The effects of reducing European and American subsidies on agricultural exports of developing countries

Although the key issue in the WTO negotiations on agriculture is subsidies reduction, the EU and USA still account more than 85% of the world agriculture subsidies. An important policy question confronting developing countries is whether the reduction agreed within the Hong Kong conference could enable them to reap significant trade gains. Using data for 19 developing countries from 1995 to 2005, the results of cointegration and ECM indicate that 1% reduction in the subsidies imposed by the EU and USA would raise the developing countries' share in the world agricultural exports by an amount averaged between 0.11% to 0.55%. Simulation results confirm that real gains would be when there is a deep reduction in the current ceiling on overall trade-distorting subsidies by more than 75% for USA and 80% for the EU. The major challenge in coming negotiations is to address the ambiguity in the definition and quantification of agricultural subsidies.