What Effect Does Free Trade in Agriculture Have on Developing Country Populations Around the World?

Jacinto F. Fabiosa
April 2008  [08-WP 466]

Highlighted in the "battle in Seattle" in 1999, anti-trade sentiments still persist, even with development considerations placed at the core of reform negotiations at the World Trade Organization, in which two-thirds of the members are developing countries.

In this paper, the impact of agricultural trade liberalization on food consumption through changes in income and prices is considered. First, agricultural trade liberalization is estimated to raise economic growth by 0.43% and 0.46% in developing and industrialized countries, respectively. Since food consumption of households with lower income are more responsive to changes in income, their food consumption increases more under a trade liberalization regime.

Second, trade liberalization is expected to raise world commodity prices in the range of 3% to 34%. Since, in general, border protection is much higher in developing countries and the level of their tariff rates are likely to exceed the rate of price increases, 87% to 99% of the 83 to 98 countries examined would have lower domestic prices under liberalization. Again, given that low-income countries are more responsive to changes in prices, food consumption in these countries would increase more.

Finally, empirical evidence shows that if there is any harm on small net selling producers in a net importing country, it is neither large in scale nor widespread because the substitution effect dominates the net income effect from the lower domestic prices.

Keywords: agricultural trade liberalization, income and price elasticity, income distribution, developing countries.

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