Article

Quantifying the Outcome of the Uruguay Round

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
January 1995
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How large are the global welfare benefits to be derived from the Uruguay Round agreement? What are the quantitatively most important aspects of the Round? How are developing countries affected by the Round? Are there countries or regions that will lose from the Round and, if so, why? Subject to a statistical margin of error, our study (see box) found that the world as a whole will gain substantially from the reforms agreed under the Uruguay Round: about $96 billion annually in the short run and $171 billion in the long run. However, the short-run gains are concentrated in developed countries, especially in Japan, the European Union (EU), and the United States.

This outcome reflects the fact that the industrial countries, especially the United States and the EU, “gave up” the most in the Uruguay Round. In other words, these countries are modifying policies that are very costly, in terms of forgone welfare, to themselves, most notably distortionary agricultural policies and the import quota protection in textiles and apparel afforded through the Multifiber Arrangement (MFA), which is to be dismantled. In contrast, under the Uruguay Round agreement, the developing countries reduce agricultural distortions relatively less (although the reduction of production subsidies is important in some cases) and do not restrict imports under the MFA. The only general exception is that developing countries reduce protection in manufactures by more than Organization for Economic Cooperation and Development (OECD) countries, since the latter now have relatively lower protection, on average, in this area.

In fact, some developing countries will be net losers from the Uruguay Round in the short run. These short-run losses derive primarily from two effects. First, the reduction of agricultural subsidies in the member countries of the EU and the European Free Trade Association (EFTA), and the United States results in terms of trade losses for some countries. Second, MFA liberalization induces losses for some developing countries because the elimination of the MFA quotas will reduce the prices received by all exporters to OECD countries (this is known as capturing the quota rents), and less efficient developing country clothing exporters will lose market share.

What developing countries can do to improve their relative position is to limit self- inflicted costs by reducing their trade barriers and other distortions further. The post- Uruguay Round world presents a more open global trading environment. Unilateral tariff reduction or the reduction in other distortions in developing countries will lead to a change in developing countries’ production and exports based on comparative advantage, and the export expansion that follows is less likely to be impeded by global protectionism. Moreover, in the long run, higher income levels are expected to result in gains for almost all countries that lose in the short run. This suggests that all countries at least have the potential to gain from the Uruguay Round.

Results of the study

The Uruguay Round is a complex agreement that includes:

The model

Given the complexity of the Uruguay Round agreement, the study by the authors used a 24- region, 22-commodity model of world trade to quantify the impact of the Uruguay Round. This model is considerably more disaggregated than other models and presents results for many more regions and countries. For a thorough discussion of the data and the methodology used in the study, see the authors’ discussion paper (cited below under “Suggestions for further reading”).

Glenn Harrisonan Australian national, is Professor of Economics at the University of South Carolina.

Thomas Rutherforda US national, is Assistant Professor of Economics at the University of Colorado.

David Tarra US national, is Principal Economist in the International Trade Division of the World Bank’s International Economics Department.

Table 1.Welfare effects of the Uruguay Round

(billion dollars)1

Agricultural reformMFA reformManufacturing sector reformComplete Uruguay RoundComplete reform as a percentage of GDP
Short-term

effect
Long-term

effect
Short-term

effect
Long-term

effect
Short-term

effect
Long-term

effect
Short-term

effect
Long-term

effect
Short-term

effect
Long-term

effect
Australia0.70.90.00.10.52.31.23.30.41.1
New Zealand0.30.50.00.00.10.90.41.41.03.6
Canada0.30.20.91.00.11.31.32.60.20.5
United States1.83.210.09.21.213.713.326.70.20.5
Japan15.116.8-0.6-0.52.26.216.922.70.50.6
Korea4.65.2-0.5-0.40.72.74.80.51.52.5
European Union 228.326.47.67.83.014.939.30.90.60.7
Indonesia0.20.30.60.90.61.41.32.61.12.1
Malaysia1.22.20.10.30.72.61.85.03.38.8
Philippines0.71.10.00.20.41.10.92.41.64.4
Singapore0.60.5-0.2-0.20.50.40.90.72.11.7
Thailand0.81.40.10.81.810.32.512.62.110.9
China-0.5-0.81.01.70.91.21.32.00.30.5
Hong Kong0.60.6-1.7-1.5-0.1-0.2-1.2-1.1-1.4-1.1
Taiwan Province of China0.00.0-0.4-0.30.81.30.41.10.20.5
Argentina0.40.70.00.10.31.60.72.30.31.0
Brazil0.30.1-0.00.11.24.01.44.30.31.1
Mexico-0.00.7-0.10.20.31.40.22.30.00.7
Latin America1.52.0-0.50.30.33.21.34.70.41.7
Sub-Saharan Africa-0.2-0.5-0.0-0.10.10.2-0.3-0.7-0.2-0.4
Middle East and North Africa-0.30.1-0.40.20.81.9-0.31.5-0.10.3
Eastern Europe 3-0.1-0.0-0.5-0.30.82.3-0.21.2-0.10.1
South Asia0.30.20.91.93.15.33.76.71.02.0
Other European countries2.21.6-0.2-0.81.77.04.28.80.30.7
Developing countries (total)9.913.9-1.53.412.940.519.455.20.41.2
Industrial countries (total)48.749.817.916.98.746.376.7115.40.40.6
World58.663.716.420.321.786.896.0170.60.40.7
Source: Authors’ calculationsNote: The first three headings represent the effect of each reform by itself. The fourth heading (Complete Uruguay Round) reports the welfare effects of all of the reforms combined.

1992 dollars.

Membership in 1994.

Also Includes the Baltic countries, Russia, and the other countries of the former Soviet Union.

Source: Authors’ calculationsNote: The first three headings represent the effect of each reform by itself. The fourth heading (Complete Uruguay Round) reports the welfare effects of all of the reforms combined.

1992 dollars.

Membership in 1994.

Also Includes the Baltic countries, Russia, and the other countries of the former Soviet Union.

  • tariff reductions in manufactured products;

  • tariffication of nontariff barriers in agriculture and binding commitments to reduce the level of agricultural protection;

  • the reduction of export and production subsidies in agriculture;

  • the elimination of Voluntary Export Restraints (VERs) in textiles and apparel and the elimination of the MFA;

  • institutional and rule changes, such as the creation of the World Trade Organization (WTO) and safeguards, as well as antidumping and countervailing duty measures;

  • new areas such as Trade-Related Investment Measures (TRIMs), Trade-Related Aspects of Intellectual Property Rights (TRIPs), and the General Agreement on Trade in Services (GATS); and

  • areas receiving greater coverage, such as government procurement.

Our study evaluated the changes in the first four of these areas. To the extent that there are additional benefits (or, possibly, costs) from Uruguay Round changes in the other areas, our findings may underestimate (or overestimate) the gains from the Uruguay Round.

Our results suggest that the world as a whole stands to gain about $96 billion annually, and that the gains in dollar terms are concentrated in the developed countries, especially in the EU, Japan, and the United States, which gain $39 billion, $17 billion, and $13 billion annually, respectively, from the change (see Table 1). Nevertheless, some smaller countries also gain significantly: Malaysia gains 3.3 percent of GDP, Singapore and Thailand about 2.1 percent of GDP each, and the Republic of Korea and the Philippines about 1.6 percent of GDP each.

Since our model is the most geographically disaggregated one available, we produce results for a number of countries and regions not otherwise available. On the one hand, although developing countries as a whole gain from the Round, a few developing regions are estimated to lose, on balance, in the short run. Countries in sub-Saharan Africa would lose about 0.2 percent of GDP annually, while for countries in the Middle East and North Africa, the effect would be slightly negative (a loss of 0.1 percent of GDP). On the other hand, the study by Frangois and others finds that the combined Africa and Middle East region will gain from the Uruguay Round, owing largely to beneficial terms of trade effects resulting from the Round’s reduction of manufacturing protection. While developing countries gain less overall than industrial countries, the opposite would be true if we considered only the reduction of protection in manufacturing, since industrial countries have relatively lower protection, on average, in this area. Compared with the industrial countries, the developing countries reduce agricultural distortions relatively less under the agreements (although the reductions in their production subsidies are important in some cases), and developing countries do not restrict imports under the MFA.

Table 2.Decomposing the welfare effects of agricultural reform

(billion dollars)1

All

distortions
Export

subsidies
Production

subsidies
Import

distortions
Australia0.70.10.10.4
New Zealand0.30.10.10.1
Canada0.20.00.3-0.1
United States1.7-0.01.5-0.1
Japan15.2-2.2-0.517.7
Korea4.6-0.2-0.04.7
European Union 228.511.517.8-1.2
Indonesia0.2-0.00.10.1
Malaysia1.2-0.00.11.2
Philippines0.6-0.10.00.9
Singapore0.6-0.0-0.00.6
Thailand0.7-0.00.20.6
China-0.6-0.2-0.1-0.3
Hong Kong0.60.10.00.2
Taiwan Province of China0.0-0.0-0.00.1
Argentina0.40.10.20.1
Brazil0.3-0.00.20.1
Mexico-0.0-0.0-0.00.1
Latin America1.4-0.01.40.1
Sub-Saharan Africa-0.3-0.4-0.10.3
Middle East and North Africa-0.4-0.80.20.1
Eastern Europe 3-0.2-0.60.30.0
South Asia0.1-0.00.10.0
Other European countries2.4-0.62.10.5
Developing countries (total)9.2-2.32.48.8
Industrial countries (total)49.19.021.517.3
World58.36.724.026.1
Source: Authors’ calculations.

Import distortions and export and production subsidies on agricultural goods.

Membership in 1994.

Also includes the Baltic countries, Russia, and the other countries of the former Soviet Union.

Source: Authors’ calculations.

Import distortions and export and production subsidies on agricultural goods.

Membership in 1994.

Also includes the Baltic countries, Russia, and the other countries of the former Soviet Union.

MFA reform. In fact, countries such as the members of the EU and the United States that used import quotas under the MFA to protect their home-market producers are expected to gain from the removal of the MFA, while developing countries in the aggregate are estimated to lose. The reasons for this pattern are as follows. Countries that remove import quotas can obtain more imports, which will drive down import prices for their consumers (thus capturing quota rents). In addition, they will experience efficiency gains as they shift their productive resources into sectors where they have a comparative advantage. Net importing countries that do not constrain imports under the MFA, such as Japan, will lose from MFA removal owing to a terms of trade loss. Net exporting nations shift their sales to the previously constrained markets, such as those in the EU and the United States, and this diversion of sales drives up prices in markets such as Japan.

Among developing countries that are net exporters, the results vary. The most efficient suppliers also typically gain, but their gains vary substantially. These exporters suffer a terms of trade loss in the previously quota- constrained markets but gain on the terms of trade in previously unconstrained markets such as Japan, and they also experience an efficiency gain from shifting more productive resources into textiles and apparel where they possess a comparative advantage. Most of the marginally inefficient suppliers among developing countries lose, because they lose quota rents and, in the long run, lose market share to more efficient suppliers in developing countries. Without a change in their competitiveness, that loss of welfare and market share will be larger in the long run.

Agricultural reform. A distinguishing feature of our study is that we decomposed the overall agricultural reform scenario into its three major components (see Table 2): export subsidies, production subsidies, and import protection.

Reducing agricultural export subsidies would result in welfare gains for the EU of $11.5 billion. The principal food exporting nations—Argentina, Australia, Canada, and New Zealand—gain slightly, whereas most other countries lose. This component of agricultural reform was the one feared by the “net food importing” countries, which expected to suffer a terms of trade loss.

Regarding production subsidies, almost all of the economies included in the study have at least some agricultural production subsidies. In some cases, such as grains in the Middle East and paddy rice in Korea, the subsidy is extremely high, although it is often paid on a low volume of output. Thus, the reduction of this production distortion produces benefits for most countries, although several net food importers of wheat and nonrice grains suffer losses (Japan, Korea, Mexico, Singapore, sub- Saharan Africa, and Taiwan Province of China). The EU again enjoys substantial welfare benefits, with other European countries and the United States enjoying the next largest, although considerably smaller, gains.

As for reducing import protection in agricultural products, the two dominant gainers are Japan and Korea, which is not surprising given their extremely high level of agricultural protection. The other regions with relatively high agricultural protection also gain. The EU loses in this scenario because we assume that its export and production subsidies in agriculture are maintained. Hence, the additional exports the EU countries would obtain from the reduction of import protection in the rest of the world aggravate their already costly export position.

Combining all effects, the EU gains over $28 billion owing to the reduction of subsidies. Japan gains from the reduction of its high import protection. Although China and some other developing regions lose small amounts, there are few overall losers, which is surprising given the concern about losses of the net food importing countries. This is explained by the fact that most regions have something to gain by reducing their own production subsidies and most also export some food, even if they are net food importers overall. Clearly, countries need to reduce agricultural production subsidies if they wish to avoid losses from this component of the Uruguay Round.

Dynamic effects. While the dynamic benefits of trade liberalization and the Uruguay Round are often described, they are rarely estimated. Our study estimated these effects, assuming a sufficiently long adjustment period so that the capital stock in each country could readjust to its optimal “steady- state” level after the initial changes induced by the Uruguay Round. The resulting calculation may overestimate the potential welfare gains in a long-run neoclassical growth model, because forgone consumption to achieve the higher capital stock is not taken into account; the model may underestimate the long-run gains, however, since it fails to capture endogenous growth effects such as those arising from induced improvements in productivity or innovation.

The results from our long-run, steady-state model appear in Table 1. The obvious difference with respect to the short-run model is that the global welfare gains from the Uruguay Round rise from $96 billion to $171 billion, nearly half a percentage point of world GDP. Using this approach, the gains for developing countries are striking—they rise from 0.4 percent to 1.2 percent of total developing countries’ GDP. In addition, the Middle East and North Africa, as well as Eastern Europe and the Baltic countries, Russia, and the other countries of the former Soviet Union are now estimated to gain.

Comparisons with other models

In addition to our model, there are two other general models that employ the actual changes agreed in the Uruguay Round by the Contracting Parties to the General Agreement on Tariffs and Trade (GATT): the GATT/WTO team of Frangois, McDonald, and Nordstrom; and Hertel, Martin, Yanagishima, and Dimaranan (see references), who used the GTAP (Global Trade Analysis Project) model. Estimates of the gains from the Uruguay Round from all three of our models were presented at a conference organized by the World Bank and entitled “The Uruguay Round and the Developing Economies” (held January 18-20, 1995, in Washington). Where significant differences in the estimates exist, they may be intuitively explained. Indeed, subject to a statistical margin of error, what is remarkable is our ability to interpret the reasons for the differences and their broad consistency in terms of the overall benefits and the relative importance of various components.

In one of their earlier models, the GATT Secretariat estimated that the gains from the Uruguay Round would equal about $510 billion annually. This relatively high estimate was obtained by projecting the world economy forward to the year 2005 (when all the Uruguay Round changes would be implemented). Given a much larger world economy in 2005, the same percentage cuts in tariffs and export subsidies, and the same percentage gains expressed as percentages of GDP yield larger absolute dollar gains. That is, even though the gains from the Uruguay Round estimated in the GATT study are quite comparable to the long-run estimates from our study in percentage terms, the dollar value of the former is much higher owing to the size of the economy on which the tariff and export subsidy cuts are applied. In their later World Bank conference paper, the GATT/WTO authors estimate the impact of the Uruguay Round changes based on the economy of 1992, as we do; they then obtain estimated gains of $193 billion in their steady- state, increasing-returns-to-scale model, rather than $510 billion. There is nothing inherently correct about using either 2005 or 1992 as the base year of the model, but when the estimates are in terms of dollars rather than percentages of GDP, it is important to keep the year of the estimate in mind.

There have been earlier studies of the impact of the Uruguay Round, including that of Goldin, Knudsen, and van der Mensbrugghe using the RUNS model. In general, earlier estimates were based on assumed formula cuts in tariffs and subsidies. These cuts were overly optimistic, especially with respect to developing countries. Consequently, those authors who have updated their welfare estimates have revised them downward as it became apparent that the Round would achieve somewhat less than expected.

The estimate by the GATT/WTO team of $193 billion is comparable to our estimate of $171 billion, since both estimates were obtained using models that evaluated the Uruguay Round in a long-run steady state with increasing returns to scale. In the static or short-run version of their increasing- returns-to-scale model, these authors obtain $99 billion per year of estimated gains, compared with our estimate of $96 billion. That is, taking into account dynamic or steady-state effects roughly doubles the estimated gains from the Uruguay Round in both of our models. Model variants with lower elasticities produce lower estimated gains in both models; but, given that the Uruguay Round will be implemented over ten years, we do not report estimates from low-elasticity versions.

Hertel and others have estimated the global gains from the Uruguay Round at about $258 billion. Since they do not incorporate dynamic, steady-state, or increasing-returns- to-scale effects, the appropriate comparison with their model is our static constant- returns-to-scale model. But their estimates are based on the world in the year 2005, and the projection of the world forward from 1992 roughly doubles the dollar estimates. Even after adjusting for the forward projection the estimates of Hertel and others remain somewhat larger than ours. This is due to two factors: they project that the MFA quotas will grow at a somewhat slower rate than the world economy, so the gains from removing the MFA are slightly larger than those calculated using our model; and they employ slightly larger (but plausible) elasticities.

The remaining differences between our estimates and those of the GATT/WTO and GTAP teams are not significant. The broad themes emphasized elsewhere in this article are quite similar across the models. In particular, all the models indicate that those countries that liberalized the most gained the most. The gains may be expected to be larger in the long run when the capital stock can adjust, and the responsiveness of firms and consumers to price changes (as indicated by elasticities) will be greater.

Implications

Our evaluation of the quantitative effects of the Uruguay Round suggests that although there may be some losers in the short run, in the long run almost all countries will gain, and unilateral liberalization (both of tariffs and of production distortions) can be implemented to ensure that all regions can gain. In fact, our additional estimates for sub-Saharan Africa confirm that it will gain substantially if it allows its exporters to capitalize on the improved export opportunities presented by the post-Uruguay Round environment.

Suggestions for further reading: Will Martin and L. Alan Winters (editors), The Uruguay Round and the Developing Economies, World Bank Discussion Paper No. 307, Washington, World Bank, 1995; Joseph F. Francois, Bradley McDonald, and Hakan Nordstrom (WTO team), “Assessing The Uruguay Round,” in Martin and Winters; General Agreement on Tariffs and Trade (GATT), “The Results of the Uruguay Round of Multilateral Negotiations,” Geneva, GATT Secretariat, November 1994; Ian Goldin, Odin Knudsen, and Dominique van der Mensbrugghe, Trade Liberalization: Global Economic Implications, Paris, OECD, and Washington, World Bank; Glenn Harrison, Thomas Rutherford, and David Tarr (World Bank team), “Quantifying the Uruguay Round,” in Martin and Winters; Thomas W. Hertel, Will Martin, Koji Yanagishima, and Betina Dimaranan (GTAP team), “Liberalizing Manufactures Trade in a Changing World Economy, “in Martin and Winters; Merlinda Ingco, “Agricultural Liberalization in the Uruguay Round: One Step Forward, One Step Back?” Washington. World Bank, 1994.

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