WTO World Trade Report on Subsidies

On July 24 - the day the G6 talks broke down at the World Trade Organization (WTO), leading to the suspension of the Doha Round - the WTO Secretariat released the 2006 World Trade Report. This year's report focuses on subsidies. Readers will find this to be one of the most comprehensive surveys of the subsidy literature, and data, written to date. This timely report describes in considerable depth why governments employ subsidies and how their use can distort global trade. It also delves into more specific issues related to trade and subsidies, such as the difficulty the WTO has had in ensuring that data on trade-distorting subsidies are made public through regular notifications. WTO members must submit notifications describing the essential features of all specific subsidies, under Articles 1 and 2 of the Agreement on Subsidies and Countervailing Measures (ASCM). But compliance with the ASCM obligations is notoriously poor; notifications are often incomplete and delivered late.

New Reports on the Effects of Liberalizing World Agriculture

The U.S. Congressional Budget Office has released a review of modeling results that look at the effects of liberalizing world agricultural trade (The Effects of Liberalizing World Agricultural Trade: A Review of Modeling Studies). Trade models, such as those produced by the World Bank, are used to calculate the likely effect of trade liberalization. Economists have used these models to forecast whether countries would win or lose economically from a given trade agreement, and some recent modeling results caught widespread attention when they predicted losses for poorer countries coming out of a Doha Round trade agreement. There is, however, debate over the extent to which these models should be used to guide trade policy (see Subsidy Watch, July 2006). This paper provides an introduction to models, distinguishing the different types, and summarizing the results of those that have examined agricultural trade.

Meanwhile, Oxfam has released a new research report, by Lance Taylor and Rudiger von Arnim (both of the New School for Social Research, New York) that presents a review and critique of the most widely used trade models based on computable general equilibrium (CGE) models. The emphasis throughout Modelling the Impact of Trade Liberalisation: A Critique of Computable General Equilibrium Models is on methodology. The authors set out concise analytical arguments explaining what they see as the fundamental weaknesses of CGE models, paying particular attention to the way that these models conceptualize and measure welfare. The authors also argue that the manner in which the World Bank uses CGE modeling is highly problematic, making implausible assumptions about elasticities, the exchange rate, and macro causality. Using a table-top, two-region and three-sector CGE model which represents sub-Saharan Africa and the rest of the world, the authors illustrate that the results of modeling are radically different when alternative - and, they contend, more plausible - assumptions are made.

Ethanol Bubble predicted to Bust

US policies mandating minimum levels of ethanol as a fuel additive has sparked intense interest among investors in this additive and alternative to gasoline. However, a report by KWR International, a firm that provides financial advice, warns investors to temper their enthusiasm. "The investment bankers first fueled the dotcom boom with the technology hype and then that bubble went bust," writes the report's author, Salman Anwar. "Now it appears to be the time for ethanol."

The KWR International report, "Ethanol: Is it Viable?", notes that the US farm lobby has been effective in promoting the use of ethanol. But whether ethanol represents viable alternative to gasoline is questionable. The OECD has said that it would take nearly a third of U.S. farmland to power one in 10 of America's cars with homegrown corn-based ethanol. There is also debate over whether ethanol production creates a net energy gain, since ethanol made in the US requires significant amounts of fossil-fuel inputs during the production process.

But it is the financial costs that concerns Anwar. Ethanol affords considerable profits due to its mandated use as a fuel additive, subsidies to producers, tariffs on imports and record high oil costs. Whether these factors will remain over time is less than certain.

While KWR International warns institutional investors against pouring funds into ethanol, the U.S.-based advocacy group National Taxpayers Union has argued recently that it is also a bad investment for US citizens. In an NTU Policy Paper released last month (Ethanol: Bumper Crop for Agribusiness, Bitter Harvest for Taxpayers), "Ethanol: Bumper Crop for Agribusiness, Bitter Harvest for Taxpayers", the paper's author, Jeff Dircksen, estimates that federal support to ethanol is at least US$ 2 billion a year. 

Citizens then pay additional costs as consumers, as it is more expensive to produce than gasoline and costlier to transport. Moreover, he predicts that fuel bills will rise, and so will the food bill, "as food inflation ripples through commodities markets."