Impact of Agricultural Reform in the Western Hemisphere and the European Union on Latin America: Bright Prospects or Distant Illusions?

Over the last decade, Latin America has made progress in agricultural liberalization in a two-tier reform process: at the multilateral level and at the regional level. On the multilateral front, the Uruguay Round Agreement in Agriculture made significant progress as agriculture was brought under the disciplines of GATT for the first time. At the regional level, integration in the region has liberalized agriculture progressively within blocs. Despite these achievements, agriculture is still the most protected sector in the world economy, especially in industrialized countries. The paper examines the costs for Latin America of the continued high protection in agriculture by developed countries, and the gains from reform and liberalization in the sector, using a multi-region, multi-sector comparative static CGE model with trade-linked externalities and scale economies. Two scenarios are examined: a Western Hemisphere liberalization and a liberalization between Mercosur and the EU, that can be considered a proxy of the formation of a free trade area in agriculture delivered by the ongoing talks along the Western Hemisphere for a Free Trade Area of the Americas (FTAA), and between Mercosur and the EU. The model considers the three pillars of agricultural policy distorting world prices and restricting trade flows—tariffs, domestic support and export subsidies—and simulates their elimination individually and simultaneously. The results show that, for Latin American countries, tariffs are the most trade-restrictive policy measure, while the elimination of domestic support has small positive effects on exports. The elimination of export subsidies hardly affects Latin American exports. Protectionism in developed countries depresses world prices of agriculture in which Latin American has strong exports competitiveness. For Mercosur, full liberalization with the European Union generates greater trade gains than hemispheric liberalization.