DAIRY: ASSESSING world MARKETS AND POLICY REFORMs: IMPLICATIONS FOR DEVELOPING COUNTRIES

sources of economies in procurement, processing and logistics, and foreign direct investment. Policy reforms leading to free markets would pitch consumers against producers in most countries because of the large transfers implied by current policies and their removal. In importing countries with high barriers (Asia), consumers’ gains are larger than producers’ losses because the dairy sector is small. In competitively producing countries, consumers currently benefit from depressed world dairy prices and low trade barriers and have much to lose in undistorted markets, whereas producers have much to gain. The largest net welfare gains would accrue in the Quad, however, because large consumer gains and reduced budgetary costs for support policies would be much larger than producers’ losses. In most other countries, net efficiency gains would remain small because the gains to one group would be offset by losses to the other. Our simulations also show the production gains from trade liberalization are captured by dynamic reformers attracting foreign direct investment and overcoming supply constraints and technology transfers. World dairy markets exhibit an extreme case of distortions traceable to a complex system of domestic and international trade barriers—including surplus disposal in the Quad countries (Canada, European Union, Japan, and the United States) and the Republic of Korea. Oceania (Australia and New Zealand)—which, with the Quad, dominates the export market—is a competitive exporter with few distortions. However, dairy interest groups in the Quad are entrenched, and prospects for policy reforms appear dim. Domestic price discrimination schemes in the Quad (minus Japan) rely heavily on the ability to close borders, suggesting that the emphasis in the Doha negotiations should be on commitments to lower border protection to force domestic reforms. Despite the quagmire of distortions, dairy is a dynamic sector with much growth potential, especially in Asia, where dairy consumption has been propelled upward by income growth, urbanization, and westernization of diets. Dairy is also experiencing innovations in food processing, with valueadded opportunities in traditional products and new dairy-based protein ingredients facing few trade barriers. Concentration and vertical integra-