countries amounted to US$40 million, LDC's received about US$2.5 billion in foreign exchange from the exports of coffee. Latin America accounted for 67% of the value of these exports and Africa for 27%, the remainder originating in countries in Asia and Oceania.

23. Exports of coffee by the LDC's are expected to increase by 1.7% per annum to over 4 million tons in 1980. As actual prices are projected to increase by 168% between 1967-69 and 1980, total export receipts from coffee will more than triple to US$7.9 billion. In real terms, however, prices will decline by 3.0% and export receipts will grow by only 1.7% per annum over the period concerned. The growth in export receipts will be more marked in Africa than in Latin America, mainly due to the declining market share of Brazil. Latin America's share in total LDC's foreign exchange eamings is projected to be 62% by 1980 as against 31% for the African countries by that time.

24. On the import side the increase in demand will be extremely sharp in Japan, with also appreciable gains being recorded in the Western European countries. The increase in consumption in the USA will virtually be nil, however. As a result, the share of the USA in the volume of imports from developing countries will decline from 41% in 1967-69 to 34% in 1980. The share of Western Europe on the other hand will increase from 39 to 45%.

25. As coffee is a non-competing commodity in the markets of the developed countries, tariffs are generally low or non-existent. No external tariffs exist in the USA, Canada and Japan; and the UK tariff is negligible. The EEC levies an import duty of 7%, but coffee from most of the African countries enters duty-free. Of the other Western European countries only a few have duties of any importance. Non-tariff barriers are even less widespread than import duties, except in two cases in which they are very substantial indeed. Italy has an internal tax on coffee of about US$40 per pound, and in Western Germany it is even as high as US¢68 per pound.

26. The price elasticities of the demand for coffee that are needed to compute the gains that would result from the removal of all barriers to trade were taken from an unpublished study by the Economic Research Service, conducted in 1972 under an agreement with USAID. In most countries the effects of trade liberalization on import demand are minor either because the reduction in the retail price of coffee is small, or because the demand for coffee is rather inelastic. In Italy, for example, despite a 25% reduction in retail price, consumption would increase by no more than 6.5%, due to a price elasticity of demand of -0.25. The only notable exception is Western Germany, where a sharp reduction in price would combine with a highly elastic demand. Consumption in this country, the second largest importer of coffee after the USA, would increase by about 50% in the event of a total trade liberalization. Compared to this the increases in consumption in Switzerland (7%), Italy (6.5%), Denmark (6%) and Japan (5%) are all of minor importance.

27. The total gain from trade for the developing countries in the case of trade liberalization would be US$539 million in current terms (US$327 million in 1974 constant terms), by 1980, due to an incremental import demand of 260,000 metric tons. Prices will not be affected as, given a time-lead of about 5 years, the upword price-elasticity of supply is infinitely large within a

Largin of 10 to 5% of the production projected for 1980. The reason for this is that at present the expansion of production is being limited artifically in order to prevent prices from falling. Of these 260,000 metric tons, 220,000 would go to West, Germany. Since the West German market shows a very strong preference for mild arabica coffees the major share of the gains from the increased trade would go to the producers of these types of coffee, of which the majority are Latin American countries.

Cotton

28. In most developed countries which are net importers of cotton, this fiber is considered to be an industrial raw material and import barriers are minimal and generally considered to have an insignificant effect on trade volume. Conversely, barriers to cotton imports in the net exporting countries are generally substantial and prohibitive. Among the net exporting countries, only the United States is a developed country, and the USSR is a centrally planned country. In the USSR the current National Plan 1971-1975 envisages the continuation of a modest expansion in the cotton growing area to cover the increased consumption requirements of their expanding population and higher per capita use 1/. Since trade in cotton in the USSR is more responsive to government decisions than to market conditions, the assumption is that of continued supply of a similar share of world cotton exports under liberalized trade in 1980, as in the 1967-69 base riod. This implies an annual growth rate in USSR cotton exports of 0.8 percent.

29. Complete trade liberalization apparently would have a major impact on the cotton economy in the United States the world's largest producer and exporter of cotton and in turn on the economies of the developing producing countries. The US Department of Agriculture published in 1971 the estimated effects of eliminating existing programs of cotton support payments and marketing quotas on cotton planting and production in the United States 2/. Based on 1970 prices for inputs, US cotton production would be expected to fall to 1,518,750 metric tons 3/ (7.0 million bales) at a domestic cotton price of 17 cents per pound. This T970 average US price may be converted to an equivalent 1980 c.i.f. North Europe price for SM 1-1/16 inch quality by adjusting for quality differences and the actual and expected influence of inflation. This derived 1980 price was in 1973 roughly equivalent to current 1980 projection for Mexican SM 1-1/16" quality c.i.f. Liverpool. Considering the outlook for domestic cotton consumption in the United States in 1980 at between 1.5 to 1.6 million metric tons, it appears that, under conditions of liberalized trade, indigenous production would about meet domestic mill requirements. Trade liberalization, therefore, would shift the projected export of 845,600 tons of US cotton in 1980 to other producing countries. Assuming the USSR would export roughly its present market share, the additional market would be available to the developing cotton producing and exporting countries.

1/ Cotton Production in the Soviet Union, Foreign Agriculture Circular.33-72, USDA December 1972.

2/ Cotton Production and Farm Income Estimates Under Selected Alternative Fam Programs, Agricultural Economics Report No. 212, ERS, USDA, Washington, D.C. September 1971.

3/ Converted at 4.6121 bales per metric ton.

30. The developing countries would not expand cotton production rapidly enough to cover such a deficit in supply in 1980 at the price projected in 1973. Based on an estimate of the price e asticity of production in the developing countries of +0.47, 1/ a price ise of nearly 24 percent would be necessary to stimulate the 17 percent i crease in aggregate production in those countries required to meet this demand. The tendency for prices to rise would reduce the anticipated decli e in output in the United States. Based on the responses determined in the USDA study 2/ the price elasticity of production, at the level of output projected for T980 under liberalized trade, is estimated at +1.7. The elasticities of production in the US and the developing countries imply that the net gain in cotton exports of the developing countries under conditions of liberalized trade in 1980 would be around 473,600 tons. It is assumed that the benefits of the increased exports will accrue to the developing areas in proportion to the market share held in the 1967-69 base period.

31. The rise in production in the LDC's and the US would require an increase in c.i.f. cotton prices from the projected level of about 14.5 percent. Since the higher price would apply to total exports, the benefits to the LDC's from liberalized cotton trade would be around $1,796 million in c.i.f. value or $1,700 million in f.o.b. value in current (1980) terms which is equivalent to $996 million in f.o.b. constant (1974) terms.

Sugar

32.

Sugar is produced in both developed and developing countries; removal of trade barriers, abolishing tariffs and internal taxes in developed countries will, therefore, cause firstly increasing demand. Secondly, there will be a substitution effect, resulting from eliminating subsidies and other incentives for domestic production in developed countries. Both the increasing demand and the substitution effect can lead to incremental export earnings of developing as well as developed countries.

33. The estimated impact of increasing demand and the substitution effect is limited to developed countries members of the OECD only.

34. The estimate of the incremental demand in 1980 is based on a number of assumptions and results of other studies. A forecast of total consumption in 1980 on the assumption of unchanged market regulations, tariffs and subsidies is taken from the Bank's own most recent assessment of market prospects. study also projects a current price of 15¢ per lb. f.o.b. Caribbean raw value for 1980 and correspondingly a price of 94 in constant 1974 terms, and approximately $25 per ton cost of freight and insurance. Use is also made of a study

by UNCTAD 3/, which estimated the price effects of hypothetical removal of agricultural protection in 1980.

This

1/ World Demand for Cotton in 1980 With Emphasis on Trade by Less Developed Countries, Foreign Agricultural Economics Report No. 000, ERS, USDA January 1971, page 48.

2/ Agricultural Economics Report No. 212, pages 4, 7 and 18.

3/ UNCTAD, Research Memorandum No. 4, Agricultural Projection and the Food Economy, UNCTAD/RD/L, March 30, 1972, p. 18 (Table 5).

35. When a low and high estimate of substitution effect are imputed (as shown in paragraph 36), the price of sugar is assumed to increase slightly. The total incremental demand resulting from removing the trade barriers are estimated to be about 8 percent of the basic demand projection for which is an additional consumption of approximately 1.8 million metric tons (raw value). 36. The estimate of the substitution effect is based on the assumption that domestic sugar production and refining in the developed countries will be decimated as a result of removing subsidies and protecting tariffs. In the absence of firm estimates of supply elasticities two alternative assumptions were used:

37.

a) that by 1980 the domestic production in the developed
countries will decline by 20 percent from the level which
is otherwise forecasted;

b) that their domestic production will decline by 50 percent
in 1980 from the level which is otherwise forecast. It is
assumed that both the developing and the efficient developed
producing countries will be able to expand sufficiently to
compensate for the production decline in the OECD countries.

The basic projection for 1980 implies already that the level of production in developed OECD countries by 1980 will, in fact, remain almost at the level reached in 1972. The alternative assumptions of 20 and 50 percent decreases in production resulting from removal of trade barriers are, therefore, quite low.

The

38. The substitution effect in case of a 20 percent reduction in the output level by 1980 is estimated at 3.9 million metric tons, which is equivalent to a value of $1.3 billion in current dollars or $900 million in constant 1974 dollars. The total effect both of demand and substitution totals approximately $1.9 billion in current dollars and $1.14 billion in constant dollars. substitution effect based on a 50 percent reduction in the output level by 1980 is estimated at approximately 9.9 million tons, and the corresponding value is $3.27 billion in current dollars or $1.962 billion in constant dollars; together with the incremental demand the total effect would be $3.86 billion in current dollars to $2.3 billion in constant dollars.

39. The sharing of the total effect of both demand and substitution between developing and developed countries differs between main markets. For Canada, the US and Japan the shares are estimated to remain the same but a change in favor of the developing countries in Western Europe is expected for two main reasons. Firstly, account must be taken of the proximity to Africa and the Central Latin American countries; secondly, the total absolute quantity of sugar which will be supplied to the EEC in 1980 is relatively small, therefore, the overall global distribution of production between developing and developed nonOECD countries can be considered a realistic indication for the share in the case of trade liberalization.

40. The total beneficial effect to developing countries based on a 2 percent reduction in the production level of OECD countries is estimated at $1.6 billion (c.i.f.) export earnings in current dollars or $960 million in constant 1974

ollars or $1.4 billion in f.o.b. current terms, equivalent to $840 million in constant 1974 terms. If production declines by 50 percent, incremental export earnings may reach $3.4 billion (c.i.f.) in current terms, equivalent to a 2 billion in constant terms, or about $3.15 billion in f.o.b. current Terms, equivalent to $1.84 billion in constant terms. Compared to these the export earnings of developed non-OECD countries would increase by $260 million in current terms, equivalent to $156 in constant in the case of the 20% reduction assumption and $430 million in current terms, equivalent to $258 constant (c.i.f.) or $240 current and $400 million in current terms, $240 constant in f.o.b. terms in the case of 50% reduction assumption.

Tea

41.

There are no quantitative restrictions on tea in effect 1/. Regarding import duties, the highest import duties are imposed by Japan 27. Some import duties are also imposed by Australia, Austria and the EEC. The Common External Tariff of the EEC for tea will become applicable in 1980 to the United Kingdom, Ireland and Denmark, the new members of the Expanded Common Market.

42.

Internal taxes on tea which constitute trade barriers are found only in France and West Germany. None exist for other countries.

44.

The gains from trade liberalization for developing countries in 1980 would amount to some US$1.1 million in current terms (US$0.7 million in 1974 constant terms). Of this, the sources of these gains are as follows: about $0.8 million can come from the EEC (Six) and $0.3 million from Japan.

Wood Products

45. For the purpose of this exercise, only the trade in hardwood in the form of logs, sawnwood, veneers and plywood has been considered. A predominant portion of existing wood resources in LDC's is hardwood (broadleaved wood) and 90 percent of LDC's forest product exports consists of tropical hardwood.

1/ Except for New Zealand whose share in world imports is very small.

2/ 35%; preferential rates for unpacked tea at 5%, packed for retail at25% ad valorem.

3/ From FAO, Intergovernmental Group on Tea, doc. CCP:TE72/EXPO/5/5, July 1972.