Abstract:
The drive for securing markets for export commodities led in 2001 to the initiation of the Doha Development Rounds. These emphasized the role of international trade in the promotion of economic development and the creation of a fair and market oriented trade agricultural regime. Like the Uruguay Rounds, the Doha Development Rounds focused on the reduction of trade-distorting domestic supports, improvement of market access and the elimination of export subsidies. In the Netherlands, where exports account 56% of the total GDP and whose largest trading partner outside the European Union, is the United States, could greatly benefit from greater access to US markets and better market conditions. For that reason, we hypotheses the positive net effect of the Doha Development Rounds on trading relations between the US and the Netherlands and their subsequent impact Dutch agricultural exports.
Drawing from the results of our research we were able to conclude though there is not a statistical significant relationship between the variables presented in our model, as there is no direct impact on agricultural exports based on the Doha Development Rounds.
Introduction
The European and the American economies combined account for a little over the half of the world’s total output, that also contributes to nearly a third of the global net trade flow. Since its admission to the European Union, the Netherlands alone has become a passage point for 17% of total American exports to the European Union. Making the port of Rotterdam the largest port in Europe and the world’s 6th largest port of entrance traded goods (Pinckaers, 2016).
Historically, the Netherlands have known as extraordinary traders due to the country’s geographical location. To illustrated this, according to the World Trade Organization (2014) Dutch agricultural exports account for 3.54% of the world’s total output. Moreover, the lower country has become the second largest market for American made goods, with a value of 54.5 billion euros, (Francois, Van Mejil, &Van Tongeren 2002).
The overall dependence of Dutch producers on foreign markets ( primarily the United States) makes this long & historical partnership a valuable case study. In the following research, it is aimed to understand the effect of the Doha Development Rounds on US- Dutch agricultural relations.
The Netherlands, since its admission in January 1st, 1995 to the World Trade Organization, Dutch agricultural output has not only increased in size but also becoming heavily dependent on foreign markets for the import of raw materials and agricultural commodities. The Dutch agricultural complex adds up to 70% of the country’s total economic significance, making it the world’s third largest exporter of agricultural products after the United States and France (Rutten, Wijnands, & Verhoog, 2014). Similarly, Dutch imports to and from the United States average a total of 2 billion euros per year, that at the beginning of the new millennium brought to the Dutch economy a positive trade balance with the United States. (Rutten, Wijnands, & Verhoog, 2014).
Nonetheless, even if the value of Dutch exports has shown earnings at 2.2 and 1.8 billion dollars, it has demonstrated over time a decline in output, from 15% – 16% to a 9% (Francois, Van Mejil, and Van Tongeren, 2002), primarily due to current import restrictions on imported goods and the difficulties associated with access to US markets, that are further enhanced by uneven trading rules and increasing competition from US domestic exporters (Pinckaers, 2016).
A recent study conducted by University of Wageningen & Research center (2014), indicated that this disproportionate relation could potentially cost the Netherlands (and the EU as whole) $100 billion in potential gains (Ploumen, 2013). Moreover, studies carried out by the Dutch research consultancy Ecorys showed that as much as 80% of the potential GDP gains would come further liberalization on trading rules, including an overall reduction in costs associated with bureaucracy and regulations. For the Netherlands alone, the country’s national income by income of 3.27% (Ploumen, 2013).
Increasing liberalization could make the Dutch agricultural and other economic sectors alike, more competitive and grant greater access to its goods to the world market. The goal of this research is to establish the relationship between agricultural bilateral relations between the Netherlands and the US and the impact of the Doha Rounds in the Dutch Economy.
Literature review
International trade in agricultural goods has increased substantially since World War II, however, the agricultural sector continues to be dominated by government intervention rather market competition. Over time, the agricultural trade liberalization debate has continued to attract a great deal of attention because of its improvement capabilities for the global market (McCalla, 2003). To illustrate this, trade policy reform in the 1980’s through the 2000’s improved global economic welfare by $233 billions per year. With further decrease on trade restrictions, the global economy could potentially add another $168 billion per year in net gains (Anderson, 2010). Today, tariffs on agricultural products are still many times higher than those of manufacturers (62% versus 4% in terms of added value), domestic farm subsidies are still robust and rules for agricultural export trade fail to address issues related fully market liberalization. For that reason, market access, export competition, and domestic support are still used as the basic framework for trade negotiations (Leche, 2009).
A starting point for distortions in global agricultural trade began with the creation of the European Economic Community that has now evolved into the European Union. Beginning in the 1950’s, the creation of the European Common Agricultural Policy was developed as a mean to guarantee European farmers high prices whenever these fell below support levels. Over time, these have evolved not only in tariffs but also in export subsidies that put pressure on world prices. As a result, food exporting countries like the United States and Developing countries have complained about the effect of CAP policies on world exports ( Krugman, Obstelfeld & Melitz, 2012)
Continuous disparities in global agricultural trade led in 1995, to the first rounds of negotiations of the WTO called the Uruguay negotiation Rounds that resulted in the creation of the World Trade Organization. At its core, the WTO aims to address the limitations in markets and discriminatory trading policies. In essence, under the World Trade Organization member countries would be treated equally under the principle of national treatment (Stiglitz, 2006): both foreign and domestic producers would be treated the same and would be subjected to the same rules, markets and regulations.
The Uruguay Rounds brought agriculture trade into the WTO framework (Messerlin, 2005). Though limited, it also marked the first step into the restructuring multilateral trading system. The Uruguay Round Agreement on Agriculture (URAA) provided a framework for both trade policies rules, quantitative limits and the number of instruments were imposed. Moreover, bound tariffs replaced non-tariff barriers, and countries agreed to minimum market access commitments. Though export subsidies were limited both in the expenditure and quantity agricultural tariffs still stand at 62%: with Canada, the European Union, Japan and the United States being the highest among OECD states (Josling & Hathaway, 2004). For that reason, uneven trade rules and their effect on productivity and economic growth continues to be a heated debate in World Trade (Stiglitz, 2006).
Over the years, trade agreements and trade liberalization have built a reputation of animosity among economists: from its impact on the environment, the use of environmental regulations as disguised tariffs to growing inequality and disparities in agricultural production (Harold &Runge, 1993). Proponents of trade liberalization have created a scenario where a 50% decrease in agricultural subsidies, tariffs and OECD support on agriculture would result in an overall expansion of agricultural markets. Furthermore, countries involved would gain continuous access to other markets outside their regions. Economies of scale would have opportunities to be fully employed and thus be maximized (Meijil & Tongeren, 2004).
Global trade would also see an increase of 12% in the short run, compared to 15% in the long run (Meijil & Tongeren, 2004). Effective trade liberalization would emphasize the different strengths and weaknesses of the countries involved including their comparative advantage and the way they would export (Stiglitz, 2006).
The continuous drive for securing markets and further liberalization of economies led the second round of negotiations, in Doha, Qatar in 2001 (Cornish & Fernandez, 2005). Like its predecessor, the Doha Development Rounds aimed to place a strong emphasis in the role of international trade in the promotion of economic development, poverty alleviation and the creation of a fair and market-oriented agricultural trade system (Perez del Castillo, Gifford, Josling, Moehler, & Regunaga, 2009). At its simplest, it would grant greater access to the markets and eliminate preferential trading agreements and promote global gains deriving from reforms in agriculture ( Hertel & Keeney, 2007).
Its supporters hoped that new rules and commitments would encourage countries to less trade-distorting mechanisms by further progressing exports and decreasing domestic support for local industries (Brink, Orden, Blandford, & Josling, 2011). Literature on this issue affirms that trade liberalization has a positive effect on global trade flows, that in turn, could increase a country’s net welfare. Furthermore, conclusive agreements on agricultural trade policies would reduce the legal and economic implications of the countries involved (Brink, Orden, Blandford, & Josling, 2011).
Lowering trading barriers and tariffs would, in the long run, yield positive results in the African, European and Asian regions. From boosting competition through improved markets and access to suppliers, to an increase in Global income between 210 billion € for partial liberation to 670 billion € for a full liberalization scenario (Meijil & Tongeren, 2002). Overall, trade liberalization will lead to an expansion in the agricultural market and service sectors would expand, simply put, because it would grant access to more markets. Even if in the short-term economies of scale would be drawing resources from industrial sectors and shrinking, in the long run, it would still magnify opportunities for further specialization (Van Berkum, S., Rutten, M., Wijnands, J., & Verhoog, D.,2014).
Under the Doha reforms, however, complete liberalization of rich country farm policies agricultural reforms could potentially have a negative effect on the farm income of countries OECD states, including Japan, Canada, and France where agricultural products receive high levels of support. The Doha scenarios call for a decrease in trade volume -reducing exports and subsequent subsidy elimination. Production of farming goods, such as cotton and grains would see an overall decrease as well as the global trade volume for wheat and dairy (Hertel, Keeney, Ivanic & Winters, 2007)
For the Netherlands however, the country could see a fair share of the world’s welfare gains (Van Berkum, 2014). Further economic liberalization would translate for the Netherlands in an increase in national income by 2 % by 2027 (Meijil & Tongeren, 2002) as well as, a sizable increase in export values with both the service and food industries being at the top. Though the manufacturing industries and agriculture would see an increase in international competition, these economic sectors would also experience greater exposure to markets outside the European Union (EU).
Comparatively in the United States, even if some economist argue that trade could damage America’s welfare and global competition (Lawrence & Edwards, 2012). A successful conclusion of the Doha Rounds would contribute to more job creation the United States and increase in market share for American goods at the global level. Moreover, the United States could see an increase in both its merchandise exports and services. Better terms of trade for American made exports and imports would lead in the long run to more prosperous American businesses and farmers, including higher wages to an increase in productivity and to better access to manufactured goods (Lawrence & Edwards, 2012).
Under the DDA, deeper economic cooperation among these two historical partners could yield positive returns in the long run. Given that the EU (including the Netherlands)- and the US together, account for over the half of the world’s population, an increase in global trade and investments would, in turn, reduce trading costs among both countries and the overall convergence of both economies. To illustrate this, in a trading scenario where trading barriers would be decreased by 25% and a 75% decrease in manufacturing would boost not only GDP, but also an increase both imports and exports from the US and the Netherlands (Van Berkum, Rutten, Wijnands, & Verhoog, 2014). The following research takes a look at this historical partnership and the effects of the Doha Development Rounds on agricultural exports between the United States and the Netherlands.
Data Analysis:
Globalization has prompted an increase in trade openness. According to Credit Suisse’s report on globalization (2015) in 2013 alone trade openness has risen to 54% of total global GDP. However, the new millennium brought a preference for non-tariff barriers which have the ‘charm’ of not distorting price dynamics but restricting trade volumes through more qualitative routes (O’Sullivan & Subramanian, 2015)
The debate surrounding the Doha Development Agenda (DDA), focused extensively on the promotion of welfare effects of trade reform with a primary focus on agricultural export. For most of the world, global agricultural trade still remains highly distorted through the high level of productions, governmental subsidies and market protection (Cornish & Fernandez, 2005). To illustrate the importance of the agriculture sector in most OECD states by 2014, total agricultural exports accounted for 15.6% of the Netherland’s total exports, making the Dutch economy the world’s 4th largest producer of agricultural output. In the following data analysis, we look at the effects of further trade liberalization in the Netherlands agricultural exports to the United States following the Doha Development Round in 2001.
For this research, we use data provided by the Organization for Economic Cooperation and Development (OECD) and the World Bank’s World Developmental Indicators. Ranging from 1980 until 2015 (with special consideration on 1986-1994 period (Uruguay Rounds), 1995 (admission to the WTO) and 2001(beginning of the Doha Development Agenda). In this analysis the explanatory variable used is called net trade changes labeled as NET TRADE change. This variable is coded 0 and 1 where 0 is no and 1 is yes in order to indicate whether throughout the 30-year span there was a net trade change in the Dutch economy. Subsequently, for our predictor variables ,we use Doha Round dummy variable labeled as WTO_Negotiation_1 variable, coded 1 for yes and 0 for no. This indicates whether during the time period we analyzed world trade negotiations took place. Similarly, it is also employed Terms of Trade (TT) labeled as TOT. This variable is defined as the ratio between export prices and the index of import prices (OECD, 2016). Thirdly, we also use labor productivity and utilization this variable is defined as a measurement of economic performance. This is an essential indicator for changes in living standards and overall improvements on the GDP as it measures changes in labor utilization and capital use as well as, an increase or decrease on low productivity workers (OECD, 2016). Fourthly, this project uses agricultural support labeled as AGRSUPP. This variable is defined as the annual monetary value of gross transfers to agriculture from consumers and taxpayers arising from government policies that support agriculture, regardless of their objectives and economic impacts (OECD, 2016)
The Dutch economy then and now: figures 1.1-1.4
To begin the analysis, we briefly illustrate the state of the Dutch Export market in relation to the United States, concluding the following; Since its admission to the World Trade Organization, the Netherlands in 1995 has enjoyed from favorable trading conditions especially in the agricultural/vegetable market. Is also worth noting that an increase in dollar terms of Dutch imports to the United States.
That same year, vegetable/agricultural output accounted for 8.64% of the country’s imports to the United States. Over time, as the Netherlands experienced better trading conditions with the US is worth noting a substantial decrease in agricultural output, accounting for 3.62% of total imports whereas manufactured goods accounted for 40.23% of total imports in 2001 (OECD, 2016). Interestingly enough, in 2015, compared to previous years the agricultural sector experienced a small growth of 4.75% in the Netherlands total imports to the US. we can assume as an effect of greater trade openness with their North-American partners.
Descriptive statistics 2.1:
From 1980 to 2015, by looking at the chart presented above we can see that the terms of trade for the Netherlands have been on an average ratio of 98.32% compared to an OECD ratio of 100.9 % (OECD, 2016). Favorable terms of trade have allowed the Netherlands to increase their share of exports in the world market. Similarly, the standard deviation of this variable, which is a unit of scale that measures how dispersed the data is away from the mean, shows that Terms of Trade have been somewhat constant as these have ranged from 96.51% to 101.09%, agricultural support we can also note that on average has been 1.61% of the European Union’s (including the Netherlands) GDP compared to the .42% total of the United States (OECD, 2016).
Even if the Dutch economy has increasingly become more open to trade, agricultural support stands with a standard deviation of 0.71%, it implies that it still plays a key role in Dutch agricultural output. Similarly, for our labor productivity variable, we note that it has been constant with annual growth rate of 1.24% on average. We can assume as the Dutch economy opens up to trade there is a positive reflection in the changes of allocation of factors of productions.
Pearson’s correlation 3.1:
A correlation is a statistical technique that is used to measure and describe the linear relation between two variables. From this data, there are a few key elements that are worth looking at. Firstly, there is a negative linear relationship between agricultural support and Terms of Trade with – 46%, Dutch economy increases liberalization of its markets agricultural supports decreases: exports become regulated by world supply and demand instead of government intervention: Dutch agricultural sector subsidies accounted for 34% of the government’s monetary gross transfers to an overall decrease to 18.92% in 2014 (OECD, 2016). Secondly, there is a positive linear relationship between Terms of Trade and net trade change, as the former increase the latter also increases. Better terms of trade translate into greater demand for Dutch exports with a positive correlation of 51%.
Lastly, there is a negative correlation between the Doha Rounds (labeled as WTO_ Negotiation_1) and agricultural support with a correlation of – 45% and a negative relationship between the Doha Rounds and labor productivity. For the former case, the data shows that increasing liberalization would cause a shift in the allocation of factors of production, as it would progressively eliminate low performing sectors and transfer them to more productive sectors instead, demonstrated by the Heckscher-Ohlin model. In a similar scenario for the latter case, labor productivity is negatively affected by the Doha Rounds. However, we can interpret this negative relation as a shock in labor productivity, given that the Doha Development rounds have progressively caused a change in how low skilled labor is employed and/or capital is allocated.
Multivariate regression analysis 4.1
A multivariate regression analysis is a form of statistical measurement that is used to estimate the linear association between the predictors and responses. Firstly, the data used in this research had an R-square of 30.99; this indicated that 30.99% of the variations in net trade change are explained by the variables used in the model presented Secondly, the P-values of our variables indicate that there is no statistically significance between our variables as most of them ( with the exception of terms of trade with a p-value of 0.006) have no direct impact on the net trade change.
Conclusion
This research aimed to explain the relationship between trade liberalization and agricultural exports following the Doha Development Rounds. In a full trade liberalization scenario where both developing and developed countries become freer both consumers and producers will benefit from an increase in their general welfare: the world’s gains in welfare will mostly come from the global elimination of barriers to traded goods and food policy reform (Messerlin, 2015). Yet, for a country like the Netherlands, where farm households are among the wealthiest income earners within OECD member states (Messerlin, 2015) and Dutch agricultural output still accounts for a substantial percentage of the Netherlands total exports, is understandable why trade liberalization is still regarded with skepticism primarily because, trade liberalization will cause a shift in agricultural imports to the US, as these could decrease over time.
The Dutch economy has progressively enjoyed greater access to markets for its exports, the literature presented in this research demonstrated that in the short-run in a full liberalization prompted by the Doha Development rounds would cause an increase in income gains. Nonetheless, the strong relation between the variables did not provide significant statistical evidence to support the effects of the Doha Development Rounds on Dutch exports towards the United States.