1.1 Major changes are currently taking place in the international trade environment. These are partly driven by breakthroughs
in transport, communications and information technologies, and partly by policy reforms. Globalization of markets and
increased economic integration mean that goods, capital and ideas move around the world ever more easily, bringing new
opportunities as well as risks. Shifts in production patterns are leading to changes in the structure of world trade, particularly
because of rapid growth in the East Asian economies, and in its composition, with the growth in importance of internationally
1.2 These trends will be reinforced by the conclusion of the Uruguay Round of multilateral trade negotiations, the most
wide-ranging and ambitious agreement ever negotiated. Restrictions on manufacturing trade will be further reduced, while
significant steps are being taken to liberalize agricultural and services trade. Moreover, the transitional economies and many
developed and developing countries have been adopting more market-oriented trade policies, with the Uruguay Round
reinforcing this trend. Further liberalization is taking place in the context of regional trade groupings, which are taking on a new
significance. Agricultural trade is fully included in the changes under way, and it will be affected profoundly by ongoing
deregulation and liberalization, given the extensive nature and scope of government intervention in agricultural markets in the
1.3 This document sets out to examine the nature of these changes and the adjustments that are needed in domestic and international agricultural policies. The focus of the paper is on whether the changes are leading towards a more food-secure or -insecure world, and on the necessary steps to ensure that food security is promoted in the new trade environment.
2.1 A number of characteristics of food and agricultural trade performance during the past two decades can be highlighted: its
continuing importance for both developed and developing countries; its uneven growth over the period, with rapid expansion
in the 1970s followed by virtual stagnation in the mid-1980s and a slow recovery since then; the collapse of commodity prices
during this latter decade; the changing directions and commodity composition of agricultural trade; and the disarray on world
markets resulting from policy distortions in both developed and developing countries.
2.2 Since the World Food Conference in 1974, the volume of agricultural trade, including temperate zone and tropical
products, and fishery and forestry products, has grown by 75 percent and its value from US$148 billion to some US$485
billion in 1994 (GATT, 1995). Because trade in manufactures grew more rapidly, the share of agricultural products in
merchandise trade fell from around 20 percent in the early 1970s to 12 percent in 1994. For developing countries as a group,
the fall has been even more dramatic, from around 36 percent of their total export revenue in the early 1970s to less than 14
percent by 1993 (UNCTAD, 1995c). This average figure, however, conceals the much greater dependence on agricultural
trade of many individual countries, both as exporters and as importers. In around 25 percent of the countries the share of
agricultural exports exceeded two-thirds of total exports in the early 1990s, while in a further 20 percent the agricultural
export share exceeded one-third (UNCTAD, 1995c). Low-income countries remain most heavily dependent on agricultural
trade, often still relying on one or a few agricultural exports for the bulk of their foreign exchange revenue. Agricultural trade is
less important for high-income countries but remains a substantial source of export earnings for some of them, such as
Australia, France, New Zealand and the United States. Moreover, even for high-income countries, changes in agricultural
trade conditions can have important economic impacts, as shown by the volatility in land prices and the farm-debt crisis in the
United States since the early 1970s, brought about by the expansion and subsequent contraction of agricultural exports
coinciding with a period of substantial changes in real interest rates.
2.3 Growth in agricultural trade among developing countries, after having slowed down in the 1980s, became more vigorous
in the early 1990s. By 1993 its value was estimated at around US$46 billion, or over 10 percent of world agricultural trade.
This represents an improvement over the shares registered in the past (Table 1). The main source of the more buoyant market
in recent years has been agricultural trade among Asian countries and among countries in Latin America and the Caribbean.
However, the increase in trade probably owes more to the relatively rapid economic growth in these two regions than to the
intensification of trading arrangements among groups of countries in these regions, even though these two factors are linked.
2.4 The expansion of agricultural trade has not occurred at an even pace in the past two decades, but has reflected the
influence of a number of global shocks: the commodity price booms during the 1970s; the oil price shocks of 1973 and 1979;
and the sharp increases in interest rates in the early 1980s which inaugurated the international debt crisis and the subsequent
slow growth and recession in developed countries and most developing-country regions. Two indicators highlight the difficult
commodity-trade environment in the mid-1980s. First, this was the only period in which trade in agricultural products failed to
expand faster than agricultural output (Figure 1). Second, real commodity prices, which had tended to move downwards in
the previous two decades, fell dramatically in the 1980s. A comparison of the three years 1990-1992 with the years
1979-1981 shows a decline of 30 percent in the net barter terms of trade between agricultural commodities and imports of
manufactures and crude petroleum.(1) The decline was close to 40 percent for the agricultural commodity exports of developing
countries and 20 percent for those of developed countries (FAO, 1995b). At the same time, however, the trade
patterns of many developing countries have changed significantly towards other sectors, notably manufactures and services.
GROWTH OF AGRICULTURAL TRADE AND OUTPUT, 1963-1993
2.5 Around one-third of international agricultural trade takes place among the countries of Western Europe. If trade among
these countries is excluded, then North America, Western Europe and Asia have roughly equal world export market shares,
while Asia is by far the most important import market. Several notable trends can be observed over time. These include a
decline in the once- large import market in Western Europe and its shift to a net export position in a number of commodities;
growth in import markets in Pacific rim countries; a related but more general shift in import-market emphasis from high-income
to middle-income developing countries; increasing market surpluses in some agricultural export countries; and proliferation in
the use of export subsidies by major industrialized countries. Among developing-country regions, Latin America and the
Caribbean is a significant net exporter of agricultural commodities, while Asia, the Near East, Africa and the transitional
economies are now net importers (GATT, 1995).
2.6 Trade in food commodities has exhibited the same trends since the early 1970s as agricultural trade as a whole. The value
of food trade, some US$266 billion in 1994, was over 300 percent greater than it had been 20 years earlier. Developing
countries accounted for some 28 percent of total food imports in 1994, the same share as in 1974. However, their share of
food exports in 1994 had declined to 26 percent from 30 percent. As a result the trade balance in food commodities, which
was marginally positive 20 years ago, has turned negative.(2) In 1994, developing countries imported about US$75 billion
worth of food commodities, compared with US$67 billion worth of food exports. These trends highlight the growing
importance of trade in meeting food consumption needs, especially for the developing countries. In terms of cereals, imports
accounted for some 14 percent of the domestic consumption of developing countries in 1994, up from less than 10 percent 20
2.7 Two dimensions of the commodity composition of agricultural trade are of interest; the horizontal differentiation by product, and the vertical differentiation by level of processing. As agricultural trade has grown, there has also been a structural shift in the commodity composition of this trade from bulk commodities to value-added products, as a result of rising incomes. High-value trade in products such as cut flowers and tropical fruits has been the source of agricultural export growth for a number of developing countries.
2.8 The sharp fall in world food prices during the 1980s was partly a symptom of the state of disarray of world markets in
which national levels of production and consumption, and hence trade, were heavily influenced by government policies, and
many countries insulated their domestic markets from changes in world market conditions.
2.9 Government intervention in agricultural markets in developed economies usually provides support to the agricultural sector
(though because of vertical market relationships, the effective rate of protection for grain-using sectors such as pig and poultry
production can sometimes be negative). The magnitude and modalities of this support vary widely between countries and
commodities. Japan and some countries in Western Europe have had the highest levels of support, Australia and New
Zealand the lowest, while the United States and the European Community (EC) have had intermediate levels. In all countries,
dairy products and sugar tend to be more heavily supported than the average. The regular monitoring of agricultural support in
developed countries undertaken by the Organisation for Economic Co-operation and Development (OECD) shows that
support (measured as the percentage producer subsidy equivalent) increased from an average of 30 percent in 1979-1981 to
43 percent of the value of production in 1993-1994 (OECD, 1995).
2.10 The pattern of government interventions in developing countries is more mixed. Because of the relatively large share of
agriculture in the economy and the relative ease of collecting border taxes, many governments have taxed agricultural exports.
On the other hand, in the pursuit of self-sufficiency for food staples, governments have often provided protection to producers
of grains and other import items. Input subsidies have also been a common feature of developing-country agricultural policies.
However, often more important than the direct effects of sectoral policies are the indirect effects on agricultural production
incentives of industrial-sector protection and exchange rate overvaluation. An important World Bank study of 18 developing
countries, using a common methodology, found that over the period 1960 to 1984 the effects of these indirect measures were
typically stronger than the effects of direct policies in most countries (Schiff and Valdés, 1992). More recent data on
protection for a wider number of countries, drawn largely from the data on agricultural trade distortions collected by the
Economic Research Service of the United States Department of Agriculture, confirm that implicit taxation continues to be an
important feature of the policies adopted in developing countries, but also that protection, sometimes at high rates, is observed
for a number of commodities and regions (Brandão and Martin, 1993).
2.11 Agricultural markets were also distorted in the economies in transition in the past. Both consumers and producers were
subsidized in the pre-reform period, though to different extents for different commodities and in different countries. Most
heavily subsidized on the consumer side were grains, beef and dairy products, while sugar was heavily taxed. Production was
subsidized compared with world prices at the official exchange rate both through input subsidies and high producer prices,
though animal products were more strongly favoured. However, evaluation of producer incentives, particularly in the former
Union of Soviet Socialist Republics (USSR), is very sensitive to the choice of exchange rate (Goldin, Knudsen and van der
Mensbrugghe, 1993). On balance, these policies probably added to import demand on world markets.
2.12 Agricultural trade made a substantial contribution to the improvements in global and household food security that
occurred during the 1980s. Ample food supplies were available on world markets at decreasing real prices. The volatility of
world prices decreased. World grain stocks never fell below the 17 to 18 percent of world cereal consumption estimated by
FAO as the minimum necessary to ensure world food security. Food aid flows, particularly for emergencies, increased.
Despite this overall positive balance, a number of weaknesses were also evident in the 1980s. Depressed commodity markets
damaged the growth prospects of agricultural exporters; the continued insulation of many national markets from world market
trends meant that world markets were excessively sensitive to changes in supply and demand conditions; and increased
volumes of commodity exports were achieved at the expense of environmental degradation in some countries. To some extent
the situation in the last six years has been different, with stocks lower, prices higher and food aid flows by 1995 at their lowest
since the mid-1970s.
3.1 Food security is defined as a situation in which all households have both physical and economic access to adequate food for all members, and where households are not at risk of losing such access. There are three dimensions implicit in this definition: availability, stability and access. Adequate food availability means that, on average, sufficient food supplies should be available to meet consumption needs. Stability refers to minimizing the probability that, in difficult years or seasons, food consumption might fall below consumption requirements. Access draws attention to the fact that, even with bountiful supplies, many people still go hungry because they do not have the resources to produce or purchase the food they need. In addition, if food needs are met through exploitation of non-renewable natural resources or degradation of the environment, there is no guarantee of food security in the long term.
3.2 Food security can also be defined at different levels: for the world as a whole, or for individual nations, regions or
households. Ultimately, food security concerns the individual or family unit, and its principal determinant is purchasing power,
income adjusted for the cost of what that income can buy. Similarly, purchasing power at the national level, the amount of
foreign exchange available to pay for necessary food imports, is a key determinant of national food security.
3.3 There are two broad options for achieving food security at the national level: the pursuit of food self-sufficiency or the
pursuit of food self-reliance. Food self-sufficiency means the satisfaction of food needs as far as possible from domestic
supplies with minimized dependence on trade. In several developed countries the motivation for the policy goal of high
self-sufficiency in food has often been more to transfer income to farmers than to protect against uncertain world markets. A
number of larger developing countries adopted this policy because year-to-year changes in their import requirements could
otherwise have been big enough to affect world prices. This was particularly true with respect to rice, for which the world
market was relatively small. Another consideration that influenced the choice of self-sufficiency policies in some countries was
that under a free-trade regime they could have been exporters of basic food commodities, which would have resulted in higher
than affordable domestic prices, to the detriment of the food security of poorer consumers. Other countries have, however,
pursued a policy of encouraging the country to produce enough food itself to provide a minimum level of food intake per
person, to protect against the contingency that it might be unable to import food at any cost, as in time of war or embargo.
The concept of food self-reliance takes into account the possibilities of international trade. It implies maintaining a level of
domestic production plus a capacity to import in order to meet the food needs of the population by exporting other products.
The benefits and risks of relying on international trade to ensure food security are at the heart of the debate between these
3.4 Trade contributes to food security in a number of ways: through making up the difference between production and
consumption needs; reducing supply variability; fostering economic growth; making more efficient use of world resources; and
permitting global production to take place in those regions most suited to it. But reliance on trade may also bring some risks.
These include deteriorating terms of exchange on world markets (falling prices for agricultural exports, higher prices for food
imports); uncertainty of supplies; world market price instability; and increasing environmental stress if appropriate policies are
not in place. These and other important linkages between trade and food security, both positive and negative, are elaborated
3.5 A major contribution of trade to food security has been that it has permitted food consumption to grow faster than
domestic food production in countries where there are constraints on increasing the latter. Over the period from 1970 to
1990, gross agricultural production in the 93 developing countries covered by WAT2010 grew by 3.3 percent per annum,
while domestic demand increased by 3.6 percent per annum. Partly because domestic production constraints on food
consumption in developing countries could be relieved through food imports, availability per head increased from 2 120
Calories in 1969-1971 to 2 470 Calories in 1988-1990, and the proportion of chronically undernourished in the population
fell from 36 to 20 percent (FAO, 1995a).
3.6 Developing countries could meet more of their domestic food needs from national production if food prices were allowed
to increase to a high enough level or sufficient alternative incentives were provided to domestic producers. From a purely
economic point of view, however, the cost of pursuing food self-sufficiency policies can be high, as shown by the differences
between domestic and world rice prices in Japan or between domestic and world wheat prices in Saudi Arabia.(3) In a more
general sense, therefore, the role of trade is that it allows domestic food consumption to be met more cheaply by less costly
imported supplies. This is an important contribution, as even countries with strongly growing agricultural sectors pass through a
phase where the dynamics of population growth, income growth and changing diets are such that declining self-sufficiency is
almost inevitable. Trade also increases consumer choice by providing access to a greater range and diversity of foods. This is
particularly important in high-income countries where food trade includes the exchange of broadly similar but differentiated
products. Much of the one-third of world food trade which takes place within Western Europe is of this kind.
3.7 While food imports can make a vital contribution to food security, countries relying on food imports have two key
concerns: their capacity to maintain food imports at desired levels and reliability of access to these imports. Food import
capacity depends on the prices and other terms on which food can be imported (including food aid),(4) as well as on the foreign
exchange situation, which for many developing countries is limited by debt repayments, declining terms of trade and limited
export potential. Of particular importance are the market conditions facing agricultural exporters. Throughout the 1980s, the
prices of agricultural commodities tended to fall on world markets while those of manufactures tended to rise. The net barter
terms of trade between agricultural commodity exports and imports of manufactures and crude petroleum declined by close to
40 percent for developing-country exporters between 1979-1981 and 1990-1992. Furthermore, the global decline in prices
has been so large that it has generally offset the expansion of production, thus actually reducing overall earnings (FAO,
3.8 A sudden collapse in the purchasing power of export commodities can also put a country's food security at risk. For this
reason, countries (and farm households) often maintain a higher level of food self-sufficiency than might otherwise be
warranted as insurance against unexpected fluctuations in import purchasing power. However, for many countries, achieving a
higher level of food self-sufficiency may still represent an illusory security if it shifts dependence from food to fertilizer and
other essential inputs where these are imported. Maintaining foreign exchange reserves is an alternative and, in theory, a more
efficient approach, but in view of other development needs, reserve levels in developing countries are rarely sufficient.
3.9 The purchasing power of a country's export earnings in the world market is a partial but important indicator of food import
capacity. For developing countries, the purchasing power of exports with respect to food staples has been variable over the
past two decades as a result of shocks in the energy, financial and commodity markets. However, the ratio has inclined
upwards for developing countries as a whole, including the least-developed countries. Thus, despite difficult commodity
markets, food imports have become less onerous over time. This has contributed to the fact that, even though
developing-country food imports have been increasing in absolute terms, the share of food import expenditure in total imports
has remained relatively unchanged in most developing-country regions and has fallen substantially in South and Southeast Asia,
where the share of food imports in total imports fell from 16 to 6 percent between 1970 and 1991. During the same period,
the food import share fell from 11 to 10 percent in Latin America and from 14 to 12 percent in western Asia, though in Africa
it increased slightly, from 14 to 15 percent. A declining share of food imports in total imports implies that developing-country
food importers have greater flexibility to reallocate foreign exchange to food imports in the event of major price increases.
Conversely, those countries whose dependence on food imports has been increasing are now more vulnerable to shocks
arising in food or other markets.
3.10 Policy-makers in both developed and developing countries remain concerned about other risks associated with reliance
on international trade as part of a food-security strategy, and in particular whether imports will be available when needed and
the possible impact of political trade embargoes. General trends in grain markets suggest these risks may have become lower
than they were (Donaldson, 1984). Because of the increased volume of trade, from some 120 million tonnes in 1970-1971 to
around 200 million tonnes in the mid-1990s, world grain markets are now more liquid than before.(5) An importer can be more
confident that additional import requirements can be supplied without a knock-on effect on market prices. The transport and
handling infrastructure in exporting countries has been expanded and should be well positioned to meet medium-term needs;
some 215 million tonnes of grain were handled in the peak year 1984/85. Importers now have a greater choice of suppliers in
an increasingly competitive market. Improved information systems are in place to monitor harvests on a global basis, and
market surprises, such as the effect of grain purchases by the former USSR in 1972, are now less likely to happen. Futures
markets are more developed and are more likely to play a stabilizing role in price formation.
3.11 Occasionally, food-surplus nations place restrictions or embargoes on their exports when domestic or political conditions
provide the necessary justification. The United States embargoed soybeans in 1973 and 1975 because world demand was
threatening domestic availability and driving prices to record highs. More recently, in 1995-1996, some exporters in Europe
restricted their exports of some cereals via quantity controls or taxes in order to protect domestic consumers. Food may also
be used as a political and strategic weapon. Often, however, food is exempted from embargoes imposed for political reasons.
For example, the Islamic Republic of Iran continued to purchase United States grain throughout the period 1979-1980 when
almost all its other commercial, financial and political ties were cut off. Political embargoes are also difficult to enforce, and the
possibility of purchases through transshipment facilities in other countries makes it relatively easy to circumvent exporters'
attempts to exert political pressure. Internationally agreed embargoes may be more effective in this respect but are even less
likely to include food. Nonetheless, any trend towards the greater use of trade sanctions to enforce, for example, human rights
concerns or international environmental agreements, will increase uncertainty about import supplies.
3.12 For both developed and developing countries, stabilization of both producer and consumer prices is an important
objective. Production fluctuations can only be absorbed by consumption adjustments, changes in stocks, or trade. For most
developing countries, consumption fluctuations are unacceptable because of existing low levels of consumption for a large part
of the population, and reliance on stocks tends to be rather costly. Therefore most developing countries rely to a significant
extent on trade to even out the bulk of their production fluctuations. This approach, however, requires a flexible
import-management capability and does not eliminate price fluctuations, as in addition to variations in exchange rates,
underlying world food prices exhibit a degree of variability. This price variability is a function of global production variability,
the degree to which markets absorb some of this variability and the size and behaviour of global stocks.
3.13 Food security is most sensitive to grain market instability. The volatility of grain consumption decreased between 1960-1977 and 1978-1989, indicating that since the late 1970s the world's grain stocks have protected consumers from the year-to-year volatility of grain production (Martinez and Sharples, 1993). From a developing-country viewpoint, an important factor contributing to reducing market instability is the diversion of grain to livestock in developed countries, the so-called "feedgrain buffer". When world prices rise, the amount of grain fed to livestock tends to decline, thus providing a partial response to production shortfalls. This can occur either when producers substitute grain with other feedstuffs or more usually by reductions in herd size. For example, when grain prices rose during 1972-1974, the drop in United States feed consumption was as large as the total global production shortfall.
RECENT PRICE INCREASES AND STRUCTURAL CHANGES IN THE WORLD CEREALS MARKET
|International cereal prices rose sharply in the 1995/96 season. Wheat prices (US No. 2 hard winter) reached as high as
US$271 per tonne in early May 1996 before they eased to a lower level by June, compared with an average of US$157
per tonne in the 1994/95 season. Similarly, maize prices have risen sharply, reaching a high of over US$212 per tonne
(US No. 2 yellow) in May 1996 and remaining high. |
The sharp rise in the level and volatility of cereal prices in the current season needs to be seen in conjunction with developments in the first half of the 1990s. Particularly the past two years have been characterized by a generally close balance between supply and effective demand in world cereals markets, with international prices rising sharply and stocks declining to their lowest levels in relation to consumption in over 20 years. As a result of policy reforms in the major exporting countries since the early 1990s, structural surpluses in these countries have been reduced or even eliminated, leading to substantial reductions in publicly held stocks. These developments also coincided with weather-induced production declines, mainly in the United States, the world's largest cereals exporter. Relatively strong economic growth, mainly in the developing countries of Asia, has also contributed to the recent price surge in cereals.
The effect of recent high prices has not apparently made a major impact on consumption in 1995/96. Production in
developing countries was relatively good and imports have held up, probably reflecting heavier than usual purchases
earlier in the year when prices were significantly lower. However, this should not be interpreted as implying that food
security in many of these countries is not being adversely affected by the recent upheavals in world cereals markets, as the
aggregate outcome for all the developing countries conceals very disparate situations, with very difficult food situations in
many low-income food-deficit countries (LIFDCs). Also, these increased imports have come at higher prices and with a
smaller component of food aid and other concessional exports. As a consequence, cereal import bills have risen much
more than could have been expected: those of the LIFDCs rose from US$9.4 billion in 1993/94 to US$16.6 billion in
3.14 Since 1993, the global supply/demand situation has become tighter and there has been a significant fall in the size of
aggregate stocks held in the main exporting areas, particularly the United States and the EC. Wheat and maize prices have
risen sharply in 1995/96 over 1994/95 as a result (FAO, 1996). Reviewing the experience of the past 25 years, the irregular
appearance of price "spikes" rather than instability per se appears to characterize world grain markets. For all countries that
rely on foodgrain imports, but particularly the very poorest countries, an important aspect of the evaluation of trading regime
changes for food security is the likely impact on world market instability. As global stocks are likely to remain relatively low in
the 1990s compared with the previous decade, and despite the higher share of the more responsive private stocks, the chance
of price spikes occurring is probably greater than in the past.
3.15 An important way in which international trade contributes to food security is by accelerating national income growth. Economic growth can enhance food security by increasing individuals' command over resources and thus their access to food. As incomes grow, the fraction spent on food declines and the chances of falling into food insecurity decrease, while at the same time savings enhance longer-term food security. However, if national economic growth does not trickle down to the poor, then the food security of poor groups does not improve and may in some cases deteriorate.
3.16 Trade contributes to income growth in a number of ways. First, it enables countries to reap the benefits of comparative
advantage. Second, an increase in export demand enables production to be expanded. Third, trade is associated with greater
possibilities for the transfer of capital and expertise, particularly through foreign investment. While the role of transnational
agribusiness firms in developing countries has been controversial in the past, there is increasing recognition of the management
benefits they can bring to production, processing and marketing. However, the impact may be more positive on larger farmers
producing cash crops than on small or subsistence farmers.
3.17 Economic literature offers much theoretical support for a positive relationship between trade and economic growth.
Export growth may relieve a foreign-exchange constraint and permit a higher level of imports, thus allowing more domestic
growth if this has been constrained by the need to keep import demand at a certain level. It allows firms to escape the
limitations of home market size and to reap the benefits of economies of scale. Exposure to foreign competition helps to
remove inefficiencies that may build up in relatively closed economies and discourages unproductive activities such as lobbying
and rent seeking. Access to foreign markets means that countries gain exposure to ideas, knowledge and new technologies.
3.18 Inevitably, however, theoretical conclusions are derived from simplified models of the real world, giving rise to scepticism about their validity when policy choices must be made. Thus it has been the empirical evidence that has been the most persuasive. Two lines of inquiry are relevant; one has focused on detailed multicountry studies of protectionist practices and liberalization episodes, while the other has relied on cross-country regression analyses on the relationship between export growth and economic performance (Edwards, 1993).
3.19 Examples of detailed multicountry studies include the United States National Bureau of Economic Research study
conducted by Bhagwati (1978) and Krueger (1978), and the World Bank study of 19 countries published in Michaely,
Papageorgiou and Chikso (1991). These studies attempt to classify countries into different trade regimes (and, in the World
Bank study, into different trade regimes at different periods) and examine whether there is any relationship between trade
orientation and economic performance. The key is building an index of trade orientation and using it to classify countries along
a trade-orientation continuum. The classification of a country's trade strategy is carried out on the basis of a number of
indicators such as the effective rate of protection, use of direct controls such as quotas and import licences, use of export
incentives and degree of exchange rate overvaluation. Building on earlier applications of this methodology by the World Bank
(1987), the International Monetary Fund (IMF) recently compared the economic performance of four groups of developing
countries following different trade regimes. The results generally support the conclusion that more open trade orientation is
associated with better economic performance.
3.20 Studies of this kind are, however, open to a number of criticisms. The attribution of countries to particular trade-regime
categories is inevitably arbitrary and subjective. The question of causation is not directly addressed. It may be that rapidly
expanding economies are more able to dismantle protection than stagnant ones. Various authors have queried whether the
results hold consistently for countries at all stages of development (in particular, whether or not a "threshold effect" exists, such
that growth is positively related to trade orientation only once countries achieve some minimum level of development). Others
argue that the studies ignore the importance of world market conditions in determining the feasibility of a successful
3.21 The alternative approach
investigates whether there is a positive relationship between exports and
economic growth, making the (usually implicit) assumption that higher export
growth is associated with a more open trade orientation. Research has generally
shown that a positive relationship exists, and that faster export growth is
correlated with higher productivity growth in developing countries.(7) The approach, however, has been criticized for its
reliance on simplistic statistical methods and for bypassing the question of
causality. Output growth may be the cause of export growth or vice versa.
Overall, the issue of the relationship between trade and income growth is still
open and available evidence does not permit definite conclusions.
3.22 Although, for
methodological reasons, research to date has had difficulty in rigorously
proving that trade liberalization causes faster economic growth, the
circumstantial evidence remains strong that it is a basic element in
growth-promoting policy packages. A separate issue directly related to ensuring
household food security, but unfortunately not well researched, is the impact of
trade liberalization on poverty and income distribution. If the benefits of
trade-induced growth are highly concentrated among better-off families, then
household food security may worsen for many, despite higher overall rates of
3.23 Economic growth will only contribute fully to greater household access to food if it is broadly based and includes the lowest-income households in society. Only if trade can contribute to broadly based economic development that increases the employment possibilities and earning opportunities of the poorest households will it play an important role in improving household food security.(8)
3.24 It has been pointed out
that rapid economic growth in the newly industrializing East Asian economies has
been accompanied by marked improvements in employment and income distribution
and the reduction of levels of absolute poverty (Fields, 1984). However, while
rapid economic growth in these countries has been associated with
export-oriented development, other factors such as land reform, prudent
macroeconomic policies, an emphasis on agrarian development and improved
education have also been present. Given the difficulties in measuring poverty
rates or changes in income distribution over time, studies that attempt to link
trade and poverty tend to focus on intermediate variables, such as employment or
real wages. The general presumption is that rapid economic growth resulting from
trade policies should lead to higher rates of growth of employment and improved
income distribution. But the relationship between trade strategies and
employment is complex; it will be influenced by the effect of the choice of
trade strategy on the overall rate of growth, by the effect on the demand for
labour via the influence of the trade strategy on the composition of output and
by the effect of the trade strategy on factor prices (Krueger, 1978).
3.25 Some empirical evidence
on the long-term relationship between trade orientation and employment creation
has shown that in most developing countries export industries tend to be more
labour intensive than import-competing industries. They also tend to be
relatively more intensive in the use of unskilled labour than import-competing
sectors. Employment has also tended to grow faster in outward-oriented economies
(Krueger, 1981). More recently, the World Bank has pointed out that during the
past two decades, real wages rose at an annual rate of 3 percent in those
developing countries where the growth of exports as a share of gross domestic
product (GDP) was above the average, while wages stagnated in those countries
where exports expanded least (World Bank, 1995). In general, the impact on
poverty will be affected by the nature of trade-induced growth. Issues such as
the degree of access of small- and medium-scale firms to export markets are
important, as well as attention to the improvement of human capital through
education, training and health, although a lack of entitlements remains the
basic problem of the poor; unless hunger is tackled, people cannot benefit from
human-capital development (UNCTAD, 1995a).
3.26 Fears are expressed
that in areas where production for export increases, food consumption and the
nutritional status of the poorest households decline. The mechanisms through
which export production can influence consumption and nutritional status include
its effects on local and national food availability, household access to food
and intrahousehold distribution of food. For example, if increased production
for export reduces local food availability, local food prices will rise. The
nutrition of the poor who do not share in the benefits from export crops, but
purchase food in the same markets, may suffer. Here, however, the principal
problem is deficiencies in rural marketing and transportation infrastructure, or
policy decisions, that prevent the movement of food from one area to another. In
situations where export production is less labour intensive than staple food
production, reduced employment will have adverse effects on the food security of
landless farm labourers. More broadly, increases in foreign exchange earnings
through agricultural exports do not automatically guarantee the conversion of
these earnings into the types of imports that are required by the poor,
especially if the political influence of the poor is weak. Similarly, when the
export-crop income is controlled by male heads of households, who are usually
less likely than women to spend this income on food, then the food security of
women and children in the household may be put at risk.
3.27 Hypothetical linkages
of this kind need to be tested by evidence. Recent evidence from a series of
coordinated studies by the International Food Policy Research Institute (IFPRI)
suggests that a move by smallholders from staple food to export production did
not have a negative impact on nutrition. In the areas studied, they found that
despite the reallocation of land to new cash crops, staple food production per
caput remained at high levels or even increased in the participant groups as
compared with non-participant groups. Employment, particularly of hired labour,
and income were higher, and in no area was child nutrition adversely affected
(von Braun and Kennedy, 1994; see also von Braun, 1995).
3.28 The impact of trade is
part of the wider issue of the impact of agricultural modernization and
transformation on welfare and distribution. Trade provides new opportunities for
specialization and exchange and is usually associated with structural change.
Because small-scale producers often lack the resources necessary to grow
export-oriented crops, they may not be able to participate in this growth. On
the contrary, they may find that commercial expansion has an inflationary effect
on production costs and on land rent that may even make their traditional
production less feasible. Small producers may abandon their land or be bought
out by larger commercial interests. Export production is sometimes associated
with the expansion of large-scale capitalist enterprises which displace
small-scale farmers from their land, and specific policies may be required for
their protection. More generally, where productive assets are controlled by a
few and where inegalitarian social relationships predominate, export agriculture
may worsen the position of the poor majority. In evaluating such concerns, it is
important not just to consider the impact of trade from the perspective of
producers, but also to take into account the induced effects on employment and
consumers in other sectors of the economy. Where a problem exists, it is more
often a question of policy bias and institutional failure than a result of trade
3.29 Another fear associated
with opening up a country's food markets to trade is that it will lead to
increased competition for food supplies between rich consumers in high-income
countries and low-income consumers in developing countries. Meat consumption in
developed countries and increasingly in middle-income countries is criticized
for resulting in additional demands on grain production for use as feed, raising
world prices and reducing the food security of the poor. This criticism is
offset by a number of factors. First, not all livestock is produced from
feedgrains, and animal production may make use of agricultural resources that
would otherwise go unused. Second, in the absence of feedgrain demand, some of
the grain would not be produced. Lower demand for grain in the absence of
feedgrain demand might have slowed the rate of price-reducing technical progress
in grain production. Third, as noted above, following a sharp increase in world
grain prices, the feeding of grain to livestock will become less profitable.
Thus, as the derived demand for feedgrain begins to fall, the pressure on
supplies should begin to ease, and price increases should be mitigated.
4.1 Over time, global food
security depends on maintaining and conserving the natural resource base for
food production in both developed and developing countries. There is increasing
evidence that as agricultural production becomes more intensive, there are
substantial risks that the natural resource base can become degraded unless
specific conservation measures are put in place. Soil erosion and
desertification, waterlogging and salinization, deforestation, the exhaustion of
water supplies and chemical pollution from fertilizer and pesticide use are all
serious threats to maintaining and increasing food production levels over time.
4.2 Because agricultural
trade affects the volume and location of agricultural production it may have
important positive or negative environmental effects. For example, there has
been concern in the United States that along with export of commodities, the
country was also, in effect, exporting its soil. Based on a pollution-impact
index for different farm commodities, one study found evidence that the crops in
which the United States performs best in world trade are also the most polluting
(Tobey, 1991). This concern led to the introduction of provisions to deal with
excessive soil erosion (the Conservation Reserve Programme and conservation
compliance provisions), the conversion of fragile lands to cropland (the
sodbuster provision) and the conversion of wetlands (the swampbuster provision)
in the 1985 Food Security Act. In general, with fewer distortions and
appropriate prices that reflect environmental concerns, the volume, pattern and
location of agricultural production would be different, and so would levels of
interventions have often led to environmental problems. In some developed
countries certain subsidies for agriculture have reinforced market failures by
encouraging intensification, although in other cases subsidies have been paid to
withdraw land from crop production.(9) Similarly,
in some developing countries prices for farm inputs such as water, fertilizers
and pesticides have been kept artificially low. In these cases the effect has
been to encourage producers to specialize in certain crops and to intensify
their use of inputs, contributing to soil and water degradation and other types
of environmental mismanagement. However, most developing countries suffer from
low levels of productivity and need to increase their input use in order to
raise output and to avoid environmental problems associated with expanding the
area under production into marginal lands.
4.4 As awareness of the
environmental and health impacts of agricultural practices has grown, countries
have introduced increasingly stringent environmental, food-safety and
food-quality standards. Such standards have been introduced unevenly across
countries, however, giving rise to some fears that agricultural competitiveness
in high-standard countries will be undermined and to demands for the use of
trade measures, either to protect producers from competition from low-standard
countries or to try to raise environmental standards in those countries. At the
same time, some countries fear that the higher standards may have indirect
protectionist effects and make it more difficult for them to gain access to
4.5 Trade and environmental issues thus interact in two ways. First, there is concern about the impact of trade on the environment. Second, there is concern about the way that environmental standards may change conditions of competition and induce demands for protection against products from countries with lower environmental standards. As discussed below, trade and the environment can be compatible and complementary to each other provided certain policies are in place. Both interactions are currently being studied by the Committee on Trade and Environment (CTE) of the World Trade Organization (WTO), whose terms of reference include examination of the effect of environmental measures on market access, especially in relation to developing countries, as well as the environmental benefits of removing trade restrictions and distortions.(10)
4.6 Trade reform has both
scale and structural effects. The scale effect refers to the market expansion
and growth induced by trade reform. The structural effect relates to the changes
in the pattern of production and resource use after the reform. Following
agricultural policy reform, prices will fall in subsidizing countries but rise
in non-subsidizing countries. Thus the scale effect will be limited (FAO,
1995b), and the main issue is empirical, i.e. whether the environmental benefits
from reduced production in subsidizing countries is offset by the environmental
costs of increased production in non-subsidizing countries.
4.7 The extent of the
environmental impact of trade liberalization cannot be directly estimated from
conventional measures of changes in the volume of agricultural output. Thus, for
example, while 1 tonne of rice is priced at twice the level of 1 tonne of wheat,
it cannot be assumed that the environmental impact of an additional tonne of
rice is twice as great as the environmental impact of an additional tonne of
wheat. Assessment requires measures more closely reflecting the environmental
impact of each commodity in each region. Environmental impacts are not
equivalent across countries. Intensive pig production is common to both China
and the Netherlands, but in the former manure is a valuable by-product which is
recycled as a fertilizer or to produce fuel in the form of methane, while in the
latter enormous pollution is generated from the large quantities of undesirable
manure output. FAO has developed a manual for use in the economic evaluation of
environmental effects associated with the production and local processing of
commodities in producing countries which should facilitate more of this type of
analysis in the future (FAO, 1994).
4.8 Agricultural trade
liberalization could well reduce global environmental damage, although it is not
necessarily the case that environmental pressure in each individual country will
be reduced and in some it may increase. What is relevant is the environmental
impact of the change in resource use in each country, relative to the
environmental impact of alternative uses for these resources. The main effects
of such liberalization derive from three sources. First, an international
relocation of crop production from high-subsidy (and high chemical input) to
low-subsidy countries would reduce the use of chemicals in world food production
(Anderson, 1992). Chemical use in low-subsidy countries, including developing
countries, would increase, though from a relatively low base. Second, trade
reform will also lead to a reduced demand for land in high-subsidy countries and
an increased demand for land for agricultural production in low-subsidy
countries, including developing countries. Empirical evidence shows, however,
that land is the input least responsive to changes in farm prices, and that the
expansion in agricultural area induced by the price increases expected from the
Uruguay Round will be small. Third, if trade reform encourages export crops that
are more labour intensive than staple food production, this will help to reduce
the pressures on forests from the encroachment of subsistence farming.
Liberalization of trade in tropical timber will have a more direct impact on
deforestation trends. The rise in producer log prices following liberalization
may lead to increased felling of the remaining commercial timber reserves in
producer countries, but it could also provide an important incentive for
sustainable timber management (see discussion in FAO, 1995b).
4.9 Where, nonetheless,
environmental problems are exacerbated by trade, in general trade is not the
root cause of the problem. Environmental damage generally results from
(domestic) policy distortions and private costs not reflecting the full social
cost of resource use. The appropriate policy response to address such failures
is the internalization of unaccounted environmental costs. This can be done
through regulation and/or the use of market-based economic instruments, but it
must be recognized that, in developing countries in particular, the
administrative and market mechanisms to implement these policies may not yet be
in place. Moreover, many developing countries are under tremendous economic
pressure to exploit their resources regardless of the long-term consequences.
Because this is a consequence of poverty rather than a deliberate desire to
exploit the environment for the purposes of competitive gain, multilateral
assistance towards the implementation of environmental policies is an
appropriate policy response.
4.10 Even in the absence of
appropriate environmental policies, trade can still be welfare improving. The
standard welfare gains from trade liberalization may be sufficiently great to
offset the environmental costs of increased agricultural production.
4.11 Environmental and other
standards fall broadly into two categories: process and production method (PPM)
standards, which stipulate how goods should be produced; and product standards,
which define characteristics that products must have for consumption. Process
standards impose norms on producers regarding emission and pollution levels,
e.g. norms relating to the maximum permissible levels for the discharge of
effluents into water. Examples of production method standards include
regulations governing management practices for forest resources, norms that
should be used in catching fish, methods used for fattening animals intended for
slaughter, technologies for enhancing the milking capacities of dairy animals,
and methods used for killing animals for food. PPM and product standards give
rise to two sets of concerns. In the case of PPM standards, the fear is that
higher domestic standards give producers in other countries a competitive edge;
in the case of product standards, it is other countries which fear their trade
will be adversely affected by higher standards in import markets. Even PPM
standards may adversely affect market access, to the extent that the importing
country imposes its own environmental preferences and environmental assessment
on the exporting country.
4.12 In principle, the
adoption of environmental regulations will alter the international structure of
relative input costs (or availability) with potential effects on patterns of
specialization and world trade. Environmental regulations will lead to reduced
specialization in the production of polluting or environmentally damaging
outputs in countries with stringent environmental standards. In contrast,
countries with less stringent or no environmental protection programmes should
be able to increase their market share in the production of commodities that
damage the environment. How important these trade effects are in practice will
depend on the dispersion of environmental standards across countries, the impact
of environmental standards on the structure of relative costs and the extent to
which altered relative costs modify the structure of comparative advantage.
4.13 The demand for
environmental protection generally rises with levels of individual income, so
environmental regulations are often first introduced in developed countries.
Also, if developing countries are producing less intensively, the assimilative
capacity of the environment may be higher, so there is less need for
environmental protection in such countries. There is thus an incentive for
developing countries to increase their export market share in those commodities
that are highly pollution intensive in developed countries. Some evidence has
been found that environmental policies have had a discernible impact on trade
patterns of agricultural commodities (Diakosavvas, 1994). More sceptical writers
have argued that developing countries are not very effective competitors in the
most environmentally damaging crops.(11)
Competition may also have an impact among developed countries, as in the impact
of environmental regulations on the location of intensive animal production in
4.14 There are legitimate
economic as well as environmental reasons why PPM standards vary across
countries. For example, countries with lower levels of nitrate pollution in
water supplies may not need to enforce the same standards with respect to
nitrogen fertilizer use as countries where nitrate pollution is a serious
problem. Also, countries at different levels of economic development will not
necessarily want to make the same trade-off between economic development and the
alleviation of poverty on the one hand, and environmental quality on the other.
From this perspective, trade facilitated by differences in environmental
standards is an important mechanism for raising incomes in low-standard
countries, thus ensuring higher environmental standards in the longer term.
However, harmonization of standards may be desirable where pollution results in
transborder spillovers or has an effect on the global environment. The Rio
Declaration on Environment and Development makes clear, however, that such
problems should be solved through international cooperation and consensus.
4.15 An issue that has
arisen in recent years is the attempt to enforce value preferences of the
importing countries on the PPM standards followed by exporting countries, even
where unrelated to the characteristics of the products.(12) For example, the United States banned the import
of tuna from Mexico because Mexican fishing methods killed dolphins. It also
banned the import of shrimp from countries that have not taken sufficient steps
to protect endangered sea turtles. Some EC countries also banned imports of furs
from animals caught with leg-hold traps. The justification for these measures is
often that they are necessary to protect the global commons. Other countries
will often see them as disguised protectionism. Another danger lies in the
proliferation of unilateral measures, thus pointing again to the desirability of
international cooperation and consensus as the best approach for dealing with
4.16 Currently, under the
General Agreement on Tariffs and Trade (GATT), there is little a country can do
if imports from a country with lower PPM standards (as opposed to product
standards) result in damage to the competitiveness of domestic agriculture
burdened with higher environmental costs, except in cases where it is
established that such standards have affected the quality or performance of the
imported commodity. Some countries argue for a change in these rules to bring
PPM standards more fully, e.g. even where unrelated to product characteristics,
within the ambit of the Technical Barriers to Trade (TBT) agreement. This, they
claim, would enable countries to impose restrictions on imports from countries
that adopt lax or lower standards and thus indirectly encourage the raising of
standards in exporting countries. Standards requiring ecolabelling are also a
source of concern to exporting countries, though they could help many developing
countries turn environmental awareness in developed-country markets to their
advantage, e.g. allowing fibre producers to exploit the environmental advantages
of natural fibres over synthetics.
4.17 In general, trade measures pursued to achieve environmental aims often do not address the real cause of the environmental problem, although such policies are often favoured because they are easy to implement and manage. The ability of the Uruguay Round agreements to defuse disputes between countries and to prevent trade tensions arising from the clash between trade and environmental interests will be tested in the years ahead.
5.1 For countries dependent
on agricultural trade, either as exporters or importers, the prospects for
global trade growth provide the context for assessing the implications of
agricultural trade growth and its regimes for food security. The global trade
context is important primarily because of the link between trade and income
growth. If greater trade volumes or particular trade regimes lead to higher
incomes or faster growth, then agricultural exporters will benefit from more
buoyant demand, while agricultural importers will more easily be able to finance
food import bills. A more stable general trade regime should also increase the
food security of agricultural traders by diminishing fears that arbitrary trade
policies might lead to the disruption of foreign exchange earnings and a fall in
purchasing power with respect to food imports.
5.2 The general changes
under way in the international trading and policy environment will have
far-ranging consequences for the food and agriculture sector and specifically
for food security. Although the most recent and noteworthy of these changes is
represented by the Uruguay Round Agreement on
Agriculture (AOA), other policy changes at the national level having a bearing
on food and agriculture are under way in all groups of countries.
5.3 In addition to the
changed agricultural policy environment resulting from the Uruguay Round (as
discussed below), many countries have embarked on autonomous policy reforms. The
effects of these reforms could in many cases be greater than those flowing from
the Uruguay Round and indeed have been instrumental in facilitating multilateral
trade reforms. It is possible to identify three additional sources of change in
the world food economy: first, structural adjustment programmes (SAPs) in many
developing countries; second, the transition to market economies in the
countries of the former USSR and Eastern Europe; and third, budgetary pressures
on agricultural policy in developed countries. The process of adjustment to a
new trade regime may itself generate social impacts that must be carefully
monitored and alleviated for those whose food security becomes threatened. While
trade instruments are not adequate means for this purpose, social safety nets
and prudent sequencing are frequently indispensable components of policy
5.4 The deterioration in the
external environment arising from the adverse shocks of the global recession of
1979-1982, the increase in real interest rates and the decline in the terms of
trade for producers of oil and primary commodities led to large and growing
external imbalances in many non-oil-exporting developing countries just when
external financing from private sources declined sharply because of the debt
crisis. Thus many countries had to turn to the international lending agencies
(the World Bank and the IMF) for their financing needs. Loans from these
agencies were made conditional upon acceptance of comprehensive policy reform
packages aimed at macroeconomic stabilization and structural adjustment, and the
incorporation of cost-effective social safety nets is now recognized as a
necessary component of such programmes in many cases.
5.5 The agricultural focus
of SAPs varies widely across developing regions. For southern, central and
eastern Africa, of 36 loans between 1980 and 1987, 80 percent included
conditions for agricultural policy. In other developing countries in the same
period, 33 percent of loans (of a total of 46 loans) contained agricultural
policy conditions (Knudsen and Nash, 1991). Typically, agricultural policy
conditionality required pricing changes, institutional reform and macroeconomic
policy changes. In the case of pricing, countries have been required to bring
producer prices closer to world market prices and to change the mechanisms of
domestic price formulation. Input prices have also been increased. Many loans
have required some element of trade liberalization; for example, loan conditions
have been linked to the removal or reduction of restrictions or taxes on
exports, and in some cases to a reduction in import barriers. Institutional
requirements often include some reduction in the monopoly powers of state
marketing boards, measures to reorganize public enterprises so that they operate
more efficiently and deregulation of internal markets. Finally, most
agricultural adjustment programmes have required exchange rate reform of some
kind, with the most common requirement being for more rapid devaluations
(Knudsen and Nash, 1991).
5.6 The intended effect of
these reforms is to enhance incentives to agricultural production. Their actual
impact to date is more difficult to assess. This is partly because, first, many
reforms are fairly recent; second, governments have not always been fully
committed to the reforms, so the necessary private-sector response has been
hesitant and limited; and third, pricing and institutional reform are only part
of the story and need to be complemented by significant public investment in
roads, irrigation systems and research and extension services. However,
cut-backs in public expenditures have often fallen on agricultural investment,
with the result that the expected supply response has been very limited. There
is also some evidence that the position of smallholders and those producing
staple food crops has worsened under SAPs compared with that of larger,
cash-crop producers (Alamgir and Agora, 1991). The opposite has also been
observed among small producers of non-traditional export crops in Latin America
5.7 The potential for reform
to affect world markets is particularly great in the transitional economies. As
a result of pricing distortions, waste and low productivity growth, a number of
these countries have become significant net food importers over the past two
decades. Net imports have continued to grow in the early years of the reform
period, partly because of a severe price-cost squeeze on agriculture and partly
because of the disruption caused to agricultural production by political and
institutional upheaval. As these economies stabilize, however, agricultural
production should recover and self-sufficiency should increase. On the
assumption that per caput income levels will reach pre-reform levels by the year
2010, the WAT2010 study projects that production
growth in the transitional economies, measured from pre-reform 1988-1990 levels,
will be 0.7 percent annually (given the levels reached in 1995, growth to reach
this target will be higher), compared with 0.2 percent growth in consumption
(FAO, 1995a). However, there remains considerable uncertainty about the success
of reform efforts, particularly in the former USSR, and about the pace and
unevenness of reforms.
5.8 For both of the major
food exporters, the United States and the EC, agricultural policy has been under
pressure because of its budgetary cost. In the United States, target prices were
frozen for five years under the 1990 Farm Bill and farmers were given greater
planting flexibility, which was further extended in 1993 through programmes such
as 0/92 and 50/92. Under the new bill, spending on farm programmes would be cut
further and farmers given even greater flexibility in choosing crops to plant.
Moreover, it is expected that the additional area currently set aside under the
Conservation Reserve Programme will again be brought under cultivation. These
changes reduce the government's ability to control the supply of programme
commodities as a result of lower programme participation, resulting in prices
more strongly influenced by market forces. For several commodities, producer
prices could fall as well. In the EC, agricultural expenditure is constrained
until 1999 by a financial guideline agreed between the European Council and the
5.9 The Final Act of the
Uruguay Round of multilateral trade negotiations has led to very significant
changes in the global trade regime for both merchandise and services trade, and
particularly for agriculture, which, as noted above, was included for the first
time in a significant way in such negotiations. The liberalization process is a
dynamic one, in that negotiations on further liberalization, particularly in
agriculture and services, are scheduled to begin in 1999. In some instances,
individual-country trade policies, particularly those of developing countries,
may actually be changing more rapidly than as signified by their schedules to
the Uruguay Round, which establish maximum levels of protection or minimum
access opportunities. Furthermore, the greater interest in new regional trade
groupings(13) with ambitious objectives of freeing
intraregional trade also implies a more rapid reduction in barriers on certain
trade flows than were foreseen in the Final Act.5
5.10 Over the years, many
attempts have been made to estimate the impact on world income of trade
liberalization. Recently the focus of this literature has been on the Uruguay
Round, including an effort to assess liberalization in all sectors of the
economy that have been significantly affected by the round.
5.11 Existing studies
modelling the impact of the Uruguay Round only cover parts of the Final Act,
typically those that are more amenable to quantification. These include the AOA,
market-access reforms in manufactured and industrial products, and the
phasing-out of the Arrangement Regarding International Trade in Textiles
(MFA).(14) Table 2 summarizes the results of two
studies which make comprehensive assessments of income effects of these three
components of the Final Act, using general equilibrium techniques. Income
effects are measured under a number of scenarios, reflecting different model
specifications such as competitive structure, returns to scale and capital
closure rules. The income effects are shown to have a fairly high degree of
sensitivity to these assumptions, which, in turn, calls for a careful
interpretation of the results. The estimated impact of the Uruguay Round (to be
precise, of its three components referred to above, as incorporated in the
models) on aggregate incomes ranges from 0.17 percent (about US$40 billion) of
the 1992 base period GDP to 0.94 percent (about US$215 billion) in one of the
models, and from 0.41 percent (about US$94 billion) to 0.75 percent (US$172
billion) in the other model reviewed. Thus, despite the delicate nature of
modelling such complex agreements, the difference in aggregate income effects
estimated by these two general equilibrium models is not very great, considering
that the global GDP in 1992 was some US$23 000 billion. Also, both models show a
relatively marked impact of the Uruguay Round on developing regions, in
particular East and South Asia. One area where the two models seem to disagree
is on estimated income effects for Africa. While one of the models finds this
region gains from the overall (modelled) Uruguay Round package, the other model
consistently shows negative effects. Clearly, there is a need for further work
in this area, in particular in identifying the sources of loss or gain for
5.12 Overall, as regards the
quantification of the impact of the Uruguay Round, an important limitation needs
to be emphasized. The estimated trade and income gains from the increase in
market access for goods underestimate the full impact of the Uruguay Round on
world trade and income. First, there are many possible dynamic effects mentioned
in the economic literature that were not considered. Second, the estimates
implicitly assume that the status quo in commercial relations and business
confidence would have been maintained if the Uruguay Round had failed. Many
observers would argue that a failure of the round would have meant a distinct
worsening of trade relations for a considerable period into the future and a
delay in world economic recovery. Avoidance of the associated losses in trade
and income would have to be included in a full accounting of the gains from a
successful Uruguay Round. Third, and in many ways most important of all, the
estimates ignore every result of the round except the liberalization of trade in
goods. Models have not attempted to include the beneficial impact of the
strengthened rules, procedures and institutions, including the market-access
commitments and rules for services in the General Agreement on Trade in
Services, on the more than US$45 000 billion in current world trade in goods and
5.13 Irrespective of the magnitude of the impact of the Uruguay Round, there are also important distributional shifts both between and within countries, with significant implications for household incomes and therefore household food security. On balance, UNCTAD estimates that the Uruguay Round will lead to a small reduction in absolute poverty (1.4 percent), though there will be gains and losses across regions as well as groups within countries (UNCTAD, 1995b).(15)
5.14 Finally, an important
issue for some countries is the loss of preferential margins. UNCTAD has
calculated the loss of preferential margins under the Generalized System of
Preferences (GSP) scheme at around 40 percent for the EC and Japan (though much
less, around 20 percent, for textile products in the EC), 50 percent for the
United States and almost 100 percent for Canada. Countries whose competitive
advantage resulted from quotas, for example, under the MFA, may also lose quota
rents. In regional terms, Asia and Latin America are expected to gain most from
additional market opportunities, while the Caribbean and sub-Saharan Africa
could become worse off. If China and India substantially increase their share of
world markets in clothing and other labour-intensive export manufactures, since
around one-half of the world's absolute poor live in these two countries,
significant gains to them will swamp all other effects on poverty in other
developing countries (UNCTAD, 1995b).
5.15 The main elements of
the AOA are summarized in Table 3. The AOA covers market access, domestic
support, export subsidies, export prohibitions and restrictions and introduces
important rule changes in each of these areas. The Uruguay Round Agreement on
Sanitary and Phytosanitary Measures introduces new disciplines in this
increasingly important area and is designed to minimize the discriminatory and
adverse trade effects of such measures. Special and differential treatment was
provided for developing countries under the rules on domestic support and export
subsidies, in the form of lower reduction commitments and longer implementation
time frames, as well as through more substantial tariff reductions on tropical
agricultural products. Least-developed countries were not required to make
reduction commitments. Particular concerns of the net food-importing and poorest
countries were met through the Uruguay Round Decision on Measures Concerning the
Possible Negative Effects of the Reform Programme on Least-Developed and Net
Food-Importing Developing Countries.
5.16 The rules and
commitments on domestic support are broadly designed to consolidate domestic
policy reforms at the international level and to encourage a progressive shift
towards domestic policy measures that are less trade distortive and are exempt
from reduction commitments. Initially there may be some scope for switching
support from one commodity area to another under these sector-wide or global
domestic support commitments. However, the provisions of Article 13 of the AOA
(the "peace" clause) will operate to limit the scope for such support switching,
because raising support for a specific commodity in excess of that decided in
1992 will result in the subsidies concerned becoming actionable under GATT 1994
and the WTO subsidies agreement. Developing-country members enjoy specific
exemptions in respect of investment and input subsidies, as well as for
encouraging diversification away from growing illicit narcotic crops. Overall,
trade-distorting domestic support is to be reduced from US$197 billion to $162
billion, mainly by developed countries.
5.17 Export subsidies are
subject to reduction commitments and to new rules which prohibit WTO members
from using export subsidies on agricultural products that are not subject to
such commitments. Developing-country members enjoy a temporary exemption from
this provision in the case of certain marketing and transportation subsidies.
Overall, export subsidy outlays are to be reduced from US$22.5 billion to $14.5
billion. These new rules and commitments should ensure that market shares of the
commodities concerned (mainly temperate zone) are increasingly determined by
basic ability to compete rather than by countries' ability to finance export
5.18 The new rules and
negotiated commitments on import protection, together with the binding of
virtually all agricultural tariffs, represent an unprecedented and important
step in the direction of systematically liberalizing trade in agriculture, in
terms of both improved conditions of competition and trading opportunities.
Under the new rules border protection may only be provided through tariffs.(16) Border measures such as quantitative restrictions
and variable levies are now formally prohibited, except for a couple of
time-bound product-specific exceptions (mainly rice) in the case of four
countries. Measures applied under generally applicable, non-agriculture-specific
WTO provisions, such as measures taken for balance-of-payments purposes, are not
affected by this new rule.
SUMMARY OF THE MAIN PROVISIONS OF THE URUGUAY ROUND AGREEMENT ON AGRICULTURE (AOA)
|Policy||All countries||Developed countries||Developing countries|
|Market access||Prohibition on the use of
restrictions on imports other than tariffs
All tariffs bound
Special safeguard provisions against import surges or a steep import price decline (limited to tariffied products and not applicable to imports under related tariff quota commitments)
Tariffs resulting from conversion of non-tariff border measures under negotiating modalities, plus pre-existing tariffs on all other agricultural products, to be reduced
Implementation of current and minimum access opportunity commitments in respect of tariffied products
|Average tariff reduction of
36 percent (minimum 15 percent) over six years
||Average tariff reduction of
24 percent (minimum 10 percent) over ten years
Where ceiling binding commitments undertaken, reductions not required except on ad hoc basis
Least-developed countries not required to
|Export subsidies||Definition of export
subsidies subject to reduction
Other export subsidies subject to anti-circumvention provisions which include disciplines relating to food aid
Prohibition on the use of export subsidies on
products not subject to reduction commitments
commitments on both volume basis (21 percent) and budgetary outlay basis
(36 percent) over six years
For incorporated/ processed products budgetary
outlays only (36 percent)
|Two-thirds of the reduction
required for developed countries over ten years
Exception during the implementation period in
respect of certain marketing and transportation subsidies
|Export prohibitions and restrictions||Foodstuffs: requirement for advance notice and obligation to consult on request and supply information||Applicable only to developing countries that are net exporters of the foodstuff concerned|
||Policies divided into two
permitted policies (Green Box)
other policies included in the Aggregate Measure of Support (AMS) subject to reduction commitments
Decoupled direct payments associated with
production-limiting programmes not in Green Box but excluded from AMS
minimis provision allowing exclusion of support less than
5 percent of output value
Total AMS support to be reduced by 20 percent over
|Developing countries allowed
to use some other policies, |
e.g. investment and input subsidies, under certain conditions
De minimis provision allowing exclusion of product-specific support less than 10 percent of output value from AMS
Total AMS support to be reduced by 13.3 percent over ten years
Least-developed countries required to bind AMS
support level if applicable but not required to reduce it
|Sanitary and phytosanitary measures||Reaffirmation of right of
countries to set their own health and safety standards provided that they
are justifiable on scientific grounds and do not result in unjustified or
unnecessary barriers to trade
Encouragement of use of international standards
|Other aspects||"Peace" clause
WTO Committee on Agriculture which will oversee the implementation of the commitments generally
Decision on Measures Concerning the Possible
Negative Effects of the Reform Programme on Least-Developed and Net
Food-Importing Developing Countries
5.19 The provisions of the
AOA and the related ministerial decision on the least-developed and net
food-importing countries also reflect a number of concerns that were taken into
account in the negotiations.
5.20 First, the ministerial
decision reflected the concerns of a number of net food-importing and
least-developed countries that, while the implementation of the results of the
Uruguay Round as a whole should generate increasing opportunities for trade and
economic growth for the benefit of all participants, negative effects might be
encountered by these countries during the implementation of the
trade-liberalizing reform programme on agriculture. In this regard, specific
reference was made by ministers to the need for adequate supplies of basic
foodstuffs from external sources on reasonable terms and conditions, and to
short-term difficulties in financing normal levels of commercial imports of
basic foodstuffs. The ministerial decision contains a number of provisions
relating to these aspects, including export credits, technical assistance to
agriculture and access to the resources of the international financial
institutions or such facilities as may be established. In addition, ministers
agreed to review the level of food aid established periodically under the Food
Aid Convention; to initiate negotiations in the appropriate forum to establish a
level of food aid commitments sufficient to meet the legitimate needs of
developing countries during the reform programme; and to adopt guidelines to
ensure that an increasing proportion of basic foodstuffs is provided to
least-developed and net food-importing countries in fully grant form and/or on
5.21 The decision is to be
subject to regular review by the WTO Ministerial Conference, with follow-up to
be monitored by the WTO Committee on Agriculture. Notification requirements were
adopted in June 1995 by the WTO Committee on Agriculture to facilitate this
monitoring role. In March 1996 the committee established a list of net
food-importing developing countries for the purpose of the decision. Also, a
preparatory work programme has been set up for a review in 1996 of food aid
levels and related guidelines.
5.22 A second area of
concern, related specifically to the implications that agricultural trade reform
and liberalization could have for domestic food security, is reflected in the
provisions of the AOA on quantitative export prohibitions and restrictions. The
new disciplines specifically require WTO members instituting export prohibitions
or restrictions to prevent or relieve critical shortages of foodstuffs, to give
due consideration to the effects of such measures on importing members' food
security. Specifically, members instituting such measures are required to give
detailed notice in advance to the WTO Committee on Agriculture and to consult,
on request, with any other member having a substantial interest as an importer.
For developing countries, these provisions only apply to developing-country WTO
members that are net exporters of the specific foodstuff concerned.
5.23 Concerns relating to
price and currency fluctuations in the context of tariffication are also
reflected in the provisions of the AOA relating to the use of the special
safeguard clause. Where the right to resort to the special safeguard has been
formally reserved in a member's schedule of commitments (a right that was only
open to members that tariffied), it may be used to impose an additional duty
(but not on imports under current or minimum-access tariff quotas) to offset
partially import price decreases below certain trigger levels. The special
safeguard clause may also be used in response to import surges. Overall this
clause, which may not be used in conjunction with the general GATT 1994
safeguard provisions, is applicable to about 15 percent of total agricultural
tariff lines, mainly of the developed countries.
5.24 Overall, the AOA
represents a major improvement in the conditions of competition governing trade
in agriculture. The new rules are not just systemic improvements. In a practical
sense they will enhance the quality of trade concessions and other commitments.
The new rules prohibiting the use of export subsidies not subject to specific
reduction commitments and prohibiting non-tariff access measures have already
entered fully into force and will have a beneficial effect on conditions of
competition for trade in all agricultural products. Moreover, these new rules
and disciplines, which apply to all WTO members, are backed up by the new WTO
arrangements for the settlement of disputes and for effective implementation of
rulings by panels and the new WTO appellate body.
5.25 Closely linked to the
AOA is the Agreement on Sanitary and Phytosanitary Measures (SPS). The SPS
recognizes that governments have the right to take sanitary and phytosanitary
measures but that they should be applied only to the extent necessary to protect
human, animal or plant life or health and should not arbitrarily or
unjustifiably discriminate between members where identical or similar conditions
5.26 In order to further the
use of harmonized sanitary and phytosanitary measures on as wide a basis as
possible, members are encouraged to base their measures on international
standards, guidelines and recommendations, where they exist. However, members
may maintain or introduce measures that result in higher standards if there is
scientific justification, or as a consequence of consistent risk decisions based
on an appropriate risk assessment. The SPS spells out procedures and criteria
for the assessment of risk and the determination of appropriate levels of
sanitary or phytosanitary protection.
5.27 The changing policy environment has implications for the size and stability of world food markets and the likely levels of prices prevailing. As developed countries usually subsidized their agricultural sectors while developing countries often taxed them, the net effect of policy reforms on world markets is ambiguous. The Uruguay Round disciplines bear most heavily on developed countries, but SAPs in developing countries are being implemented simultaneously.
5.28 Bearing in mind the difficulties of modelling the results of the Uruguay Round, in particular the fact that some important achievements of the Round in terms of improved trade rules are essentially unmeasurable or, like changes in the services sector, not modelled, projected world price effects of the Round are reported in Table 4.
Developed-country exports of wheat are expected to decrease and imports to increase, the latter in Western Europe being only partially offset by decreased feed wheat imports by the republics of the former USSR and Eastern Europe. This should push up wheat prices by 6 to 7 percent in the year 2000 because of the Uruguay Round and encourage developing countries to produce more grain for their own requirements.
The Uruguay Round is expected to have a significant influence on the rice market because of the reduction of subsidized rice exports by developed countries and the opening of previously closed markets for rice. The volume of global trade is expected to increase by 1.2 million tonnes and international rice prices to increase by 4 to 7 percent above the level they would have reached without the trade agreement.
Both imports and exports of coarse grains are expected to increase slightly in both developed and developing regions as a result of the Uruguay Round. Though the increase in the overall volume of trade is slight, coarse-grain prices are expected to rise by 4 to 7 percent.
In oils, the Uruguay Round is expected to lead to increased import demand in developing countries, particularly in the Far East, including China, which will be met largely by the low-cost producing countries of the Far East and Latin America.
Oilmeal trade and prices are expected to be little affected.
The Uruguay Round is projected to induce a minor rise in the volume of overall meat trade. It should stimulate an increase in imports by countries in the Far East, North America, Eastern Europe and the area of the former USSR as well as Japan, while improved market access should benefit mainly countries in Latin America, North America and Oceania. Partly because of the commitments to reduce subsidized exports, FAO projects a boost in international meat prices of the order of 8 to 10 percent, although this is significantly less in the World Bank/OECD model (3 to 6 percent).
Overall milk trade is not expected to change
significantly as a result of the AOA, although there will be some redistribution
of trade flows in terms of regional origin and destination. The reduced volume
of subsidized exports permitted to several developed countries will be offset by
increased exports from Oceania, while imports into developed countries could
rise as a result of the minimum access provisions of the AOA. An overall boost
in milk prices of 7 to 10 percent is projected.
5.29 As a result of these
changes the total food import bill of the developing countries is projected to
increase from US$40 billion in 1987-1989 to US$65 billion by the year 2000, with
US$3.6 billion (15 percent) resulting from the Uruguay Round (recalling the
caveats mentioned above on all such projections). For LIFDCs the food import
bill is projected to rise by US$10 billion, of which some 14 percent may be
attributable to the Uruguay Round.
5.30 The welfare effects of
the Uruguay Round as noted above, and of agricultural trade liberalization in
particular, can differ for agricultural importers and exporters depending on the
importance of the terms-of-trade effects, but all countries have an interest in
greater global price stability. The Uruguay Round will influence price stability
in at least three ways. Production will shift from high-subsidizing regions to
low-subsidizing regions, with differing likelihoods of production variability.
Even if the low-subsidizing regions experience greater production fluctuations,
there could be less global instability if these fluctuations are less linked to
each other. Little empirical work has addressed this issue, and history may be
an imperfect guide if the adoption of new technologies in low-subsidizing
regions in response to higher prices alters the amount of production variability
5.31 The Uruguay Round will
also influence world price stability through the tariffication process. If
prices in all countries now become more responsive to changes in world market
conditions, the magnitude of the changes needed in world market prices in
response to supply or demand shocks is likely to be reduced.(17) While most agricultural tariffs are now bound,
countries may apply lower tariffs at any time. This gives countries some
flexibility to soften the effect of world price fluctuations on the domestic
economy, for example by applying a sliding scale of tariffs, subject to the
constraint that tariffs may not exceed the bound levels.(18) Where non-tariff measures were replaced by tariffs
and WTO members have reserved the right to invoke the special safeguard clause
as indicated in their schedule, use of that clause would also make imports less
responsive to a significant decline in world prices.
5.32 Another way in which
the Uruguay Round could influence the extent of world price instability is
through changed incentives for stockholding. The reduction in market
intervention, particularly by developed-country exporters, makes it less likely
that government stocks will accumulate in the same way in the future as seen in
the past, and thus the size of global stocks may fall. Limited global stocks
mean that the world is less able to buffer adjustments of consumption to changes
in production. However, the reduction in government stocks in developed-country
exporters will provide an incentive both for increased private stocks and for
more government stocks by developing-country importers, since government
purchases of food-security stocks continue to be permitted under the AOA. Even
though the degree of substitution of private for public stocks will not be
complete, a reduced level of global stocks, with a higher proportion in private
hands, could make the same contribution to stability if private stocks are more
sensitive to world market fluctuations than stocks in government hands. On
balance, price stability should improve for most commodities, but because of the
stockholding effect it may deteriorate for grains and for some livestock
5.33 A further, more general
effect is that liberalization of trade is often associated with the removal of
barriers to the international flow of capital. International capital movements
are now much less linked to underlying trade in goods and much more responsive
to speculative assessments regarding rates of return in different asset markets.
As a result, international capital flows are much more volatile. A sudden change
in investor sentiment, as occurred recently in some Latin American countries,
can result in large changes in a country's exchange rate, with knock-on effects
on the domestic prices of imported goods, including food. The magnitude of such
currency-related shocks in future may be much greater than those arising from
food markets themselves.
5.34 Food aid19 makes an important contribution to food security by providing relief in emergencies and by adding to imports in countries with a shortage of foreign exchange. Most food aid has been provided in the form of cereals, though non-cereals such as milk powder and vegetable oil are also important. For developing countries as a whole, the share of food aid in total cereal imports has been declining. In recent years food aid amounted to only one-tenth of cereal imports by developing countries with one-fifth to one-quarter in the early 1970s. Nevertheless, for a large number of countries food aid remains an essential source of imported supplies. For over 40 recipient countries the share of food aid exceeded 40 percent of total cereal imports in the late 1980s.
5.35 The consequence of the
Uruguay Round for food aid flows is of importance to those food-insecure
countries that rely heavily on food aid deliveries. Under the AOA, bona fide
food aid is exempt from the prohibition on export subsidies or export-subsidy
reduction commitments, so the possible consequences for food aid flows are
indirect. Food aid flows in the past have been largely related to the disposal
of surplus production in food-exporting countries. The reduction in government
intervention in agricultural markets and, in particular, reduced public
stockholding in exporting countries might be expected to lead to a reduction in
the willingness of donor countries to provide food aid in kind. Working in the
opposite direction, food aid could become a more attractive outlet for countries
with surplus disposal problems now that tight limits on the volume of subsidized
exports are in place. On balance, the Uruguay Round may not affect food aid
flows very much. However, provided that donors are still prepared to assist
countries with food aid, a useful approach would be to provide cash for
triangular food aid transactions. This has the advantage of matching more
closely the particular food requirements of recipient countries while
stimulating South-South trade.
5.36 The volume of food aid
in future will be more responsive to general public perceptions of its
usefulness and value in the donor countries. There has been a sharp increase in
the number of people affected by disasters and in need of emergency assistance
during the past decade. Thus the need for transitory and emergency food aid
seems likely to increase. Minimum guaranteed food aid quantities under the Food
Aid Convention were recently revised downwards from 7.4 million tonnes to 5.3
million tonnes annually from 1 July 1995 for the following three years. While
actual food aid deliveries exceeded the agreed Food Aid Convention minimum, as
well as the 1974 World Food Conference target of 10 million tonnes of cereals
annually over the past decade, this reduction may be a sign that donors foresee
some reduction in programme and project food aid over the next few years.
5.37 While the Uruguay Round
represents only a partial liberalization of agricultural trade and the benefits
from increased trade will not be shared equally by all countries, there are
still potential opportunities for all of them. In the case of the products that
were subject to the tariffication process, the main trade opportunities are
expected to be generated in the short term through the arrangements negotiated
under tariff quotas and the related concessions. As noted above, tariffied
products represent only about 15 percent of total agricultural tariff lines, and
in many cases concern basic agricultural commodities whose trade growth has been
relatively sluggish. The majority of other tariff lines, many of which relate to
processed and other high-value products where international trade has been
expanding rapidly, are to be significantly reduced, in many cases by rates close
to or in excess of the 36 percent (developed countries) and 24 percent
(developing countries) average reductions that were required. In addition, for
tropical agricultural products, where tariffs were already generally low, the
reductions to be implemented by WTO members from the developed countries average
43 percent within a range of 37 to 52 percent, according to the product
categories concerned. Another important feature of the improved trading
opportunities following the Uruguay Round is that on the basis of the broadly
based sample mentioned above, about 14 percent of all agricultural tariff lines
will be bound as duty free, with more extensive duty-free bindings in a number
of areas of trade interest for all developing countries (GATT, 1994a). As the
AOA makes clear, the Uruguay Round reform programme is a first step in the
direction of more liberal and open trading arrangements for trade in
agriculture, and further negotiations are to be initiated in 1999. There have
also been certain improvements in reducing tariff escalation (GATT, 1994a). This
is inevitable in the situation where the higher tariffs on more processed
products are reduced by, on average, 36 percent in developed countries, bringing
them down closer to duty free or the very low rates often charged on the raw
product. The reduction of tariff escalation allows more value added (in the form
of further processing, packaging, etc.) to be introduced into what would
otherwise be exports of raw products. Thus, there could be opportunities for
vertical diversification. Likewise, there could be opportunities for
diversification away from traditional agricultural and other products to the
higher-value products such as fresh fruit, including tropical fruit, and
vegetable exports benefiting, for example, from the seasonal differences with
the major Northern Hemisphere markets (horizontal
diversification). Finally, there could be opportunities in non-traditional
export markets (geographical diversification). For example, many African
countries have a Eurocentric export structure; they should look more
systematically for new outlets for their exports within the region and in the
Americas, Asia, etc. The rapidly expanding trade in high-value and processed
agricultural products, unlike trade in bulk commodities, is made up of hundreds
of expanding regionally diverse niche markets. The Uruguay Round is providing
new opportunities for developing countries over the whole range of trade, from
agriculture to minerals, industrial products and services.
5.38 It is evident that
improvements in developing countries' agricultural output and export
performance, and that of other goods and services, depend on many other
policy-related factors, including improvements in infrastructure (transport
systems, energy networks, irrigation, etc.); education and training;
dissemination of knowledge about appropriate (new) production technologies and
product varieties; pest and disease control systems; quality management; and
reforms of the domestic regulatory system (including the agricultural price
system, the distribution system and land reform). These factors, together with
market access abroad and better trade and trade-related policies at home, can
help to raise agricultural (and other sectors') productivity, income and
employment and, at least indirectly, to overcome the wider impediments to
economic development and food security in developing countries, inter alia
by making these countries more attractive for, and increasing the efficiency of, foreign direct investment (including the transfer of capital, skills, technology and marketing channels), official aid and technical assistance.
5.39 Some developing
countries have been concerned that the restrictions imposed on the policy
instruments permitted to pursue agricultural policy objectives will make it more
difficult for them to achieve their agricultural-growth and food-security
objectives in the future. While direct subsidization of production will be
increasingly limited and the use of quantitative restraints on imports is
prohibited, there are no restraints on the use of public-investment measures for
agricultural and rural development purposes. Investment and input subsidies,
both frequently used measures in developing countries to promote increased
production, continue to be permitted to them under the Uruguay Round agreement.
5.40 In many respects,
reforms undertaken within the framework of SAPs go well beyond the adjustments
that countries are required to make under the Uruguay Round. SAPs usually
require greater reductions in border protection than are required under the
Uruguay Round. Input subsidies and consumer food-subsidy programmes, permitted
under the Uruguay Round, must often be cut back under SAPs. In addition, SAPs
usually require currency devaluation and institutional reforms, areas not
covered by the Uruguay Round. Generally, however, the Uruguay Round underpins
the reforms undertaken by developing countries and provides some assurance of
increased market access in return for the risks they have taken or will take in
opening up to trade.
5.41 Not all developing
countries will share equally in the expected gains from global trade
liberalization. The LIFDCs, in particular, fear the loss in the value of
preferences, greater constraints in taking advantage of new trade opportunities
and the possibility of higher food import bills. Their concerns were reflected
in the Decision on Measures Concerning the Possible Negative Effects of the
Reform Programme on Least-Developed and Net Food-Importing Developing Countries
included in the Final Act of the Uruguay Round. The early implementation of this
decision is necessary.
5.42 Despite the prospects
for expanding export earnings, the fear of a sudden sharp decline in import
purchasing power is the biggest concern of countries relying on trade for food
security. Holding foreign exchange reserves is the best guarantee that food
consumption levels can be maintained in such circumstances, but in many
developing countries the level of reserves is inadequate for such purposes. A
second line of defence in such circumstances is easy access to quick-disbursing
credit. One instrument that addresses this issue is the Compensatory and
Contingency Financing Facility (CCFF) of the IMF, which includes medium-term
credit for cereal imports. Drawings on the CCFF are additional to resources
available under other IMF arrangements. However, the CCFF has been little used,
partly because price shocks have been relatively minor since the inception of
the cereal element in the early 1980s and because the repayment period for
borrowed funds, which carry a market-related interest rate, is relatively short.
Balance-of-payments assistance can also be provided under stand-by or extended
arrangements for low-income countries under the Enhanced Structural Adjustment
Facility, which provides resources on concessional terms. Fund arrangements can
provide for flexibility in the case of unanticipated external terms-of-trade
shocks, such as higher prices for cereal imports, through the inclusion of a
contingency mechanism and/or through augmentation of access under the
5.43 Looking further ahead, recent FAO analysis implies a continuing decline in the degree of self-sufficiency and rising import requirements in developing countries in aggregate, particularly in cereals, from the base period 1987-1989 to the year 2010, offset by an increased self-sufficiency ratio in the transitional economies and in the other developed countries (FAO, 1995a). Import requirements to 2010 are derived as a residual from production and consumption projections and are thus subject to a high margin of error. Even a very small difference of 0.1 percent in projected production growth rates can, over a 20-year horizon, make a substantial difference to projected trade. Other commentators predict the necessity for much larger trade flows, particularly in grains (Brown and Kane, 1995). They argue that the FAO projections underestimate emerging constraints on growth in output, such as the shrinking backlog of unused yield-increasing technologies; the diminishing yield response of cereals to the use of additional fertilizer; the need to reduce excessive irrigation pumping to restore a balance between pumping and aquifer recharge; the effects on agriculture of social disintegration and political instability; and the effect on production of various forms of environmental degradation. If these constraints are indeed more binding than assumed in the FAO analysis, developing countries will face much higher import requirements and much higher import prices. Differences in these baseline scenarios should be borne in mind in interpreting the consequences of the policy changes in the international trade regime currently under way.
6.1 The purpose of the
international trade regime is to facilitate the mutual exchange of goods and
services so as to maximize each country's opportunities to exploit the gains
from trade. An efficient trade regime in this sense is likely, as a by-product,
to enhance both global and national food security. By encouraging income growth,
by broadening the range and variety of food domestically available, by diffusing
the risks arising from domestic production fluctuations and by enabling global
production to be achieved as efficiently as possible, trade contributes to food
security in each of its dimensions of access, availability and stability.
international trade brings change, and change usually implies winners as well as
losers. Agricultural trade liberalization has been accompanied by concerns that
the structural changes that accompany economic growth may lead to reduced food
security among the very poor countries and households unable to take advantage
of the new opportunities; that food imports may become more expensive; that
global food price instability may increase if global stock levels are run down;
and that the intensification of agricultural production in low-subsidizing
regions could contribute to further environmental degradation in those
countries. That is, trade can also have an adverse impact on food security in
each of its three dimensions of access, availability and stability, as well as
6.3 In negotiating further
trade liberalization, these concerns should be understood and steps taken to
minimize their adverse impact. There is a need for flanking policies at both
global and national levels to ensure that the gains from trade are widely
distributed and that the potential for greater food security is fully exploited.
6.4 The Uruguay Round made
very substantial progress in integrating agricultural trade into the general
GATT disciplines but less progress in actually reducing barriers to this trade.
Even at the end of this century, agricultural trade will remain heavily
restricted, and although part of it will take place at low tariffs, the average
level of tariffs will still be many times higher than those applied on
industrial trade. Too much agricultural production will still take place in
high-cost regions, while low-cost exporters will continue to have limited access
to some markets. Substantial gains from trade possibilities will remain
unexploited even when the Uruguay Round agreement is fully implemented.
6.5 It has been agreed that
negotiations to continue the reform process should take place one year before
the end of the implementation period for developed countries, that is in 1999.
They should take into account experience to that date in implementing the
reduction commitments; the effects of the reduction commitments on world trade
in agriculture; non-trade concerns, special and differential treatment for
developing-country members, the objective of establishing a fair and
market-oriented agricultural trading system and the other objectives and
concerns mentioned in the preamble to the AOA; and any further commitments that
may be necessary to achieve these long-term objectives.
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in the terms of trade when petroleum is excluded was even greater.
imports c.i.f. and exports f.o.b.
3Imported supplies can also be priced too cheaply in countries with overvalued exchange rates, in the sense that the resources used to purchase imports could have yielded a higher return if used to grow more food domestically.
4See also WFS
companion paper 13 Food security and food
5Rice, however, continues to be a relatively thin market, with about 18 million tonnes traded, representing 5 percent of production.
6These studies are reviewed in Edwards, 1993; Greenaway, 1993; Clarke and Kirkpatrick, 1992.
and Reed (1990) and Edwards (1993) provide valuable surveys of many of these
8Trade may also change food prices, which implies changes in real incomes, especially for households that spend a high share of their income on food.
9Subsidies have also contributed to environmental problems in other sectors, e.g. fisheries. Governments in both developed and developing countries have subsidized the modernization and expansion of fishing fleets, contributing to overfishing and excessive pressure on sensitive fish stocks.
10In particular, the terms of reference of the CTE include making appropriate recommendations on whether any modifications of the provisions of the multilateral trading system are required, compatible with the open, equitable and non-discriminatory nature of the system, as regards, in particular:
-the need for rules to enhance positive interaction between trade and environmental measures for the promotion of sustainable development with special consideration for the needs of developing countries, in particular those of the least developed among them;
-the avoidance of protectionist trade measures and the adherence to effective multilateral disciplines to ensure responsiveness of the multilateral trading system to environmental objectives set forth in Agenda 21 and the Rio Declaration on Environment and Development, in particular Principle 12;
-surveillance of trade measures used for environmental purposes, of trade-related aspects of environmental measures which have significant trade effects and of effective implementation of the multilateral disciplines governing those measures.
11Tobey (1991) found that the least- developed countries had a market share greater than 20 percent in only three of the five crops which ranked in the top half of his list of most pollution-intensive United States crops, namely tobacco, groundnuts and sorghum.
12Although Article XX of GATT permits countries to introduce trade barriers necessary to protect the environment, this refers to the environment within their own territory.
13The long-term impact of these regional arrangements on the global trading system is an important issue. Are they welfare increasing or welfare reducing for trading partners outside these arrangements? Can they be seen as stepping-stones on the way to more extensive multilateral agreements, or as a threat to the multilateral regime? Because regional preferences in trade, services and capital flows necessarily imply discrimination against third parties, critics fear they will lead to the disintegration of the world economy into protectionist economic blocs. A recent WTO study suggested that regional and multilateral integration are more often complements rather than alternatives in the pursuit of more liberal and open trade.
14Some attempts have also been made to measure the impact of the General Agreement on Trade in Services, but only in a limited way because of a lack of suitable data and related parameters.
15UNCTAD's assessment of poverty reduction is based on a statistical relationship between the share of the poor in developing countries, GDP per caput and an income-inequality variable. However, this approach significantly underestimates the impact on poverty as it does not take into account developing-country responses to the new opportunities and the changes in economic structure likely to follow as countries take advantage of new opportunities.
16Under the Uruguay Round's negotiating modalities participants had the option of converting non-tariff border measures to tariffs at higher levels than had existed previously. On the basis of a broad sample of country schedules, about 15 percent of total agricultural tariff lines were subject to this "tariffication" process. Given the flexibility inherent in the tariffication modalities, the resulting new tariffs are in many cases, at least initially, highly restrictive, like the non-tariff measures they replaced. In a number of cases the new tariffs were initially set at lower levels than the measures they replaced. Moreover, tariff quotas at low or less restrictive rates were negotiated as part of the tariffication process in order both to maintain current import access opportunities and to create new access opportunities where current access as a percentage of domestic consumption was below a minimum threshold level. The manner in which these tariff quotas are administered and allocated, which is subject to the general provisions of GATT 1994, including the requirements of Article XIII concerning the non-discriminatory administration of such measures, is the subject of regular scrutiny by the Committee on Agriculture of the WTO. Non-tariff border measures in respect of the wide range of agricultural product lines that were not tariffed in this way had to be eliminated under the new tariff-only provisions of the AOA. All tariffs on agricultural products, both these pre-existing tariffs and the new tariffs resulting from the tariffication process, have been legally bound and are being reduced: by developed-country WTO members by an average of 36 percent over six years, with a minimum reduction of 15 percent; and by developing-country members (except least-developed) by two-thirds of these parameters implemented over ten years. Under the special treatment provisions of the negotiating modalities, a number of developing countries made commitments in the form of tariff ceilings which have been bound at final rates and generally do not involve staged reductions.
17Some preliminary experimentation on this question using FAO's World Food Model did not, however, support the conclusion that price instability would be lower in the future (FAO, 1995c).
18It is recognized that such a practice may be challenged by other WTO members, as Article 4.2 of the AOA specifically mentions variable levies among the measures that are not permitted.
WFS companion paper 13 Food security and food