100. Given the rapid pace of globalization, the external economic environment presents major challenges as well as opportunities for agriculture in LDCs. While access to larger and more affluent markets favours growth and development through trade, the LDCs face many internal supply-side constraints, associated with their economic underdevelopment, which render their exports uncompetitive. This section reviews the major trends and patterns of their agricultural trade and examines the main factors affecting them.
1.1 The marginalization of LDCs in world agricultural markets
101. The participation of LDCs in international agricultural trade is insignificant and has been declining. Their share in world agricultural exports has dropped steadily, from 3.3 percent in 1970-79 to 1.9 percent in 1980-89 and a mere 1.5 percent in 1990-98 (Table 3). Their share in world imports has also declined, though much less so, from 1.8 percent in 1970 to 1.6 percent in 1998. While world agricultural trade (including the intra-trade of EU) expanded at an average annual rate of over 5 percent during 1990-98, exports from LDCs grew by only 3.9 percent, in contrast to 6.6 percent for the developing countries as a whole. Their market share of many key agricultural commodities has fallen significantly from the 1980s to the 1990s, by over 30 percent for such commodities as timber, coffee, tea and cocoa and about 20 percent for cattle.
Table 3. Trend in agricultural exports of LDCs and other developing countries
|LDCs||All developing countries|
|Average annual rate of export growth (percent)|
|Share of world agricultural exports (percent) 1|
1 World exports include intra-EU trade.
Source: FAOSTAT (2000).
1.2 Commodity and geographical concentration of exports
102. In addition to their small and declining share in world agricultural trade, LDCs' agricultural exports consist largely of a few low value-added primary commodities. On average, the top three export items, which are predominantly primary agricultural commodities, account for over 65 percent of total export earnings. The major agricultural exports of LDCs include coffee, cotton, jute, fish and seafood, tropical wood and bananas, mostly in unprocessed form. Moreover, the exports are concentrated on only a few markets, of which EU is by far the largest (36 percent), followed by the United States and Canada (21 percent) and Japan (6 percent). Therefore, conditions of market access to these countries are of critical importance in defining their trading opportunities.
1.3 Dependence on food imports
103. The LDCs are increasingly dependent on imports to meet their consumption requirements for their basic food commodities. For example, their ratio of cereal imports (including food aid) to total cereal food supply has increased from 5 percent in the 1960s to about 15 percent in the 1990s. For 25 out of the 42 LDCs for which comparable data are available for 1990-98 the ratio exceeded 30 percent.
104. In addition, for LDCs as a whole food imports accounted for 15 percent of total merchandise imports during 1996-98 (Annex Table 12). Cereals dominate the food import bill, accounting for about 52 percent. The volume of cereal food aid fell from about 5.4 million tonnes in 1989-91 to 3.6 million tonnes in 1997-99.
105. FAO projections for 2010 suggest that the food gap will continue to widen and will have to be filled by imports, including food aid. Whether the LDCs will be able to finance these growing imports depends on a number of factors, the most important in many cases being their export earnings and external resource inflows. In most of these countries export earnings have stagnated over the last two decades, mainly because of the fall in commodity prices. From 1980-82 to 1995-97, per caput merchandise export earnings for LDCs as a whole increased by only US$2 per year (from US$35 to US$37), whereas for other developing countries they doubled over the same period, to reach US$394 per annum. The foreign debt burden has also limited the ability of many LDCs to import. In 1995, the simple average of the debt-service ratio was 23 percent for 41 LDCs for which data are available.
106. The marginalization of LDCs in world agricultural trade is reflected in the slow growth of their agriculture sector as well as of their overall economy, slower even than that of other developing countries. As shown in Section I, one reason for this is the inherent structural and technological constraints facing these countries as well as the pursuit of inappropriate policies, along with various domestic socio-political factors. Slow growth and the low level of participation in world markets also reflect the external economic environment they face.
2.1 Commodity markets and terms of trade
107. The primary agricultural commodities on which many LDCs depend heavily (tropical beverages and agricultural raw materials) have experienced sluggish world demand and a downward trend in real prices. Two factors were identified as causing a long-term decline in commodity prices: i) low income elasticity of demand, mainly for food; and ii) declining intensity of raw materials use in manufacturing. In addition, LDCs exporting largely raw materials are particularly prone to changes in commodity markets. For example, Benin, Chad and Mali lost 25 percent of their total export earnings from 1990 to 1992 following a drop in the world price of cotton by 34 percent.15
108. Recent studies show that the downstream marketing, transport and distribution of some agricultural commodities are dominated by few multinational enterprises (MNEs), a handful of which account for 85 percent or more of world trade in wheat, coffee, cocoa, grains, jute, tobacco and tea.16 Given the high costs associated with these downstream activities, the growers' price represents very low shares of the final product, ranging from 4-8 percent for raw cotton and tobacco to 11-24 percent for jute and coffee.
2.2 External assistance to agriculture
109. In almost all LDCs official development assistance (ODA) is the main catalyst of investment in agriculture. However, such external assistance to the sector has been on the decline since the early 1990s, the average annual amount having fallen by 20 percent from 1981-1990 to 1991-99 (Annex Table 13). Although total ODA to LDCs rose over the same period the share received by the agricultural sector declined from 20 percent to 13 percent. During the 1995 to 1999 period, there was slight increase in multilateral commitments, particularly from IFAD and regional development Banks, with some decline in bilateral commitments (Annex Table 14).
110. Reversing this downward trend is crucial to ensuring that appropriate agricultural intensification strategies can be pursued in the future. In particular, adequate external assistance is essential to enhance agricultural productivity, which is dependent on the availability of sustainable alternative technologies and farming practices that will not further degrade the natural resource base.
111. Given the importance of the agricultural sector in LDCs for poverty reduction and economic growth, current initiatives to provide financial assistance through targeted debt relief and other measures could in part be directed to supporting efforts to develop their sustainable agricultural potential.
2.3 Trade preferences
112. All LDCs are beneficiaries under the Generalised System of Preferences (GSP). In addition, the majority receive special treatment under other schemes - e.g. from the European Community in the context of the Lomé Convention and its successor ` Cotonou ` Agreement described below. The Caribbean Basin Initiative (CBI) of the United States is a similar preferential arrangement, but involves only one LDC.
113. To the extent that the UR Agreements lowered tariffs, the preferential margin enjoyed by LDCs is eroded. Assessments vary as to the extent of erosion and its impact on trade flows and welfare, but the net impact is generally estimated to be very small. In any event, available statistics suggest that, with the exception of a few countries, the preference schemes have not contributed significantly to generating export growth of the beneficiaries or improving their trade shares. While this has been partly because of the various restrictions in the schemes (e.g. in respect of product coverage, quotas, and rules of origin), supply-side constraints appear to have played a greater role.
114. In June 2000 the EU and the ACP States signed a successor agreement to the Lomé IV Convention, referred to as the "Cotonou Agreement", which stresses compatibility with the WTO trading regime and envisages replacing the Lomé non-reciprocal preferential trading arrangements by regional free trade areas (RFTAs) between EU and regional groupings of ACP countries after a transitional period. One of the major features of the Cotonou Agreement is that it extends the non-reciprocal preferential access for certain ACP agricultural and other goods to the EU market for a transitional period of eight years (March 2000 to end of 2007). The commodity protocols (sugar, beef, bananas, and veal) traditionally annexed to the Lomé Convention were included in the new Agreement. In addition, the Agreement provides for cooperation between ACP and EU in trade-related areas such as competition policy, intellectual property rights, standards of certification, sanitary and phytosanitary measures, trade and environment, trade and labour standards, consumer policy and public health. It was felt that the switch from Lomé preferences to RFTAs could be particularly detrimental to African LDCs. However, in view of the many provisions of the Cotonou Agreement that are geared towards enhancing the capacities of ACP countries in production, supply and trade, it was argued that it could offer more scope for improving export growth in LDCs generally.
115. In addition, LDCs in Africa can also benefit from the United States Trade and Development Act of 2000, which extends certain trade benefits to sub-Saharan African countries. The Act is much less comprehensive than the Cotonou Agreement, and the main difficulty that is likely to arise in practice relates to eligibility requirements and rules of origin.
116. More recently, the EU announced a unilateral trade concession that would eliminate all existing tariffs and quotas on all imports from LDCs. Referred to as the 'Everything But Arms' (EBA) proposal, the intention is to extend complete access to all exports from LDCs except arms and ammunitions, with a three-year phase-in for 'sensitive' goods - i.e. bananas, sugar and rice.
2.4 Regional trade agreements
117. Regional integration continues to be an issue of great concern in LDCs and is viewed as a vehicle for promoting cooperation in agriculture and enhancing food security at the national and regional/subregional levels. For LDCs as a whole, there is a potential for their participation in intra-regional trade in agricultural products that has not been fully exploited and which could be particularly beneficial in view of the small size of their domestic markets.
118. The LDCs have been parties to numerous regional trade agreements (RTAs), the vast majority of which are among African countries. Despite their many provisions regarding the removal of trade barriers, the level of intra-regional agricultural trade in the majority of RTAs of which LDCs are members has stagnated at a low level. This has particularly been the case in Africa, where LDCs predominate (See Annex Table 15).
119. All such trading efforts have come up against structural and policy obstacles. With a few exceptions, there is not much diversity in natural endowments among countries within most of the existing RTAs. Complementarity of resources and contrasts in comparative advantage are clearer between than within the country groupings. Other difficulties include inadequate international transport and communication facilities and poor information about markets and investment opportunities. Moreover, the absence or inadequacy of a system for standardized packing, grading and quality control systems at the regional level continues to frustrate efforts to expand trade and establish transparent information systems. Improvement and harmonization of inspection and certification systems are among the missing ingredients for promotion of intra and extra-regional trade. Inadequate financing and guaranteeing of regional exports/imports has also been a factor.
120. Essential requirements for promoting intra-regional trade from which LDCs can benefit are thus the opening up of regional agricultural markets, developing export standards and infrastructures and securing greater coordination among LDCs in general and within and between existing subregional groupings.
121. The major external challenge facing LDCs is their ability to exercise their rights and meet their obligations under the new multilateral trading system. Given their high dependency on agriculture for jobs, food, national income and export earnings, they have a large stake in the current and future trade negotiations in agriculture. Multilateral reforms undertaken in the WTO context both expand their opportunities and amplify the costs of their inherent structural weaknesses and policy failures.
122. Of the 48 LDCs, 29 are at present WTO members. Six more are in the throes of accession and three have observer status. The Agreement on Agriculture that emerged from the Uruguauy Round began a process of bringing the trade-distorting agricultural policies of developed countries under multilateral rules and disciplines17. This section examines the implications of that Agreement and of other WTO Agreements for agriculture in LDCs.
123. The major factors contributing to the crucial importance of multilateral agreements and negotiations on agriculture are i) the predominant role of agriculture in their economies; ii) the relatively high degree of openness of most of their economies; and iii) their increasing reliance on international trade for satisfying domestic food consumption requirements.
124. For a number of reasons it is difficult to assess, in either quantitative terms or in terms of policy implications, the probable impact on agriculture in LDCs of the Agreement on Agriculture18. In respect of policy changes the LDCs, along with all other WTO members, have had to remove non-tariff measures and bind all agricultural tariff lines, but they were exempt from tariff reductions. Most LDCs generally bound their tariffs at levels above the applied rates (Annex Table 16). All have declared that they have not provided any support to agriculture that is subject to the reduction commitment. In fact, many do not subsidize agriculture at all but tax the sector explicitly, by taxing production and exports of many commodities, or implicitly, by giving higher protection to industry. Overall, the scope for LDCs to support agriculture through measures exempt from the reduction commitment (including green box measures and the de minimis provision) is considerable; however, such measures require financial outlays which most LDCs cannot afford.19
125. Research undertaken in FAO and elsewhere indicates that, on the whole, trade liberalization under the UR could worsen the terms of trade for LDCs, which are mostly net importers of food and net exporters of tropical products. On the export side, changes in market access conditions resulting from the UR are not considered to contribute markedly to boosting global trade and raising the prices received for most traditional primary agricultural commodities exported by the LDCs. On the one hand, the impact on tropical commodities, intensively produced and exported by the LDCs, is likely to be modest, as the level of protection was already relatively low for most of these commodities. On the other hand, for temperate-zone products, such as vegetables and fruits and cereals, the effects of trade liberalization are potentially larger, but they are not major export items for most LDCs.
126. As for food products, the expected increase in world market prices for basic food staples and other selected agricultural commodities is projected to have little effect on domestic food production in LDCs because of the severe supply-side constraints and in consequence their food import bills will increase.
127. It is generally acknowledged that supply side problems have historically played a dominant role in limiting export diversification by LDCs into non-traditional commodities and processed products. Indeed, many of today's developing countries with diversified agricultural export structures were at one time heavily dependent on primary agricultural commodities, e.g. Malaysia, Thailand, Indonesia and Chile. They achieved this diversification despite facing a similar external trading environment common to all developing countries; indeed, in some respects it was worse as, by and large, they did not benefit from preferential trading arrangements. Many LDCs failed to diversify their exports despite their having received trade preferences from the developed countries.
128. The UR initiated the process of opening up new opportunities for export diversification in agriculture, through, inter alia; across-the-board reductions in MFN tariffs on agricultural products; reduced tariff escalation, albeit limited; and the strengthening of trade rules, particularly those on sanitary and phytosanitary measures and technical barriers to trade. As discussed above, prospects for growth in LDCs are more promising in new crops and processed products than in traditional primary commodities.
129. While many traditional primary commodities exported by the LDCs suffered from slow growth in world import demand and a decline in real world prices, world trade in several non-traditional agricultural commodities (NTCs), particularly, but not exclusively, horticultural products, has been growing relatively fast and exports of such products are becoming increasingly important for some developing countries. 20
130. Another potentially beneficial effect of the WTO Agreements for the development of value-added industries in LDCs is the reduction in tariff escalation. Tariffs have generally been higher on processed agricultural products than on primary commodities. This tariff wedge between a processed product (e.g. orange juice) and its corresponding primary commodity (e.g. oranges) has been one of the obstacles in commodity-exporting countries in their efforts to establish processing industries for higher value exports. An analysis of tariff escalation has shown that tariff wedges have on average fallen from the pre-UR level of 23 percent to 17 percent.21
131. While LDCs do export a range of processed products, such as coffee extracts, cocoa pastes, crude vegetable oils and leather, the post-UR tariff rates on these products are relatively low and the lessening of tariff escalation will consequently not provide many additional export opportunities. On the other hand tariff escalation has been substantially reduced for many important processed commodities that LDCs do not export at present but could well do so in the new situation. Such potential exports include: cigarettes, some dairy products, and certain animal foodstuffs to EU; wine, some dairy and meat products to Japan; and orange juices and certain dairy products to the United States. Sanitary and phytosanitary standards play an increasingly prominent role in trade in processed products, especially foodstuffs, and this is an area where LDCs will need to do much more if they are to exploit the new opportunities.
132. Many other issues have arisen from the implementation of the UR Agreements, as well in the new negotiations on agriculture, that are of particular concern to LDCs in respect of improving their market access and developing domestic export capacities, some of which are summarized below.
Improving market access for agricultural exports
133. Many LDCs indicated that the AoA has not brought about any real improvement in market access for their agricultural exports, mainly because of the erosion of their tariff preferences, the persistence of tariff peaks and tariff escalation in some sectors of particular interest to them and the high SPS standards imposed in the importing countries. In the current negotiations on agriculture they look to ensure that there really will be an improvement in market access, especially for those products with a high growth potential and high value. Thus, they have an interest in reducing border protection and tariff escalation in the developed and developing countries and in ensuring that the beneficiaries of preferential arrangements are compensated for the loss or erosion of such preferences and assisted in adjusting to a more competitive environment.
Special and differential treatment
134. Under the WTO agreements, LDCs have received special consideration in respect of market access, implementation of their various commitments and technical and financial support. However, LDCs have been disappointed with the limited implementation of the special and differential treatment (SDT) provisions of the agreements, particularly as regards financial and technical assistance. This is particularly the case with respect to the SPS and TBT Agreements. Because SDT provisions were often expressed as "best endeavour" obligations, many LDCs have suggested that these should be included as binding commitments in a development box.
Food safety and quality standards
135. Another major challenge faced by LDCs is raising the SPS/TBT standards of their exports to at least internationally recognized levels. Because of their poor capacities in scientific research, testing, conformity and equivalence, they face difficulties in meeting international safety and quality standards. The task is even more daunting when the developed countries, on risk assessment grounds, adopt higher standards than those currently recognised by international standard-setting bodies. Moreover, rising consumer concerns in the affluent countries over food safety and quality compound the difficulty of the developing countries in meeting ever higher standards. Fulfilment of the promises of financial and technical assistance to LDCs, and other developing countries, in respect of SPS/TBT standards is thus important to them.
Compliance with the TRIPS Agreement
136. The requirement for countries to provide for the protection of plant and animal varieties, either by patents or by effective sui generis measures, presents a number of challenges for developing countries. The lack of plant variety protection and of sufficient capacity to provide rapidly such protection in most developing countries may hamper their ability to comply with this requirement. In addition, patentability of plants and animals raises a range of controversial issues relating to its implications for food security, rights of local communities and indigenous peoples, biosafety and sovereign rights over genetic resources. The provision of the TRIPS Agreement are also significant for input industries and may, in the short to medium-term, increase costs of developing and acquiring farm technology. Likewise, debates on genetically modified products, which involve also the SPS and TBT Agreements, continue to require analysis of their implications for the development and dissemination of new technologies and their consequent effects on small farmers and low-income countries.
137. The special situation of LDCs was recognised in the Ministerial Decision on Measures Concerning the Possible Negative Effects of the Reform Programme on Least Developed and Net Food-Importing Developing Countries. To date, the Decision has not been activated, despite the fact that food aid has dropped to very low levels and food import bills of LDCs and NFIDCs have risen. Implementation has so far been hampered by several factors, including: the requirement for providing evidence that the reform process led to difficulties; and the variety of instruments envisaged under the Decision to respond to such needs, without the respective responsibilities of all concerned being clearly specified. The basic consideration, however, is that the Decision addresses a transitional problem, whereas the food security problem in the LDCs is a long-term and complex one, encompassing broader development issues that go beyond trade.
138. Changes in the global economy are raising the stakes for domestic agricultural policy reforms in LDCs. The main concern is that while the WTO regime imposes disciplines on subsidized agricultural exports, it is likely to hurt poor agricultural producers in LDCs, who will become more vulnerable to instability in world prices as border protection is lowered. Although price instability on world markets affects all countries, the consequences can be much greater for LDCs for two reasons: i) a large proportion of the rural population still earns a living from food production; and ii) food accounts for a large share of household expenditure.
15 OECD, "Market access for the LDCs: Where are the obstacles?" OECD/GD (97) 174, Paris, 1997.
17 Other Agreements which bear on agriculture include: the Agreement on the Application of Sanitary and Phytosanitary Measures (SPS), the Agreement on Technical Barriers to Trade (TBT); the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), and the Decision on Measures Concerning the Possible Negative Effects of the Reform Programme on Least Developed Countries and Net Food-Importing Developing Countries.
18 Among these reasons are the difficulty to establish a counterfactual scenario with which to compare actual outcomes, the relatively short period involved for analysis and the absence of steep reductions in support and protection.
19 See FAO, Rome (2000), Multilateral Trade Negotiations on Agriculture. A Resource Manual: II - Agreement on Agriculture.
20 For example, an FAO study on EU, Japan and the United States has estimated that their total value, which amounted to 19 percent of world agricultural imports in 1994, grew at a rate of 10.9 percent per annum during 1985-94, compared to 5.8 percent per annum for other agricultural imports. (FAO, Committee on Commodity Problems, Impact of the Uruguay Round on Agriculture: Follow-up Activities, CCP 97/16, February 1997).
21 See Lindland J. (1997), The impact of the Uruguay Round on tariff escalation in agricultural products, FAO, ESCP/No. 3.