Trade Liberalization as a Vehicle for Adapting to Global Warming

Abstract

This study assesses the potential interaction between climate change and agricultural trade policies. We distinguish between two dimensions of agricultural trade policy: market insulation and subsidy levels. Building on the previous work of Tsigas, Frisvold and Kuhn (1997) we find that, in the presence of current levels of agricultural subsidies, increased price transmission—as called for under the Uruguay Round Agreement on Agriculture—reduces global welfare in the wake of climate change. This is due to the positive correlation between productivity changes and current levels of agricultural support. Increases in subsidized output under climate change tend to exacerbate inefficiencies in the global agricultural economy in the absence of market insulation. However, once agricultural subsidies have also been eliminated, price transmission via the global trading system contributes positively to economic adaptation under climate change.