The Relative Importance of Global Agricultural Subsidies and Market Access

Abstract

The claim by global trade modelers that the potential contribution to global economic welfare of removing agricultural subsidies is less than one-tenth of that from removing agricultural tariffs puzzles many observers. To help explain that result, the authors first compare the OECD and model-based estimates of the extent of the producer distortions (leaving aside consumer distortions), and show that 75 percent of total support is provided by market access barriers when account is taken of all forms of support to farmers and to agricultural processors globally, and only 19 percent to domestic farm subsidies. Then the authors provide a back-of-the-envelope (BOTE) calculation of the welfare cost of those distortions. Assuming unitary supply and demand elasticities, that BOTE analysis suggests 86 percent of the welfare cost is due to tariffs and only 6 percent to domestic farm subsidies. When the higher costs associated with the greater variability of trade measures relative to domestic support are accounted for, the BOTE estimate of the latter's share falls to 4 percent. This is close to the 5 percent generated by the most commonly used global model (GTAP) and reported in the paper's final section.