CGD in the News

Letters to The Editor: Global Agricultural Free Trade Would Benefit, Not Harm, LDCs (Financial Times)

January 15, 2010

Sir, Although I usually agree with Arvind Panagariya, I believe he is wrong in his diagnosis that global free agricultural trade would be harmful to the least developed countries ("Tide of free trade will not float all boats", August 3, 2004). He is correct that elimination of industrial country subsidies would boost world food prices, and he is correct that in the aggregate the LDCs are net food importers. He misses a crucial point, however.

The majority of the nearly 500m people in LDCs living on $2 a day or less are in countries that have a comparative advantage in food production and trade. For these countries, exports relative to imports are higher for food than for manufactures and other non-food goods. Where they nonetheless have food trade deficits, they have even larger non-food deficits, financed by aid. Improved terms of trade for food are still in their interest.

More than one-third of the poor in LDCs live in countries that actually have food trade surpluses. Nearly another one-fifth are also in countries that have comparative advantage in food, but have small food trade deficits (amounting to an average of 4 per cent of total non-food imports).

The first group would gain unambiguously from global free trade in agriculture. The second group would gain from improved terms of trade on likely future net exports, and would gain even on current trade flows if a 10 per cent rise in food prices (a plausible estimate for global free trade) is more than offset by even a small reduction (0.5 per cent) in world prices of manufactures and other non-food goods. We should expect such a price reduction, or greater, from increased global efficiency under free trade.

The real LDC problem with respect to food trade is heavily concentrated in one country, Bangladesh, with one-fifth of LDC population, and with a comparative advantage in manufactures (mainly apparel). But Bangladesh would benefit from a global deal opening markets in manufactured goods, especially in middle-income countries, and agricultural liberalisation will clearly be instrumental in forging such a deal.

The proper policy implication for the food trade issue is that special assistance may be warranted for Bangladesh and a few other LDCs. The wrong conclusion would be that LDCs as a group should fear losses from global free trade and, by implication, should mobilise to block its negotiation in the World Trade Organisation.

Similarly, my model estimates suggest ("Trade Policy and Global Poverty") that the LDCs have more to gain from global free trade through new access to markets not granting deep preferences than they stand to lose from erosion of preferential entry to the EU and US markets. Even so, to make the Doha round truly a development round while also facilitating an agreement, I have suggested immediate comprehensive free entry for imports from these and other at-risk economies (heavily indebted poor countries and sub-Saharan Africa), along with a tax holiday on direct investment, as part of an overall package.

The trade base of these economies is too small to pose a competitive threat to middle-income or industrial countries. A head start on free access within a broader WTO liberalisation timetable would provide development benefits for these countries while locking in the principle of eventual winding down of preferences through the move to global free trade. Especially with such an enhancement but arguably even without it, the LDCs as a group should be counselled that deep global trade liberalisation in the Doha round will be to their benefit, not their detriment.

William R. Cline, Senior Fellow, Center for Global Development and Institute for International Economics, Washington DC 20036, US