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There is increasing evidence suggesting that climate change will negatively impact agricultural production in South Asia. Decreased domestic production may make South Asian countries more dependent on imports. The extent to which South Asia will need to increase its imports as a result of climate change will presumably depend on the degree to which the latter will affect domestic output. The effects of climate change on agriculture may well differ substantially for individual South Asian countries and indeed for regions within a given country which can be approximated by food production units. This calls for an analysis of climate change effects on trade flows under alternative trade policy regimes both for agriculture and non-agricultural sectors. The specific objectives of the paper include the following: analyze the extent to which agricultural production in South Asia and elsewhere in the world may be affected by different scenarios regarding climate change; analyze the extent to which changes in domestic production in South Asia resulting from climate change will lead to increased demand for imports by South Asian countries; analyze the effects of increased import demand in South Asia and changing exportable surpluses elsewhere on world market prices of major agricultural commodities consumed in South Asia; to the extent that South Asian governments allow transmission of changes in world market prices to domestic prices, analyze the potential welfare effects of changes in the latter; analyze if, and to what extent, worldwide trade liberalization and implementation of South Asian Free Trade Area (SAFTA) will dampen the effects of climate change on domestic agricultural prices in South Asia. In this context, the report is organized as follows: chapter one gives introduction. Chapter two describes the methodology used - with particular attention to how different models and modeling techniques are linked to produce an as accurate as possible assessment based on state-of-the-art knowledge. Chapter three provides an up-to-date analysis of trade flows and policies, and production patterns for key food products in South Asia to explain the context in which climate change is taking place. Chapter four describes the climate change scenarios and illustrates their consequences for crop yields at a global level and for South Asia - and in particular shows the vulnerability of the region to these changes. Baseline design, simulations, and results are discussed in chapter five. The final chapter six provides a short summary, discusses the limitations of the analysis, and derives suggestions and guidelines for future research.

This paper analyzes the economic effects of agricultural price and merchandise trade policies around the world as of 2004 on global markets, net farm incomes, and national and regional economic welfare and poverty, using the global economy wide Linkage model, new estimates of agricultural price distortions for developing countries, and poverty elasticity's approach. It addresses two questions: to what extent are policies as of 2004 still reducing rewards from farming in developing countries and thereby adding to inequality across countries in farm household incomes? Are they depressing value added more in primary agriculture than in the rest of the economy of developing countries, and earnings of unskilled workers more than of owners of other factors of production, thereby potentially contributing to inequality and poverty within developing countries (given that farm incomes are well below non-farm incomes in most developing countries and that agriculture there is intensive in the use of unskilled labor)? Results are presented for the key countries and regions of the world and for the world as a whole. They reveal that, by moving to free markets, income inequality between countries will be reduced at least slightly, all but one-sixth of the gains to developing countries will come from agricultural policy reform, unskilled workers in developing countries the majority of whom work on farms will benefit most from reform, net farm incomes in developing countries will rise by 6 percent compared with 2 percent for non-agricultural value added, and the number of people surviving on less than US$1 a day will drop 3 percent globally.

Earnings from farming in many developing countries have been depressed by a pro-urban bias in own-country policies as well as by governments of richer countries favoring their farmers with import barriers and subsidies. Both sets of policies, which reduce national and global economic welfare and contribute to global inequality and poverty, have been undergoing reform since the 1980s. Using the linkage model of the global economy and modifications to the pre-release of version 7 of the Global Trade Analysis Project (GTAP) protection database for 2004, this paper seeks to compare the effect of those reforms to date with those that would come from removing remaining agricultural and trade policies. Two sets of results are thus presented: one showing the effects of policy reforms between 1980-84 and 2004, the other showing what the removal of remaining distortions as of 2004 could be. Both sets of results indicate improvements in the real value of agricultural output and exports, the real returns to farm land and unskilled labor, and real net farm incomes in most developing country regions despite the adverse effect on the international terms of trade for some developing countries that are net food importers or are enjoying preferential access to agricultural markets of high-income countries. Landowners in those high-income countries still offering their farmers price supports could readily afford to compensate them from the benefits of removing remaining agricultural protectionism.

The proliferation of preferential trade liberalization over the last 20 years has raised the question of whether it slows multilateral trade liberalization. Recent theoretical and empirical evidence indicates that this is the case even for unilateral preferences that developed countries provide to small and poor countries, but there is no estimate of the resulting welfare costs. This stumbling block effect can be avoided by replacing the unilateral preferences with a fixed import subsidy, which generates a Pareto improvement. More importantly, this paper presents the first estimates of the welfare cost of preferential liberalization as a stumbling block to multilateral liberalization. Recent estimates of the stumbling block effect of preferences with data for 170 countries and more than 5,000 products are used to calculate the welfare effects of the European Union, Japan, and the United States switching from unilateral preferences for least developed countries to an import subsidy scheme. In a model with no dynamic gains to trade, the switch produces an annual net welfare gain for the 170 countries that adds about 10 percent to the estimated trade liberalization gains in the Doha Round. It also generates gains for each group: the European Union, Japan, and the United States ($2,934 million), least developed countries ($520 million), and the rest of the world ($900 million).