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The widespread reduction in standard tariff rates (i.e. the Most Favoured Nation or MFN rates) combined with unchanged rates under the various tariff preference schemes (GSP, Lomé, Caribbean Basin Initiative) signifies a reduction in the preference margin. The basic idea behind preferential schemes is that a recipient exporting country can sell products into the preference giving country either at a lower price than non-preference receivers and so capture increased sales or sell at the same market price but get a higher return (the difference equal to the preference margin). Typically, preferential access is given on a limited range of agricultural commodities and usually not for unlimited amounts. The quantities benefit from preferential rates are limited either by quota or by rules-of-origin.
To calculate the value of preferences it would theoretically be necessary to know whether countries choose to lower prices and increase the volume or take the full benefit of the preference margin. Because, however, in most markets with preferential access the developing country recipients can be assumed to be relatively small suppliers and hence "price takers", it has been assumed that the recipient countries do not normally use price discounts but rather take the preference margin. Essentially this approach defines a preference margin potential, the maximum that could be obtained. The potential value of such preferences was taken to be the product of the percentage preference margin and the value of imports from the preference receiving exporting country. Only significant flows of such trade are reported, which indicates an underestimate of the value of preferences. However, some tariff receiving countries apparently sell some goods at the preferential rate and others (of the same type) at the MFN rate indicating an overestimate of the value of preferences. With possible sources of both over and under-estimation, it may be concluded on balance that this method of estimating the potential value of preferences is reasonable.
Using this method, the potential value of preferences given by the European Union, Japan and the United States in the agricultural sector in 1992, was US$1.9 trillion, one third going to Africa, 40 percent to Latin America and the Caribbean, and the rest mainly to the Far East anti Oceania developing countries. The Near East is estimated to have benefited very little. After the Uruguay Round reduction in MFN rates, the potential value of preferences is estimated to fall by US$0.8 billion with losses of US$ billion 0.2, 0.3, 0.2 anti 0.1 for Africa, Latin America and the Caribbean, the Far East and others respectively. On a commodity basis the biggest losses are estimated for fruit and nuts, sugar, coffee and tea.
The range of estimated impacts on world income of the Uruguay Round is quite wide. The GATT estimates these to be between US$100 billion and US$500 billion. The present study has been based on the World Bank/OECD estimate of US$213 billion. In order to see the possible effect of a higher income assumption it was chosen to take a figure double the original level. The effect on the projections is relatively small: the value of world agricultural trade would be boosted by just over one percent, half due to higher prices and half to increased trade volumes. The pattern of trade would not change significantly as the percentage increase in income postulated would be much the same for all regions compared with the lower income growth variant.
One of the more important anticipated benefits accruing from the Uruguay Round is the expected reduction in price instability. The idea behind this view is that by increasing the number of countries that are open to world price signals, "shocks" (arising say from unexpected production shortfalls) would be absorbed by a greater number of markets, thus cushioning the effect of such shocks on world prices. However, liberalization is also expected to lead to a decline in government stockholding, a decline that is unlikely to be compensated by an expansion of private stockholding, so that total stocks could well decline. This second consideration is not captured by the way that the modeling has been done (nor could it easily be done, as the matter is highly complex). The approach that was followed, therefore, relied essentially on examining the impact of production shocks on world price stability to see whether the tariffication and reduction of tariffs had the expected effect. The production shocks chosen for examination were a generalized 5 percent decline in cereals output in the year 1999 and their effect on world prices in the year 2000. The result of the simulation is that trade liberalization as modelled in this study appears to have almost no effects on the stability of cereals.
The problem of tariff escalation is that importing countries may and often do put a higher effective tariff on the more processed products and a lower effective tariff on the raw materials thus encouraging imports of the latter and discouraging those of the processed product, potentially depriving the exporting countries of the chance to increase the value added on their primary products. This question has not been examined in the present study but has been analyzed by the GATT Secretariat for hides and skins and leather, rubber, jute and tobacco among agricultural commodities. Their study shows a degree of reduction in tariff escalation for the four importers concerned (Canada, the EC, Japan and the United States). However, in about half the cases the decrease in the tariffs on intermediate agricultural processed goods has been larger than the decrease in the final goods tariffs, implying an increase in tariff escalation at the final stage. These cases include rubber in the EC, Japan and the United States; jute in Canada, the EC and the United States and hides and skins and leather in Japan. This is a subject on which more research is required.