Bilateral trade agreements and price distortions in agricultural markets

Agricultural support levels are at a crossroad with reduced distortions in OECD countries and increasing support for agricultural producers in emerging economies observable over the last decades. This paper studies the determinants of distortions in the agricultural markets by putting a specific focus on the role of trade policy. Applying various different dynamic panel data estimators and explicitly accounting for potential endogeneity of trade policy agreements, we find that an increase in the number of bilateral free trade agreements exhibits significant short- and long-run distortion reducing effects. By contrast, our evidence suggests that WTO’s Uruguay Round Agreement on Agriculture has not been successful in systematically contributing to a reduction in agricultural trade distortions. From a policy point of view, our findings thus point to a lack of effectiveness of multilateral trade negotiations.