE EFFECTS OF LIBERALIZING WORLD AGRICULTURAL TRADE: A SURVEY

turn, means that the liberalization is effectively applied to 

smaller economies than would be the case if data were 

used from a later base year, leading to smaller welfare effects measured in dollar values (although not when measured in percentage terms). In the opposite direction, all 

else being the same, studies that have earlier base years for 

the policies being liberalized will predict larger welfare effects because they include in their estimates the welfare 

benefits from liberalization that has already occurred 

since the base year.

Third, in studies with investment or productivity effects, 

the magnitudes of the effects of liberalization vary with 

the length of time between when liberalization is assumed 

to occur and the year that the welfare effect is evaluated, 

because those effects grow over time.

Fourth, some dynamic analyses include growth that does 

not stem from the liberalization at issue—such as population growth and productivity growth arising from factors 

other than liberalization—and others do not. All else being the same, studies that include such growth will predict larger effects measured in terms of dollar value (but 

not necessarily when measured in percentage terms) than 

studies that do not. The reason is that the growth results 

in the economy being larger at the time the welfare effect 

is evaluated.

Fifth, different studies analyze different degrees and kinds 

of liberalization. All else being equal, a study that models 

the effects of full liberalization—that is, elimination of all 

policies distorting agricultural trade—will predict larger 

effects than a study that examines a 50 percent reduction 

in such policies. Similarly, a study of full liberalization 

will predict larger effects than one that presumes elimination of tariffs but leaves subsidies in place.

It is possible to make rough corrections for many of the 

differences to make the various studies’ results more 

nearly comparable with one another. The estimate from 

the dynamic analysis in the 2005 World Bank study is for 

the welfare effect in 2015 (measured in 2001 dollars) 

stemming from static and investment effects of eliminating, in equal annual increments from 2005 through 

2010, all policies distorting agricultural trade. When 

rough adjustments are made to the other estimates of 

static-plus-investment effects in the studies to account for 

differences in timing and liberalization analyzed and 

thereby make them more nearly comparable to the dynamic World Bank estimate, the estimates from all of the 

studies are generally in the range of $50 billion to $185 

billion annually, or 0.1 percent to 0.4 percent of world 

gross domestic product (GDP). Depending on the study, 

adding in effects of liberalization on productivity growth 

rates as well can raise the estimate by amounts ranging 

from 50 percent to more than 100 percent. Static effects 

alone (adjusted to the year 2015) are lower. With one major exception, they are in the range of $50 billion to $170 

billion annually. Moreover, the upper half of that range 

results from considerable uncertainty in the adjustment 

for the study by Roberts and others and the fact that that 

study liberalizes the policies in effect in 1995, when little 

of the Uruguay Round liberalization had yet taken place. 

Without that study, the range would be $50 billion to 

$105 billion.

The major exception to the range of static estimates is the 

estimate from the study by Brown, Deardorff, and Stern. 

That study predicts a static loss in total world economic 

welfare from a balanced reduction in all policies distorting agricultural trade, a result that derives from the reduction of export subsidies. The study finds that a 33 percent 

reduction in tariffs increases world welfare by $9.5 billion, and a 33 percent reduction in domestic subsidies increases it by $10.6 billion. However, a 33 percent reduction in export subsidies reduces world welfare by $23.2 

billion, bringing the total to a net loss of $3.1 billion. 

The reduction in export subsidies benefits the countries 

that grant the subsidies, but the resulting increase in the 

international prices of agricultural products harms countries that import those products even more, resulting in 

the net loss for the world.

As will be seen in the following sections of this paper, the 

Brown, Deardorff, and Stern study also differs from the 

other studies in several of its other major findings. One 

reason for the different results is that the Brown, Deardorff, and Stern study, unlike the others, assumes that 

manufacturing and service industries have increasing returns to scale—that is, that given percentage increases in 

labor, capital, and other inputs to those industries result 

in larger percentage increases in output—and makes corresponding assumptions about the state of competition in
THE EFFECTS OF LIBERALIZING WORLD AGRICULTURAL TRADE: A SURVEY 5

those industries.4 That set of assumptions makes the 

model used in the study significantly different from those 

used in the other studies.

Comparison with the Cost of Trade-Distorting 

Policies in Other Goods Sectors

The World Bank studies and the Brown, Deardorff, and 

Stern study also look at policies distorting trade in sectors 

other than agriculture. The World Bank studies examine 

trade in all other goods sectors, and the Brown, Deardorff, and Stern study looks at policies distorting services 

trade as well. The World Bank studies find that the vast 

bulk of the cost of policies distorting goods trade results 

from policies relating to agriculture. The Brown, Deardorff, and Stern study has the unique result that policies 

distorting agricultural trade produce a net benefit to the 

world.

According to the dynamic analysis in the 2005 World 

Bank study, which includes static and investment effects, 

63.4 percent of the annual benefit from phasing out all 

policies distorting goods trade—$182 billion out of a total of $287 billion—would derive from the elimination of 

policies in the agricultural sector.5 According to the static 

analysis in the same study, 66.1 percent of the static benefits—$55.7 billion out of $84.3 billion—would derive 

from agricultural liberalization.6

The earlier 2002 World Bank study, which uses the same 

basic model as that used in the dynamic analysis in the 

2005 study, presents two estimates for the same liberalization scenario as in the 2005 study: one including static 

and investment effects but no productivity effects, and 

one including all three kinds of effects. The former attributes 69.9 percent of the total annual benefits—$248 

billion out of $355 billion—to agricultural liberalization. 

The latter attributes 70.6 percent—or $587 billion out of 

$832 billion—to agricultural liberalization.

The Brown, Deardorff, and Stern study finds that a 33 

percent reduction in policies distorting agricultural trade 

reduces world welfare by $3.1 billion annually (measuring only static effects). It finds that a 33 percent reduction in policies distorting trade in manufactured goods 

increases world welfare by a much larger $163 billion and 

that a 33 percent reduction in policies distorting services 

trade increases world welfare by a still larger $413.7 billion.

Some Important Considerations 

Concerning Partial Liberalization 

The Doha Round is likely to yield only partial liberalization. Assessment of partial liberalization is complicated 

by a number of factors that do not arise in the assessment 

of full liberalization. Important considerations include 

which trade-distorting policies are most costly economically, the distinction between bound and applied tariffs 

and between bound and applied domestic support, exceptions made for sensitive and special products, the effects of liberalization of other goods sectors, and special 

and differential treatment for developing countries. Some 

of those considerations have the potential to make a liberalization agreement much less beneficial economically 

than it first appears.

Breakdown of Costs by Type of Policy

Breaking down the cost of trade-distorting policies by 

type of policy reveals two significant results: the vast bulk 

of the cost arises from trade restrictions, and a number of 

developing countries—those that are net importers of agricultural products—would be harmed by the elimination of domestic and especially export subsidies.

Tariffs Are the Most Costly Trade-Distorting Policy. Of 

five studies that CBO surveyed that present welfare results by type of policy, four agree that tariffs (and tariffrate quotas) are by far the most costly of the policies distorting agricultural trade.

The static analysis in the 2005 World Bank study estimates the total welfare cost of all policies distorting agricultural trade at $55.7 billion per year.7 It estimates the 

cost of tariffs at $51.8 billion, or 93.1 percent of the total. Domestic support is second at $2.8 billion, or 5.0 

percent of the total. Last are export subsidies at $1.0 billion, or 1.9 percent of the total.

4. Technically, the corresponding assumptions are that products are 

heterogeneous and that industries are monopolistically competitive.

5. See Anderson, Martin, and van der Mensbrugghe in the bibliography.

6. See Hertel and Keeney in the bibliography. 7. Ibid.
6 THE EFFECTS OF LIBERALIZING WORLD AGRICULTURAL TRADE: A SURVEY

The Economic Research Service (ERS) study places the 

costs in the same order.8

 It estimates the total static welfare cost of all trade-distorting policies in agriculture at 

$31.1 billion per year. It attributes $25.2 billion of that 

cost, or 81.2 percent, to tariffs. Domestic support comes 

in second at $2.8 billion, or 9.0 percent. Last are export 

subsidies at $0.3 billion, or 0.8 percent.

The study by Beghin, Roland-Holst, and van der Mensbrugghe, which looks only at the trade-distorting policies 

of high-income countries, actually attributes slightly 

more than 100 percent of the $82.1 billion total annual 

cost of such policies to what it calls “border protection,” 

in which it includes tariffs and export subsidies. That result implies that domestic support by high-income countries actually benefits the world very slightly, which conflicts with the findings of the World Bank and ERS 

studies just discussed.

A study by Hoekman, Ng, and Olarreaga examines 

whether tariffs or domestic subsidies are more detrimental to trade between developed and developing countries 

and consequently to the economic welfare of the two 

groups of countries. Looking only at tariff lines of agricultural products that receive domestic subsidies in at 

least one country (158 tariff lines out of 900 at the sixdigit Harmonized System, or HS, level), the study estimates that a 50 percent cut in tariffs would increase developed countries’ exports 10 times as much, their imports 63 times as much, and their economic welfare 

almost 27 times as much as would a 50 percent cut in domestic subsidies. For developing countries, the cut in tariffs is estimated to increase exports over eight times as 

much as the cut in subsidies. The cut in subsidies reduces 

developing countries’ imports and economic welfare, 

making ratio calculations problematic, but the magnitude 

of the effects of the tariff cut on imports and economic 

welfare is much larger than is the magnitude of the effects 

of the subsidy cuts.

The only study CBO examined that does not find tariffs 

to be the most costly of the policies distorting agricultural 

trade is that of Brown, Deardorff, and Stern. As noted 

earlier, that study (which examines static effects only) 

finds that a 33 percent reduction in tariffs increases world 

welfare by $9.5 billion annually; a 33 percent reduction 

in domestic subsidies increases it by a slightly larger $10.6 

billion; and a 33 percent reduction in export subsidies reduces it by a still larger $23.2 billion.

Eliminating Subsidies Harms Many Developing Countries. In general, subsidies harm the countries that grant 

them (and competing agricultural exporters) and benefit 

the countries that purchase the subsidized products. They 

do so because they cause the subsidized products to be 

sold at prices that are less than the cost of production. 

The effect is more pronounced for export subsidies than 

for domestic subsidies because many of the sales of products receiving domestic subsidies are to domestic customers. High-income countries grant more than 90 percent 

of the domestic subsidies and more than 95 percent of 

the export subsidies reported by member countries to the 

WTO. Therefore, one would expect that eliminating 

those subsidies would benefit many high-income countries and harm many developing countries and that the 

effect would be more pronounced for export subsidies 

than for domestic subsidies.

Results from the static analysis in the 2005 World Bank 

study and from the ERS study support that reasoning. 

The World Bank analysis indicates that eliminating export subsidies would lead to a static annual welfare increase of $2.6 billion for high-income countries and a 

static annual welfare loss of $1.0 billion for developing 

countries. Moreover, 14 of the 17 individual developing 

countries and developing-country regions studied would 

see their welfare decline. Similarly, the ERS study indicates a static annual welfare increase of $2.5 billion for 

developed countries and a static welfare decline of $2.3 

billion for developing countries. Moreover, the study indicates harm to all six of the individual developing countries and developing-country regions examined.

As would be expected, the results are less pronounced for 

domestic subsidies. The World Bank analysis indicates a 

benefit to developing countries as a group from eliminating such subsidies; however, the benefit is small, and a 

number of developing countries are harmed. The ERS 

study indicates harm to developing countries as a group 

and to five of the six individual developing countries and 

developing-country regions it examined. Both studies indicate that high-income countries benefit from the elimination of domestic subsidies.

Two scenarios in the study by Beghin, Roland-Holst, and 

van der Mensbrugghe differ only in the elimination of 

8. See Diao, Somwaru, and Roe in the bibliography. domestic subsidies. A comparison of the results from 
THE EFFECTS OF LIBERALIZING WORLD AGRICULTURAL TRADE: A SURVEY 7

those scenarios indicates that that elimination benefits 

developing countries as a group and harms only one major developing country, China. Contrary to expectation, 

the comparison also indicates that elimination harms 

developed countries as a group. The harm occurs to 

Western Europe and high-income Asian countries—not 

to the United States, which benefits.

Reductions in Bindings Versus Reductions in Actual 

Tariffs and Subsidies

The Doha Round negotiations concerning reductions in 

tariffs and domestic subsidies are framed in terms of reductions in tariff bounds and subsidy bounds—not reductions in actual tariffs and subsidies. The idea is that 

the reductions in the bounds will cause reductions in the 

actual applied values. However, most tariff and subsidy 

bounds are significantly higher than the actual applied 

tariffs and subsidies they are meant to constrain. Consequently, reductions in the bounds will not begin to reduce actual tariffs and subsidies until the slack between 

bound and actual values is eliminated.

Tariff Bindings. CBO’s August 2005 paper on policies 

that distort agricultural trade presented statistics showing 

that the most-favored-nation (MFN) agricultural tariffs 

actually imposed by most countries are significantly lower 

than their bound values:9 19 percent lower, on average, 

for developed countries and lower by much larger 

amounts—ranging from 42 percent in Africa to 65 percent in the Middle East—for developing countries. The 

framework agreement for the Doha Round stipulates that 

“[t]ariff reductions will be made from bound rates” and 

that “[s]ubstantial overall tariff reductions will be 

achieved as a final result from negotiations.” Because of 

the first stipulation, the second will indeed have to be accomplished in order to have even a small effect on actual 

tariffs, and therefore on trade, since actual tariffs will not 

begin to be affected until the bound rates are reduced 

enough to eliminate the gap between bound and actual 

rates. As a corollary, the reductions in applied tariffs will 

be much smaller, on average, than the reductions negotiated in the Doha Round (see Box 1).

That conclusion is strengthened by the fact that many 

countries’ average applied tariffs are lower than their average MFN tariffs. Some developed countries, such as the 

United States and the European Union, have preferential 

tariffs for imports from some developing countries, and 

countries that are parties to free-trade agreements generally charge no tariffs at all on imports from other parties 

to the agreements. Consequently, the differences between 

average tariff bounds and average applied rates are larger 

than the differences between average tariff bounds and 

average MFN rates. Worldwide, the average bound tariff 

for agricultural products is 37.4 percent, whereas the average MFN tariff is 24 percent and the average applied 

tariff is 17 percent.10 Thus, the average applied rate is 

54.5 percent (not percentage points) lower than the average bound rate. For developed countries, the average applied rate is 47.4 percent lower than the average bound 

rate. For developing and least-developed countries, the 

average applied rates are 57.2 percent lower and 82.7 percent lower, respectively, than the average bound rates.11

Domestic Support Bindings. As it does for the tariffreduction negotiations, the framework agreement for the 

Doha Round stipulates that negotiations to reduce domestic support proceed with bound values as their starting point. Specifically, the agreement mandates the negotiation of reductions in levels of trade-distorting domestic 

support, where that term is defined as amber-box support 

plus de minimis support plus blue-box support. Furthermore, the agreement stipulates that the negotiations take 

as their starting point for each country an amount equal 

to the country’s amber-box bound plus its maximum permitted level of de minimis support plus either its level of 

blue-box support in a recent historical period to be agreed 

on or 5 percent of the value of its production in that historical period, whichever is greater. In addition, the agreement mandates the negotiation of reductions in amberbox support alone and stipulates that those negotiations 

take each country’s amber-box bound as their starting 

point.

9. Congressional Budget Office, Policies That Distort World Agricultural Trade: Prevalence and Magnitude (August 2005). With certain exceptions, the WTO agreement prohibits countries from 

charging different tariffs on imports from different WTO members (although they can charge different tariffs to nonmembers). 

The tariffs a country charges to WTO members are called mostfavored-nation tariffs.

10. See Jean, Laborde, and Martin in the bibliography.

11. Ibid.
8 THE EFFECTS OF LIBERALIZING WORLD AGRICULTURAL TRADE: A SURVEY

For most countries, actual amber-box support is significantly lower than its bound value—in excess of 50 percent lower for many countries.12 Consequently, the same 

issue arises as in the tariff negotiations: countries will 

have to agree to substantial reductions in subsidy bounds 

in order to have even a small effect on actual domestic 

subsidies.

In an extensive discussion of domestic support limits in 

the WTO, the 2005 World Bank study argues that the 

necessary reductions may be even larger because of an unintended consequence of the way amber-box support is 

calculated unless the Doha Round Agreement changes 

the method of calculation. That argument is discussed in 

the appendix to this paper.

Economic Effects. Two studies present results showing the 

influence of the gaps between bound values and actual 

values on the benefits from partial liberalization. First, 

the dynamic analysis in the 2005 World Bank study presents simulation results for a scenario of realistic but aggressive tariff and subsidy reductions that are consistent 

with the requirements of the framework agreement for 

the Doha Round. The scenario involves marginal cuts in 

tariff bounds ranging from 35 percent to 75 percent, with 

Box 1.

The Effect of the Gaps Between Tariff Bounds and Actual Tariffs

The effect of the gap, or slack, between tariff bounds 

and actual tariffs on the efficacy of reductions in 

tariff bounds can be illustrated by a simple example. 

Suppose that a tariff bound is equal to 40 percent 

and that the corresponding actual tariff is equal to 15 

percent. The resulting slack between the bound and 

the actual tariff is 25 percentage points, or 62.5 percent of the bound. Therefore, assuming that a country does not cut any of its applied tariffs until forced 

to do so by reductions in the corresponding bounds, 

the applied tariff will not begin to be cut until the 

cut in the bound exceeds 62.5 percent.

The effects of various percentage reductions in tariff 

bounds are as follows:

Thus, a 25 percent or 50 percent cut in the bound 

results in no cut in the actual tariff, and a 75 percent 

cut results in only a 33 percent cut in the actual tariff. Only for a 100 percent cut in the bound is the resulting cut in the tariff not lower than the cut in the 

bound.

The average tariff bound for agricultural products 

worldwide is 37.4 percent, whereas the average tariff 

actually applied is 17.0 percent, which is 54.5 percent lower. Therefore, the typical slack in tariffs is 

similar to that in this example. For any given country, some tariffs are closer to their bounds than are 

others, so a negotiated cut in tariff bounds does not 

have to exceed the percentage difference between a 

country’s average tariff bound and its average applied 

tariff in order to have an effect on the country’s average applied tariff rate. Nevertheless, the basic principle remains that the average cut in applied tariffs will 

be much smaller than the average cut in tariff 

bounds unless the average cut is close to 100 percent. 0 40 15 0

25 30 15 0

50 20 15 0

75 10 10 33

100 0 0 100

Bound

Percentage Tariff Actual

Tariff

After Cut

Percentage

Cut in Actual

Bound Tariff

Cut in Tariff

After Cut

12. For statistics on each country’s amber-box support and bound, see 

Congressional Budget Office, Policies That Distort World Agricultural Trade, pp. 30-31.
THE EFFECTS OF LIBERALIZING WORLD AGRICULTURAL TRADE: A SURVEY 9

the highest tariff bounds receiving the largest cuts.13 It 

also involves cuts in subsidy bounds of 35 percent to 75 

percent, with 75 percent cuts applied to the two countries 

granting by far the most subsidies (the European Union 

and the United States).14 Despite the seeming aggressiveness of the cuts in the bounds, the annual welfare benefit 

to the world predicted by the analysis is $74.5 billion—

only 41 percent of the $182 billion annual welfare benefit 

that the study estimates for the elimination of all policies 

distorting agricultural trade.15

The second study, by Buetre and others, finds that a reduction of 15 percent in bound tariffs would increase 

world gross national product (GNP) by $2.2 billion, 

whereas a reduction of 50 percent would increase world 

GNP by $12 billion. Thus, increasing the reduction in 

bound tariffs by a factor of 3.3 increases the effect on 

world GNP by a factor of 5.5. That happens because a 

significant portion of the initial 15 percent reduction is 

devoted to taking up the slack between the bound tariffs 

and actual tariffs and does not affect the actual tariffs. After that initial reduction, the slack has already been taken 

up for many tariffs, so more of the subsequent 35 percent 

reduction actually lowers tariffs.

Allowance for Sensitive and Special Products

Extremely high tariffs are a common feature in the agricultural sector. A number of countries—particularly, a 

number of high-income food-importing countries and a 

number of developing countries—want to protect some 

of those high tariffs from reduction under the tiered reduction formula that is negotiated. Consequently, the 

framework agreement for the Doha Round contains provisions for so-called sensitive products for all countries and 

special products for developing countries. Such products 

are to be subject to less severe cuts in tariff bounds than 

other products are.

The language in the framework agreement does not specify how many products will be classified as sensitive or 

special or how much the tariffs on such products will be 

cut. The answers to those questions are important because extremely high tariffs are the source of a substantial 

portion of the cost of all policies distorting agricultural 

trade. Moreover, if care is not taken to ensure that the 

number of such tariffs excluded from the tiered reduction 

formula is extremely small, the exemptions will eliminate 

almost all of the benefit from liberalization. Much of the 

benefit can be maintained, however, if a cap is applied to 

the highest tariffs.

Study by Fontagne, Guerin, and Jean. Results from this 

study show the importance of extremely high tariffs. The 

study estimates the effects on welfare, GDP, and trade of 

several different trade-liberalization scenarios that differ 

primarily in how they treat extremely high tariffs. One 

scenario, referred to as “uniform,” consists of a 35 percent 

reduction in all tariffs (not just agricultural tariffs) at the 

six-digit HS level. A second scenario, termed “uniform, 

except peaks,” consists of a 35 percent reduction in all 

tariffs at the six-digit HS level except for nonagricultural 

tariffs that are higher than 15 percent and agricultural 

tariffs that exceed 85 percent, both of which are left 

alone. A third scenario, termed “evening out,” consists of 

a 35 percent reduction in all tariffs at the six-digit HS 

level except for nonagricultural tariffs that are higher than 

15 percent and agricultural tariffs that exceed 85 percent, 

both of which are reduced by a formula that results in a 

more substantial reduction of the higher tariff rates than 

occurs in the uniform scenario, thereby evening out the 

13. Specifically, the framework agreement for the Doha Round calls 

for the negotiation of a tiered tariff-reduction formula in which 

deeper cuts are made in higher tariffs so as to reduce the disparity 

in tariffs across products. The agreement also calls for special and 

differential treatment for developing countries, meaning that 

those countries are not required to liberalize their policies that 

distort agricultural trade as much as developed countries are. In 

accordance with those requirements, the analysis applies to agricultural tariffs a marginal bracket formula of the sort used in the 

U.S. federal income tax system, with different marginal rates and 

inflection points for developed and developing countries. For 

developed countries, the first 15 percentage points of each tariff 

are cut by 45 percent, the next 75 percentage points (the component of the tariff from 15 percent up to 90 percent) are cut by 70 

percent, and any additional percentage points (those above 90 

percent) are cut by 75 percent. For developing countries, the first 

20 percentage points of each tariff are cut by 35 percent, the next 

40 percentage points (those from 20 percent up to 60 percent) are 

cut by 40 percent, the next 60 percentage points (those from 60 

percent up to 120 percent) are cut by 50 percent, and any additional percentage points (those above 120 percent) are cut by 60 

percent. Thus, for a 100 percent tariff imposed by a developed 

country, the cut would be 45 x 15 + 70 x (90-15) + 75 x (100-90) 

= 66.75 percentage points.

14. Specifically, the subsidy cuts are those in the scenario described in 

the appendix. Countries are assumed to eliminate their marketprice-support programs as a means of mitigating actual cuts in 

support, with results as discussed in the appendix.

15. Again, the liberalization is assumed to take place in equal increments from 2005 through 2010, and the welfare benefit is measured in 2015.
10 THE EFFECTS OF LIBERALIZING WORLD AGRICULTURAL TRADE: A SURVEY

higher tariffs to bring them more in line with the lower 

ones. All three scenarios eliminate tariffs below 2 percent.

The study’s results indicate that the effects of the peak 

tariffs are substantial. For many countries, the eveningout scenario increases GDP by twice as much as the 

uniform-except-peaks scenario.

2005 World Bank Study. The importance of keeping the 

number of sensitive and special products small is demonstrated by some results in the 2005 World Bank study. In 

addition to examining the effects on tariff averages of the 

tiered tariff-cutting formula discussed earlier, the study 

calculates the effects on tariff averages that result from a 

scenario with the same tiered tariff-reduction formula but 

with allowances for sensitive and special products.16 In 

that scenario, all countries are allowed to select 2 percent 

of their tariff lines as sensitive products, and all developing countries are allowed to select an additional 2 percent 

of their tariff lines as special products. Tariff bounds on 

sensitive and special products are exempted from the 

tiered reduction formula applicable to the bounds for 

other products and instead are cut by 15 percent. Countries are assumed to select as sensitive and special products those tariff lines that would cause the biggest reduction in tariff revenues if the tiered formula were applied, 

ensuring that the tariff lines chosen involve both high tariffs and significant import volumes.

The results show that the straight tiered tariff-reduction 

scenario reduces the trade-weighted average world tariff 

by 5.5 percentage points, but the scenario that allows for 

sensitive and special products reduces it by only 1.1 percentage points. Thus, the allowance eliminates 80 percent 

of the reduction in the average world tariff.

In part, the allowance for sensitive and special products 

has such a large effect because the 2 percent of tariff lines 

chosen cover a disproportionately large amount of trade. 

If sensitive and special products are limited to tariff lines 

covering 2 percent of the value of imports instead of 2 

percent of tariff lines, the reduction in the average world 

tariff is 4.5 percentage points—more than 80 percent of 

the reduction from the tiered formula.

The framework agreement for the Doha Round calls for 

further evaluation of a tariff cap in connection with sensitive products. If a 200 percent tariff cap is added to the 

scenario in which countries are allowed to designate 2 

percent of their tariff lines as sensitive and special products—that is, after the cuts in that scenario have been 

made, all tariffs over 200 percent are cut to 200 percent 

—the resulting cut in the average world tariff is 3.2 percentage points. Thus, with the tariff cap, almost 60 percent of the reduction from the tiered formula without 

provision for sensitive and special products is maintained.

The welfare effects of allowing for sensitive and special 

products and of implementing a 200 percent tariff cap as 

calculated in the dynamic analysis of the study are what 

one would expect from the effects on tariff averages.17

Without the allowance for sensitive and special products, 

the tiered reduction scenario results in an annual welfare 

benefit to the world of $74.5 billion in 2015 from the reductions phased in from 2005 through 2010. With countries allowed to select 2 percent of their tariff lines as sensitive products (and developing countries allowed to 

select an additional 2 percent of their lines as special 

products), the annual welfare benefit drops to $17.7 billion. Adding a 200 percent tariff cap pushes the benefit 

back up, to $44.3 billion.

The Effects of Liberalizing Other Goods Sectors

The Doha Round of trade negotiations covers not only 

agricultural liberalization but also the liberalization of 

trade in other goods. Developed countries’ exports of 

manufactured goods to developing countries would be 

increased by the developed countries’ liberalization of 

their own agricultural markets, and developing countries’ 

exports of agricultural products to developed countries 

would be increased by developing countries’ reducing 

barriers to imports of manufactured goods. The reason is 

that both areas of liberalization 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 gain to developing countries from reducing barriers to imports of 

manufactured goods is greater in percentage terms than is 

the gain to developed countries, according to results from 

the dynamic analysis in the 2005 World Bank study.

In addition to the results for the tiered agricultural formula discussed earlier, that analysis presents results for 

16. See Jean, Laborde, and Martin in the bibliography.

17. See Anderson, Martin, and van der Mensbrugghe in the bibliography.
THE EFFECTS OF LIBERALIZING WORLD AGRICULTURAL TRADE: A SURVEY 11

the same tiered-formula scenario modified to include cuts 

in tariffs on nonagricultural products. The cuts are 50 

percent for developed countries, 33 percent for developing countries, and zero percent for the least-developed 

countries. Developed countries and developing countries 

both benefit in terms of economic welfare from the additional tariff cuts on nonagricultural products. Under the 

tiered agricultural scenario only, developing countries 

have a welfare benefit of $9.0 billion; when the tariff cuts 

on nonagricultural products are included, the welfare 

benefit rises to $16.1 billion—an increase of 78.9 percent. For developed countries, the respective welfare benefits under the two scenarios are $65.6 billion and $79.9 

billion—the latter being 21.8 percent larger than the 

former.

The Effects of Special and Differential Treatment

The framework agreement for the Doha Round calls for 

special and differential treatment for developing countries, 

which means that they will not be required to make cuts 

in their tariffs and subsidies that are as deep as those required of developed countries. That provision, which has 

been a feature in previous negotiating rounds as well, is a 

concession by the developed countries to the developing 

countries. In fact, however, additional simulation results 

from the 2005 World Bank study indicate that special 

and differential treatment is more harmful to developing 

countries than it is to developed countries, and it is especially harmful to low-income developing countries.

The dynamic analysis in the 2005 World Bank study presents results for a scenario identical to the one discussed 

in the previous subsection—that is, the tiered agricultural 

formula plus cuts in tariffs on nonagricultural products—

except that it contains no special and differential treatment for developing countries and instead requires them 

to make the same cuts required of developed countries. 

Elimination of special and differential treatment increases 

the annual welfare benefit to developed countries from 

$79.9 billion to $96.4 billion—a 20.7 percent increase. 

The annual benefit to middle-income developing countries rises from $12.5 billion to $17.1 billion—an increase of 36.8 percent. The annual benefit to low-income 

developing countries grows by 63.9 percent, from $3.6 

billion to $5.9 billion.

The reason that developing countries favor such a provision notwithstanding its harm to them lies in the unemployment and other temporary ills that accompany the 

adjustment of their economies to the liberalization. Many 

developing countries’ economies are comparatively inflexible, so unemployment may last longer than it would in 

many developed countries. Moreover, many developing 

countries’ tariffs are higher than the tariffs of many developed countries. Finally, the temporary loss of income 

from unemployment is often a more severe problem for 

people with low incomes than for people with high incomes, and people with low incomes are more numerous 

in developing countries than in developed countries.

Distributional Issues 

A number of questions arise regarding the distribution of 

the gains to the world from agricultural liberalization, 

both internationally and within countries. Which countries would gain and which ones would lose? Which 

countries’ agricultural sectors would gain or lose? In the 

United States, which parts of the agricultural sector 

would gain or lose? How would agricultural liberalization 

affect the wages of unskilled and skilled labor and the returns to owners of capital and land? Finally, which countries’ liberalization would help developing countries the 

most? This section answers each of those questions in 

turn.

Which Countries Would Gain in Terms of Economic 

Welfare?

The studies that CBO reviewed are nearly unanimous in 

predicting that the United States and all other developed 

countries would benefit in terms of their economic welfare from the global elimination of all policies distorting 

agricultural trade. Similarly, almost all of the studies agree 

that developing countries as a group would gain, but by a 

smaller amount, and some studies indicate that some developing countries would lose initially. Over time, however, some or all of the countries that initially lost would 

eventually gain as the investment and productivity effects 

of liberalization overtook the negative static effects on 

those countries.

The United States. Seven of the studies that CBO surveyed present estimates of the welfare effects of agricultural liberalization on the United States.18 All except one 

18. The studies are the dynamic analysis in the 2005 World Bank 

study (Anderson, Martin, and van der Mensbrugghe in the bibliography); the Economic Research Service study (the Burfisher 

“Overview” and Diao, Somwaru, and Roe in the bibliography); 

the Brown, Deardorff, and Stern study; the study by Roberts and 

others; the study by Buetre and others; the Fontagne, Guerin, 

and Jean study; and the Beghin, Roland-Holst, and van der 

Mensbrugghe study.
12 THE EFFECTS OF LIBERALIZING WORLD AGRICULTURAL TRADE: A SURVEY

indicate that the United States would gain. Once again, 

the Brown, Deardorff, and Stern study is the exception.

As was the case for the world welfare effect discussed earlier, the estimate of the U.S. welfare effect from the dynamic analysis in the 2005 World Bank study is for the 

welfare effect in 2015 (measured in 2001 dollars) stemming from static and investment effects of eliminating all 

policies distorting agricultural trade in equal annual increments from 2005 through 2010. When rough adjustments are made to the other static-plus-investmenteffects estimates to account for differences in timing and 

liberalization analyzed and to thereby make them more 

comparable to the dynamic World Bank estimate, the estimates from most of the studies are in the range of $8 

billion to $27 billion annually, or less than 0.1 percent to 

about 0.2 percent of GDP.19 Static effects alone (adjusted 

to the year 2015) are lower. With the exception of the 

Brown, Deardorff, and Stern study, they are in the range 

of $10 billion to $18 billion annually. Similar to the case 

for the world welfare effect but to a lesser degree, the upper end of that range is extended by considerable uncertainty in the adjustment for the estimate from the study 

by Roberts and others and by the fact that that study liberalizes the policies in effect in 1995, when little of the 

Uruguay Round liberalization had yet taken place. Excluding that study, the range would be $10 billion to $15 

billion.

The welfare loss predicted by the Brown, Deardorff, and 

Stern study does not stem from harm to U.S. agriculture. 

To the contrary, that study predicts gains for U.S. agriculture. The reason for the loss is that the expansion of agriculture draws capital, labor, and other resources away 

from the manufacturing sector, causing it to shrink. As 

noted earlier, this study assumes increasing returns to 

scale in nonagricultural sectors, so when those sectors 

shrink, they become less productive. Because agriculture 

is assumed to have constant returns to scale, there is no 

offsetting increase in the productivity of agriculture when 

it expands. As a result, economic welfare declines.

Other Countries. Just as they do for the United States, almost all of the studies predict that all other major developed countries and groups of countries would gain in 

terms of economic welfare from agricultural liberalization. Only the study by Brown, Deardorff, and Stern predicts welfare losses for developed countries. It predicts 

losses for all of the developed countries and regions modeled except for a grouping of countries that encompasses 

the European Union and the European Free Trade Association.

In general, the studies predict that developing countries 

would gain as a group, as would most individual developing countries and groups of countries, including China, 

India, and Brazil. Some studies predict losses for some individual developing countries. The reasons for the losses 

are twofold. First, tariff reductions around the world 

would increase the demand for agricultural products internationally, and subsidy reductions would reduce their 

supply. The combination of increased demand and reduced supply would cause international prices to rise. For 

developing countries that import more agricultural products than they export, that price rise would be detrimental. Second, many developing countries are granted preferential tariffs by some developed countries, such as the 

United States and the European Union. Particularly in 

the case of the EU, liberalization would mean reduced 

price supports and increased imports from other countries that would drive down prices within the EU. As a result, the countries receiving preferential tariffs would receive lower prices for their exports to the EU.

The static studies have a greater tendency to show welfare 

losses for developing countries than do the studies that 

include investment or productivity effects of liberalization. Investment and productivity effects are generally 

positive for most, if not all, countries, and over time they 

tend to offset and even overcome any negative static effects.

Which Countries Would Gain in Terms of 

Agricultural Output?

To say that a country benefits from liberalization does not 

necessarily mean that its agricultural sector benefits, and 

neither does harm to a country from liberalization necessarily mean that the country’s agricultural sector is 

harmed. Agricultural policies often are implemented to 

benefit a country’s agricultural sector, not to benefit the 

country as a whole. This section looks at the effect of ag19. The adjusted estimate for the study by Fontagne, Guerin, and 

Jean is considerably higher than that range, and it is not possible 

to adjust the estimate for the study by Beghin, Roland-Holst, and 

van der Mensbrugghe. 
THE EFFECTS OF LIBERALIZING WORLD AGRICULTURAL TRADE: A SURVEY 13

ricultural liberalization on output and value added in the 

agricultural sector around the world.20

The World. The two studies that present estimates of the 

effect of liberalization on total agricultural output worldwide both predict that effect to be slightly negative. The 

dynamic analysis in the 2005 World Bank study estimates 

that full liberalization of all goods trade would reduce the 

rate of growth of world agricultural output slightly—

from the baseline average of 3.2 percent per year to an average of 2.9 percent per year. It estimates that the scenario 

of the tiered agricultural formula plus tariff cuts for nonagricultural products that was discussed earlier would reduce growth slightly less—to an average of 3.0 percent 

per year. Similarly, the study by Beghin, Roland-Holst, 

and van der Mensbrugghe, which uses the same basic 

model but an older data set for trade policies, predicts 

that if full liberalization of all goods trade by high-income 

countries was phased in from 2005 through 2010, annual 

world agricultural output in 2015 would be reduced by 

0.6 percent from its baseline value.

The United States. Four of the five studies that present estimates of liberalization’s effects on U.S. agricultural output or value added, or from which such effects can be inferred, predict that the U.S. agricultural sector as a whole 

would benefit. The one study that predicts a negative effect nevertheless predicts continued growth of the sector, 

but at a slower rate.

The dynamic analysis in the 2005 World Bank Study—

alone among the analyses that CBO surveyed—predicts 

that liberalization would reduce the average annual 

growth rate of U.S. agricultural output from 2005 

through 2015, with the result that agricultural value 

added would be lower in 2015 than it would be in the absence of liberalization. Growth would remain positive, 

however, at 1.3 percent per year under full liberalization 

of all goods trade, and a slightly higher 1.9 percent per 

year under the more realistic scenario of the tiered agricultural formula plus tariff cuts for nonagricultural products. As a result of the reduced growth rate, agricultural 

value added would be 15 percent lower in 2015 under 

full liberalization of all goods trade than it would be in 

the absence of liberalization, and 5.2 percent lower under 

the scenario of the tiered agricultural formula plus tariff 

cuts for nonagricultural products.

The Brown, Deardorff, and Stern study predicts that a 33 

percent reduction in all tariffs, subsidies, and other policies distorting trade in agricultural products, other goods, 

and services would result in a static increase in agricultural output of 1.86 percent. (The liberalization scenario 

for this result is more comprehensive than the one that 

produced most of the results from that study presented 

earlier in this paper. The scenario for those results involved a 33 percent reduction in only those policies distorting trade in agriculture.)

The study by Beghin, Roland-Holst, and van der Mensbrugghe estimates a gain of 0.7 percent in U.S. agricultural output in 2015 from full liberalization by highincome countries phased in from 2005 through 2010. It 

further estimates that such liberalization would increase 

value added in rural areas by 4.8 percent and that removal 

of border protection (import tariffs and export subsidies) 

by high-income countries would increase it by 6.6 percent. Presumably the study would predict even larger increases in output if the liberalization scenarios were extended to developing countries as well.

The study by Fontagne, Guerin, and Jean does not 

present estimates of effects on either agricultural output 

or value added. It does, however, present data on factor 

returns indicating that the tariff-reduction scenarios it examines would result in increases in the rates of return on 

land (explicit or implicit rents) in the United States. The 

increases imply that the model predicts that the U.S. agricultural sector would benefit from the tariff-reduction 

scenarios.

Finally, a study by Cooper, Johansson, and Peters that 

uses a partial-equilibrium model of the agricultural sector 

estimates that full global agricultural liberalization would 

cause a static increase of 0.3 percent in the volume of 

U.S. agricultural output and a 4.2 percent increase in the 

value of that output.

Taken together, the results of the five studies are consistent with the proposition that reducing agricultural tariffs 

benefits U.S. agriculture as a whole and that reducing domestic support harms U.S. agriculture as a whole. In particular, the study by Beghin, Roland-Holst, and van der 

Mensbrugghe estimates a larger increase in rural value 

added from removal of border protection than from full 

20. The value added in an industrial sector or region is the difference 

between the value of output of the industry or region and the 

value of raw materials and intermediate goods used to produce the 

output.
14 THE EFFECTS OF LIBERALIZING WORLD AGRICULTURAL TRADE: A SURVEY

liberalization. In addition, one of the three studies that 

model tariff and subsidy reductions together—the dynamic analysis in the World Bank study—is the only one 

to predict a negative effect on U.S. agriculture; a second—the Brown, Deardorff, and Stern study—finds the 

static effect to be small in magnitude, suggesting the effects of the two liberalizations may be offsetting each 

other; and the third—the Cooper, Johansson, and Peters 

study—finds the effect on output volume to be very 

small.

Other Countries. Notwithstanding the different liberalization scenarios examined, the studies are largely in 

agreement concerning which other countries’ agricultural 

sectors would gain and which ones would lose from liberalization. According to the World Bank’s dynamic analysis, the big winners under full liberalization of all goods 

trade and under the scenario of the tiered agricultural formula plus tariff cuts for nonagricultural goods would be 

the agricultural sectors of Brazil, Argentina, Australia and 

New Zealand, Canada, and Latin America and the Caribbean generally. The agricultural sectors of developing 

countries as a group would gain, but that gain would be 

almost entirely among middle-income developing countries. The agricultural sectors of low-income developing 

countries as a group would be almost unaffected. The 

study estimates no effect on Chinese agriculture. Full liberalization would cause a very small loss for India’s agricultural sector, and the tiered agricultural formula plus 

tariff cuts for nonagricultural goods would lead to a very 

small gain.

The study by Beghin, Roland-Holst, and van der Mensbrugghe predicts that the agricultural sectors gaining the 

most from liberalization by high-income countries would 

be those of Australia and New Zealand, Argentina, Canada, and Latin America and the Caribbean. Brazil’s and 

India’s agriculture would see small gains, and Chinese agriculture would see a very small gain. The winning agricultural sectors implied by the factor-returns results for 

tariff reduction from the study by Fontagne, Guerin, and 

Jean are those of members of the Cairns Group and 

members of the African, Caribbean, and Pacific Group of 

States (ACP).21

The agricultural sectors experiencing the biggest losses in 

the two liberalization scenarios of the World Bank’s dynamic analysis are those of the European Union, the European Free Trade Association, and Japan, which the 

study finds would actually shrink from 2005 through 

2015. Also losing are the agricultural sectors of Korea and 

Taiwan, which are projected in the study to have almost 

no growth over those years under full liberalization of all 

goods trade and slower growth than that of the U.S. agricultural sector under the more-realistic scenario of the 

tiered agricultural formula plus tariff cuts for nonagricultural goods.

In the study by Beghin, Roland-Holst, and van der Mensbrugghe, losing sectors from full liberalization by highincome countries include those of Western Europe and 

high-income Asian countries (Japan, South Korea, Taiwan, Singapore, and Hong Kong). In the tariff-reduction 

scenarios of the study by Fontagne, Guerin, and Jean, 

the losing agricultural sectors are those of Japan, the 

European Union, developing Asia (except in the study’s 

“evening-out” scenario), and the rest of the world (that is, 

the world other than the United States, Japan, the European Union, the Cairns Group, developing Asia, and the 

members of the ACP).

Which Components of U.S. Agriculture Would Gain?

Not all components of U.S. agriculture can be expected 

to fare equally well under a liberalization agreement. 

Seven studies that CBO surveyed present productspecific effects of various general agricultural liberalization scenarios on U.S. agriculture, and another three 

present effects of liberalization of either the sugar component or the oilseeds component of agriculture alone.22 An 

21. The Cairns Group is a coalition of agricultural exporting countries formed in 1986. Its members are Argentina, Australia, 

Bolivia, Brazil, Canada, Chile, Colombia, Costa Rica, Guatemala, 

Indonesia, Malaysia, New Zealand, Paraguay, the Philippines, 

South Africa, Thailand, and Uruguay. 

The ACP is an organization of countries created by the Georgetown Agreement in 1975 with objectives that include sustainable 

development of its member states and their gradual integration 

into the global economy. Its members include 76 developing 

countries in Africa, the Caribbean, and the Pacific.

22. The seven studies of general agricultural liberalization scenarios 

are the Cooper, Johansson, and Peters study; the Food and Agricultural Policy Research Institute study; the Beghin, RolandHolst, and van der Mensbrugghe study; the study by Roberts and 

others; the Tsigas and Ingco study; the Economic Research Service 

study (Young and others in the bibliography); and the study by 

the Organization for Economic Cooperation and Development. 

The three studies of liberalization of the sugar component and the 

oilseeds component of agriculture alone are the Elobeid and 

Beghin study; the Koo study; and the Meilke, Wensley, and Cluff 

study.
THE EFFECTS OF LIBERALIZING WORLD AGRICULTURAL TRADE: A SURVEY 15

overall assessment of the results of the studies is difficult 

because of differences in how the studies divide agriculture into sectors, differences in the liberalization scenarios, and conflicts among the studies’ results concerning 

how some sectors would fare under liberalization. 

Product-specific effects appear to be among the studies’ 

least reliable predictions.

Overall, it would appear that more sectors within U.S. 

agriculture would benefit than would be harmed by liberalization. Among the likely gainers are beef producers 

and, to a lesser degree of certainty, rice producers. Sugar 

producers would most likely lose. Given the difficulties 

and the conflicts among the studies, it is hard to place 

much confidence in predictions one way or the other for 

most other individual sectors.

What Would Be the Effects on Wages and the 

Returns to Capital and Land?

Four of the studies that CBO surveyed present estimates 

of the effects of liberalization on returns to factors of production (such as wages, returns to capital, and rents on 

land). Three of the four studies—the 2005 World Bank 

study, the 2002 World Bank study, and the study by Fontagne, Guerin, and Jean—show the same patterns of effects to varying degrees. The patterns in the effects, and 

their implications, are clearest in the results from the 

2005 World Bank study, so the following discussion presents those results, followed by the different results of the 

fourth study.

2005 World Bank Study. The dynamic analysis in the 

2005 World Bank study presents estimates of the effects 

of full liberalization of all goods trade on real factor returns (that is, factor returns adjusted for price changes). 

Because the policies distorting agricultural trade are by far 

the most significant of the policies distorting goods trade, 

the results should reflect primarily the effects of agricultural liberalization. The estimates exhibit four overall patterns overlaid upon one another.

First, for the world as a whole and for almost all countries 

and regions individually, the wages of both unskilled and 

skilled labor and the returns to capital increase.

Second, the percentage increases in wages and returns to 

capital tend to vary inversely with the level of development of a country, thereby reducing inequality of incomes among countries. Thus, for unskilled labor, the average wage increases by 4.2 percent for low-income 

developing countries, by 3.2 percent for middle-income 

developing countries, and by 0.6 percent for high-income 

countries. For skilled labor, the average wage increases by 

3.9 percent for low-income developing countries, by 2.6 

percent for middle-income developing countries, and by 

1.1 percent for high-income countries. Returns to capital 

increase by 1.9 percent for low- and middle-income developing countries and by 0.5 percent for high-income 

countries.

Third, for the world as a whole and for the vast majority 

of the individual countries and regions modeled, the 

wage gains are larger in percentage terms than are the increases in returns to capital. Assuming that owners of capital tend to be wealthier, on average, than either unskilled 

or skilled labor, which is likely to be true in most countries, the larger increase in wages should tend to reduce 

income inequality within countries.

Fourth, in countries and regions where the growth of agricultural output increases, the wages of unskilled labor 

rise more than those of skilled labor, and returns to land 

increase. In countries and regions where the growth of agricultural output declines (or actual output declines), the 

wages of unskilled labor rise by smaller amounts than 

those of skilled labor, and returns to land decrease.

Brown, Deardorff, and Stern Study. As with its other 

findings, the Brown, Deardorff, and Stern study is unique 

in its predictions of effects on factor returns. It incorporates only one type of labor and therefore has only one 

wage. The study predicts that a 33 percent reduction in 

agricultural subsidies and tariffs would cause the average 

wage to decline in all countries except South Korea and 

Malaysia.

Which Countries’ Liberalization Would Help 

Developing Countries the Most?

Developing countries as a group would benefit more 

from liberalization of their own policies that distort agricultural trade than they would from liberalization of developed countries’ policies. However, that does not mean 

that developing countries’ exports would increase more as 

a result of developing countries’ liberalization than they 

would as a result of developed countries’ liberalization. 

Instead, developing countries’ imports would increase significantly as a result of developing countries’ liberalization, adding considerably to their welfare gain. To the extent that developing countries are harmed by the tradedistorting policies of developed countries, the evidence 
16 THE EFFECTS OF LIBERALIZING WORLD AGRICULTURAL TRADE: A SURVEY

points to the European Union and high-income Asian 

countries as much larger sources of harm than the United 

States.

High-Income Countries’ Policies Versus Developing 

Countries’ Policies. Results from the dynamic analysis in 

the 2005 World Bank study indicate that economic welfare in developing countries would rise slightly more from 

full liberalization of those countries’ own policies distorting goods trade (not just agricultural trade) than they 

would from full liberalization by high-income countries—$28 billion versus $26 billion. In the earlier 2002 

World Bank study, the inequality is more pronounced, 

with developing countries gaining $114 billion in economic welfare from their own full liberalization and only 

$31 billion from such liberalization by high-income 

countries.

Benefits from liberalization result both from exports and 

from imports. Whereas competing domestic producers 

may be harmed by imports, consumers generally benefit 

by a greater total amount. Consequently, the likelihood 

that developing countries as a group would benefit more 

from their own liberalization than from that of highincome countries does not necessarily mean that their 

own liberalization would increase their exports more than 

would liberalization by high-income countries. In fact, 

estimates from the dynamic analysis in the 2005 World 

Bank study and results from the ERS study indicate that 

liberalization of developed countries’ policies that distort 

agricultural trade would increase the value of developing 

countries’ exports by much more than would comparable 

liberalization by developing countries. However, developing countries’ liberalization would also significantly increase developing countries’ imports.

U.S. Policies Versus Other High-Income Countries’ Policies. Western Europe and high-income Asian countries 

generally have the most substantial agricultural trade restrictions and subsidies.23 That fact would seem to suggest that liberalization of those countries’ policies would 

be more beneficial to developing countries than would 

liberalization of U.S. policies. Stronger evidence for that 

proposition comes from the study by Beghin, RolandHolst, and van der Mensbrugghe. Its results indicate that 

for 16 of the 18 product groupings into which the model 

divides the agriculture and food sector, output by lowand middle-income countries increases as a result of full 

agricultural liberalization by high-income countries. Output in Western Europe declines for 15 of those 16 products, and the declines are substantial. Similarly, output in 

high-income Asian countries also declines for 15 of the 

16 products (not identically the same 15 products as for 

Western Europe) with most of the declines being substantial. U.S. output decreases for only seven of the 16 products, and the declines are substantial only for refined and 

raw sugar.24

23. Congressional Budget Office, Policies That Distort World Agricultural Trade.

24. Although strongly suggestive, the results presented here do not 

completely prove that liberalizing the trade-distorting policies of 

Western Europe and high-income Asian countries would be more 

beneficial to developing countries than liberalizing U.S. policies. 

To prove that would require output numbers expressed in actual 

value changes rather than percentage changes. It is always possible 

that a product with a high percentage increase in output has a 

small base from which to increase and therefore has a smaller dollar value increase in output than another product with a smaller 

percentage increase. Moreover, the data set used by Beghin, 

Roland-Holst, and van der Mensbrugghe does not consider tariff 

preferences, such as those granted by the United States and the 

European Union to a number of developing countries. In principle, the inclusion of such preferences could change the results.
Appendix: The Implications of 

Market-Price-Support Programs for 

Negotiated Reductions in Domestic Subsidies

Because the actual domestic subsidies of most 

countries are substantially lower than the bounds on 

those subsidies, the reductions in domestic subsidy 

bounds that are negotiated in the Doha Round must be 

substantial if they are to have much effect on actual domestic subsidies. The necessary reductions may be even 

larger, according to a 2005 study by the World Bank, 

because of an unintended consequence of the way that 

amber-box support (the category considered most distorting to trade and therefore limited by the Uruguay 

Round Agreement) is calculated—unless the Doha 

Round Agreement changes the method of calculation.1

One component of amber-box support is market price 

support (MPS). MPS programs typically involve tariff 

protection of the product in question accompanied by 

some kind of support payments to maintain a country’s 

internal market price for the product at a target level—

called the administered price—that is higher than the 

price that would otherwise prevail. In the calculation of a 

country’s amber-box support, the value of its market price 

support is calculated by multiplying the quantity of the 

product whose price is being supported by the difference 

between the administered price and a fixed external reference price. (The reference prices for the various agricultural products are based on international prices in a historical period.)

Not all of the difference between the administered price 

and the external reference price arises from the MPS payments. Part of it stems from the tariff protection, and that 

is what gives rise to the unintended consequence described in the World Bank study. A country can reduce to 

zero the MPS component in its amber-box support while 

maintaining substantial support for the agricultural sector 

in question by eliminating its administered price and 

MPS payments but leaving the tariff protection in place. 

If there is enough slack between its tariff on the product 

and the bound value for that tariff, it might even raise the 

tariff to make up for the elimination of the MPS payments; or it might find other ways to make it up that do 

not count in the amber-box calculation. If support 

bounds are reduced sufficiently in the Doha Round negotiations to actually restrain countries’ amber-box support, 

countries may use this general procedure to meet their 

obligations without substantially reducing the support 

they grant to their agricultural sector.

The Doha framework agreement calls for substantial reductions in trade-distorting domestic support using a 

tiered formula by which countries with higher levels of 

such support must make larger reductions. The 2005 

World Bank study contains an analysis to determine how 

much such a formula could be undercut by the current 

difference between bound and actual levels of support in 

combination with the elimination of MPS programs as a 

means of reducing calculated amber-box support without 

substantially reducing the benefit to the agricultural sectors the MPS programs support.

The World Bank analysis assumes that countries do not 

reduce their calculated amber-box support until the formula cut in the trade-distorting support bound forces 

them to and that the first thing a country does to accommodate the cut is to eliminate its MPS programs in such 

a manner as to avoid eliminating the benefit to the agricultural sectors those programs support. Only after a 

country has completely eliminated its MPS programs 

does it begin cutting its non-MPS amber-box support. 

The purpose of the analysis is to determine how much 

1. See Hart and Beghin and Jensen and Zobbe in the bibliography. non-MPS amber-box support must be cut.
18 THE EFFECTS OF LIBERALIZING WORLD AGRICULTURAL TRADE: A SURVEY

The subsidy-reduction formula posited in the analysis requires 75 percent cuts in the trade-distorting and amberbox support bounds of each developed country whose 

trade-distorting support bound is greater than or equal to 

20 percent of the value of its agricultural production, 60 

percent cuts for other developed countries, and 40 percent cuts for developing countries. In addition, the limit 

on de minimis support is reduced from the current 5 percent of the value of production for developed countries 

and 10 percent for developing countries to 2.5 percent 

for developed countries and 5 percent for developing 

countries.

Despite the aggressiveness of the cuts posited in the 

World Bank analysis, countries’ levels of support are so 

far below their bounds that only 10 of the 29 countries 

that provide amber-box support must make cuts in their 

actual levels of trade-distorting domestic support. Of 

those 10, four can accommodate the entire required reduction by cutting only their MPS programs. Only six 

countries must make cuts in their non-MPS support, and 

those cuts are not nearly as large as the cuts in the formula: Thailand’s cuts equal 30.4 percent of its tradedistorting domestic support, the United States’ equal 

28.1 percent, Norway’s equal 18.4 percent, the European 

Union’s equal 15.9 percent, Australia’s equal 10.4 percent, 

and Iceland’s equal 0.9 percent. Of those countries, 

Thailand, Australia, and Iceland are insignificant in terms 

of the total dollar value of their trade-distorting support, 

and Norway is of borderline significance.

Those results represent the maximum degree to which 

eliminating MPS might be used to mitigate the required 

cuts in amber-box support. Especially if tariff protection 

does not currently provide a large fraction of the calculated MPS support, a country might not have other 

methods at its disposal to offset the reductions in MPS 

payments when the MPS program is eliminated. (For example, tariff bounds may prevent it from raising its tariffs 

by enough to offset the reductions.) 
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