9.4 Towards freer trade in agriculture: what is important from a 30-year perspective?

As discussed earlier, both market and policy factors have affected the evolution of volumes and patterns of trade. While some indications of the relative importance of the two factors have been given, no quantitative assessment has been provided. This section will attempt to distinguish policy factors from non-policy factors and give some guidance as to what would happen if trade policy distortion were to be removed. The removal of these policy distortions will again affect trade patterns and bring about benefits and costs for all countries, particularly those that are participating in the reform process. This gives rise to questions such as: How important are policy and non-policy factors in developing and developed countries? What will happen if some, or all, distortions are removed? What differential impacts can be expected from specific reform packages? What would help or harm developing countries and what should be the priority areas for developing countries in the trade liberalization process?

9.4.1 How significant are the expected overall benefits from freer trade?

The basic case for multilateral trade liberalization rests on the potential for large global welfare gains. Estimates for the magnitude of these welfare gains vary considerably depending on the base year for the model simulations and the comprehensiveness of the reforms over sectors and participating countries. A recent study (Brown, Deardorff and Stern, 2001) estimated global cumulative welfare gains from comprehensive trade liberalization (agriculture, manufactures, services) at about US$1900 billion over a period of ten years.¹⁶ The World Bank estimates that global gains from comprehensive trade reform could amount to about US$830 billion and that low- and middle-income countries would be able to share in benefits of about US$540 billion. All estimates include both static and various forms of dynamic gains¹⁷ (World Bank, 2001c).

The likely impacts of further liberalization in the agricultural sector have been the subject of several detailed analyses. While such analyses differ significantly in model structure and assumptions, they agree roughly in terms of the likely magnitude of impacts on agricultural commodity prices, trade volumes and economic welfare. In general, the results suggest that the expected benefits of agricultural trade liberalization are less important for developing countries than for developed countries.

ABARE, for example, has analysed the impacts of agricultural trade liberalization using a computable general equilibrium (CGE) model (ABARE, 2001). This analysis found that a further 50 percent reduction in agricultural support levels alone would create a static US$53 billion increase in global GDP in 2010. Some US$40 billion of this would accrue to developed countries. Full liberalization of agriculture and manufacturing would boost global GDP by US$94 billion, with developing countries capturing most of the increment and about half the total (because they have relatively high levels of industrial protection). If dynamic gains are incorporated, global GDP would increase by US$123 billion relative to the base case, with more than half these gains going to developing countries (because they have greater potential for productivity improvements). In the agricultural sector, the gains for developing countries would be greatest in those that are either producing or are capable of producing the commodities that are currently most heavily supported in the developed countries such as livestock products, grains, oilseeds, sugar, fruit and vegetables.

The results of a study by Anderson (Anderson et al., 2000) are summarized in Table 9.4. The study suggests that if all agricultural protection and trade barriers were removed globally, the world as a whole could expect an annual welfare gain of about US$165 billion (in constant 1995 US$). The gains could be significantly higher if reforms were extended to include freer trade in services and manufacturing as well as a liberalization of investment flows. But the results also show that the benefits of freer trade in agriculture would largely accrue to the developed countries. In fact, if reforms are limited to the developed countries, more than 90 percent of the additional welfare gains will remain within the group of high-income (OECD) countries. This reflects largely the fact that subsidies and other distortions in OECD agriculture are extraordinarily high. Their removal would create an increase in welfare for consumers in OECD countries (through lower consumption prices) and an increase in welfare for producers in non-subsidizing OECD countries (through higher farm prices).

USDA has analysed the potential impacts of further liberalization of agriculture (USDA, 2001d). This report uses a combination of static and dynamic CGE models and other analytical tools to assess the economic costs of the current distortions in global agricultural markets and the potential effects of trade liberalization on global welfare and on various countries, commodities and economic agents. For a complete removal of subsidies and tariff barriers, the USDA study assesses global welfare gains at US$56 billion annually. This total entails both static (US$31 billion) and dynamic welfare gains (US$25 billion). The static benefit would accrue almost entirely to developed countries (US$28.5 billion of the total of US$31 billion) while developing countries are expected to share in a larger part of the dynamic gains (US$21 billion out of the total of US$25 billion).¹⁸ The USDA study also finds that world commodity prices would be an estimated 12 percent higher on average, with the biggest gains for livestock and products, wheat, other grains and sugar. There are interaction effects among policy categories, but about half of the impact on prices would derive from the elimination of tariffs and other border measures, about a third from elimination of domestic supports, and the remainder from the elimination of export subsidies.

Despite the evidence of aggregate welfare gains, the USDA study found that some countries may lose from agricultural trade liberalization. Within countries, there will be both winners and losers as resources are reallocated according to their comparative advantage. Exporting countries stand to gain from improved terms of trade, relative to those they would obtain in the absence of reform. Importers may benefit from improved domestic resource allocation but losses in consumer welfare outweigh gains in producer welfare in exporting countries. Also, net exporters with preferential arrangements are likely to lose, as well as food importers where there is no potential improvement in domestic efficiency to offset the effect of higher world prices. In the case of the former, it is questionable, however, whether the dependency fostered by preferential agreements is of long-term benefit.

9.4.2 What if all OECD countries dismantle their agricultural subsidies?

The results from the various impact studies provide useful information about the general changes that are likely to emerge from trade liberalization for global agricultural markets. All of these results refer to baseline scenarios that describe a situation or an outlook without policy reforms. These baseline scenarios may differ in many important aspects from the projections presented in this study (Chapter 3). Below, the results of a policy reform scenario will be discussed, which takes the baseline scenario projections of this study as a starting-point.¹⁹

The current levels of farm support form the starting-point for two different policy reform scenarios. In a first step, all market price support is phased out in equal annual steps over a period of 30 years.²⁰ These price support measures are commonly regarded as the most distorting kinds of subsidies and form a subset of the so-called amber box measures of the Uruguay Round. They stimulate production in a direct and immediate way (Figure 9.5, 2nd diagram). In a second step, the gradual elimination of price support is accompanied by a complete phase-out of all non-price-related subsidies. This second scenario reflects a comprehensive removal of agricultural policy interventions in all OECD countries, i.e. a removal of subsidies to the tune of US$266 billion (OECD, 2001e). Both the gradual elimination of market price support and the phase-out of other subsidies are implemented at the level of individual commodity markets and countries or country groups (Figure 9.5, 3rd diagram).

Figure 9.5 Policy wedges, prices and reforms

PSE: Producer support estimate
PSE-M: Market price support of the PSE
PSE-R: Non-price related support (PSE minus PSE-M)

For countries where producer support estimates are not available, i.e. non-OECD and non-transition economies,²¹ domestic and international prices are linked via simple price transmission equations that translate, at varying degrees, changes in international prices into changes in domestic prices. These varying degrees of price transmission are encapsulated in a price transmission elasticity, which represents both tariff-based protection and “natural” protection. The elasticity can range from 0 to 1, where a value of 1 represents full transmission of price signals from the world market, while a value of 0 denotes complete insulation. In the scenario runs, these elasticities are increased year by year. In the first scenario, all price transmission elasticities are gradually increased to reach a value of 0.8 by 2030, wherever they are below this value in the baseline projections. In the second scenario, all price transmission elasticities are gradually increased from 0.8 to a level of 1 by 2030 which, together with a complete elimination of support policies in OECD and transition countries, represents the comprehensive policy reform scenario.

Impacts by commodity group.The most significant changes are expected to occur for temperate-zone commodities that account for the major portion of OECD policy distortions. OECD countries would also be most affected by these policy reforms. There would be a shift in market shares from currently highly protected and supported producers to countries that have relatively liberal agricultural policy regimes. In general, production in Japan, Norway, Switzerland and, to a lesser extent, the EU would decrease and production in Australia, New Zealand, the United States and Canada would increase.

Some developing countries would also gain. The main beneficiaries would be Argentina (wheat, maize and beef) and Brazil (poultry). The majority of developing countries would reduce somewhat their imports of temperate-zone commodities but the price effects that emerge from international markets are mostly too small to change the net trade picture significantly, either for the majority of individual developing countries or for developing countries as a whole. This reflects their low supply responsiveness for temperate-zone commodities, particularly compared with developed countries. It is also a reflection of low and declining demand elasticities, which are assumed to fall with rising income levels (for details, see Schmidhuber and Britz, 2002).

Developing countries are estimated to gain more from OECD policy reform for competing products. OECD producer support for competing products accounts for about 40 percent of total PSE support. Many developing countries could step up their production of these commodities and increase exports. Examples are Thailand (rice and sugar), China (fruit and vegetables), Brazil (sugar), Malaysia, Indonesia and Argentina (vegetable oils), Zimbabwe (tobacco) and Pakistan (cotton). However, the majority of developing countries would remain net importers: they would import lower volumes at higher prices.

Prices and markets for tropical products would not be affected substantially. There is no significant production in OECD countries and, hence, no producer support to be removed. Developing countries might be able to reap more significant gains if OECD policy reforms were extended to include a reduction in protection of processed products (tariff escalation) or the abolition of commodity-specific consumer taxes.

Impacts by country group. The impacts of OECD policy reform would be felt most strongly in those OECD countries where producer support has been highest. Consumers would gain significantly from lower prices while producers would reduce output and lose market share. OECD producers in countries where support is small (e.g. beef and dairy in Australia or New Zealand) would benefit and gain market share at the expense of producers in protected markets. This outcome is consistent with the results from the above-mentioned USDA and ABARE studies that suggest that the major part of all welfare gains would accrue to developed countries, more specifically to consumers in protected and producers in unprotected markets.

A number of developing countries would also stand to gain from OECD policy reform. In general they are already net exporters of temperate or competing products. However, they are very few in number and belong largely to the group of the most advanced developing countries. The group of the least developed countries would in general be worse off. Very few of them are net exporters of temperate-zone or competing products.

Impacts on prices. In general, the results suggest that even a comprehensive policy reform package would have only a moderate impact on the level of world market prices (border prices). Supply for temperate-zone commodities in OECD countries is relatively responsive to price incentives, particularly in countries with substantial production potential and where farmers have traditionally been producing at world market price levels (in Oceania and, to a lesser extent, in North America). As prices increase, farmers in these countries would swiftly expand production. A significant impact on world prices occurs only for products where distortions are particularly high and the responsiveness of producers to higher prices is generally low, notably milk, for which prices are expected to increase by about 17 percent (Table 9.5).

Some developing country producers would also be responsive to higher prices, notably those in Brazil, Argentina, Malaysia or Thailand. There is even an additional production potential in those developed countries in which support would decline (e.g. in Europe). Many have put in place policy programmes that offset the output-enhancing effects of support and hold production below “normal” output levels (such as production quotas, extensification programmes and set-aside schemes). Policy reforms are assumed not only to remove subsidies, but also to lift these production constraints.

A further dampening effect on prices would occur because a removal of subsidies for all commodities would be likely to result in mutually offsetting effects for interlinked markets. The expected price changes for cereals are a case in point. While a removal of subsidies for cereals would put a brake on production and underpin international prices, the removal of support for livestock production would lower demand for feedgrains. This would offset much of the potential international price boost to cereals from lower subsidies given to cereal producers.

Although producer prices for the world as a whole would not be affected strongly, this small average impact masks more significant, but mutually offsetting, price effects in individual countries or regions. For example, the world average producer incentive prices for rice are expected to fall by only about 10 percent, but those in Japan would be as much as 85 percent below the levels assumed in the baseline scenario. At the same time, producer price changes could be very substantial for farmers in non-protected markets, such as dairy farmers in New Zealand.

Changes in consumer prices are also expected to be small, especially in OECD countries. For many commodities, the price of the primary product (e.g. cereals) accounts for only a small share of the total costs for the final consumer good (e.g. bread, noodles). The effect of liberalization would be significantly diluted by substantial processing and distribution margins, which can account for up to 90 percent of the value of the final product. In developing countries, the processing and distribution margins are smaller and thus the changes in the price of the primary product translate into more pronounced increases in consumer prices.

9.4.3 What makes it difficult for farmers in developing countries to reap the benefits from lower OECD distortions?

First, a look at protection and support levels by country and commodity suggests that agricultural trade distortions are concentrated in a few developed countries and the most distorted markets are those for temperate-zone commodities. Particularly high subsidies are provided to farmers in Japan, Norway, Switzerland and the EU, while other OECD countries such as Australia and New Zealand are producing at low costs without major subsidies (OECD, 2001e). In addition, these countries have the infrastructure in place that will allow them to capture the market shares that become available when subsidies are removed in the high support countries. Only a few developing countries have a comparative advantage in producing temperate-zone commodities such as milk and meat, wheat and coarse grains. As a result, a cut in OECD subsidies may primarily result in an exchange of market shares between OECD countries.

Second, even if and when trade liberalization results in higher and more stable international prices, it is unclear whether and to what extent these signals will be transmitted to farmers in developing countries. Inadequate infrastructure and inefficient marketing systems effectively insulate many farmers from world markets. In these cases, much of the price incentive that farmers would receive from world markets can be absorbed by the inefficiencies in their marketing and transportation systems.

Third, for products where the developing countries have a comparative advantage and even LDCs could benefit, e.g. coffee, cocoa, tea, spices and tropical fruit, developed countries' import tariffs have already been reduced and the effects of further liberalization are likely to be small. Tariff escalation remains a serious problem, but it is unclear how many LDCs could develop significant export-oriented processing industries even if tariff escalation were eliminated. The biggest distortions for these products are in developing countries themselves (USDA, 2001c). Their bound import tariffs for these products are higher than those in developed countries, both for the raw commodities as well as for the processed products (USDA, 2001c). Even for these countries, applied tariffs are generally much lower than bound rates, so further reductions in bound rates will have little effect unless they constrain the applied rates.

Finally, farmers in developing countries may not gain so long as their own domestic policies offset much of the price incentives from international markets. Most developing countries heavily taxed their agriculture throughout the 1970s and 1980s (through direct and indirect measures). Many have continued to do so over the 1990s. India, for instance, has submitted an AMS notification with an overall support level of about US$-24 billion, equivalent to a tax of 31 percent of the value of production (FAO, 2000e). Also farmers in Pakistan are producing under a net tax burden, although at a lower level. For China, PSE calculations suggest that its agricultural sector faced massive taxation for much of the 1980s and 1990s, at rates of 18 to 65 percent (OECD, 2001f). Particularly high rates were reported for rice (Webb, 1989) and pork (USDA, 1998b), farm products that are typically produced by China's smallholders.²²

Over and above these direct burdens on agriculture, farmers in almost all developing countries have been handicapped by even higher effective rates of taxation caused by considerable non-agricultural tariffs. These tariffs make their inputs more expensive and bring them into a competitive disadvantage particularly vis-à-vis farmers in industrial countries who benefit from very low tariffs for manufactures (on average 4 percent). The non-agricultural tariffs make the effective burden for farmers even higher than the negative AMS or PSE calculations would suggest. The high effective burden from non-agricultural protection also explains why developing countries' agriculture stands to benefit the most from comprehensive trade liberalization. Out of the US$832 million of welfare gains from comprehensive trade liberalization as estimated by the World Bank (see above), agriculture would account for US$587 billion. Of this latter amount, US$390 billion would accrue to low- and middle-income countries, where much of this would come from a liberalization of the non-agricultural sectors in developing countries (World Bank, 2001c, p. 171).

9.5 Beyond the traditional trade agenda: emerging long-term trade policy issues

9.5.1 The new trade policy environment

The main focus of international trade policy has traditionally been on the conditions of access to markets. In the recent and emerging trade policy environment, the scope of the rules governing trade continues to expand. These include the health, safety and environmental rules that ensure quality and acceptability in discriminating markets, codes for the treatment of foreign direct investment, the regulation of conditions of competition and the codification of intellectual property rights.

Agricultural trade policy used to be dominated by farm-level issues, with the active participation of farm and commodity groups and those arguing for more protection. One major shift in the 1980s was the involvement of multinational food firms in the trade negotiations. This trend is likely to continue with the structural changes apparent in the food sector. First, the processing sector has a strong incentive to look for low-cost supplies. It therefore has the incentive to lobby governments for the ability to import those supplies from world markets, so as to remain competitive with firms located in countries where prices are lower. In many cases the low-cost food suppliers are in the Americas, as are the main competitors in the global marketplace. Hence one would expect continued pressure from the food industry to allow raw material prices to fall to roughly United States levels over a period of years. Given the disinclination of governments to support these prices indefinitely, the pressures from the food industry may well come to prevail in the end.

The tendency for international food companies to search for low-cost supplies will be reinforced by pressure from those firms that are already operating in several countries. For these firms, including those in the distribution and retailing business, international trade is often intrafirm trade. Any restriction on the movement of food items within the firm will tend to cause problems for the firm, and hence will be resisted. But just as intrafirm movement of goods can be thwarted by government regulations, so too can the contractual obligations of firms that have come together in other forms of alliance. One would expect that those firms that have been pioneering supply chains, linking producers in one country to wholesale and retail outlets in another, would also find government restrictions on trade irksome. Thus one might expect these supply chains to add their voice to pressures for trade liberalization.

Many future changes in the global food system are in the direction of a more sophisticated agricultural industry, aware that future success depends on satisfying a variety of consumer tastes, and competing for a share of consumer spending with other goods and services (Moyer and Josling, 2002). As more actors become involved in the political process, the centre of gravity will shift perceptibly away from the primary producer. Policy will become less focused on unprocessed commodities, and the emphasis will switch to adding value to the raw material and marketing the final product. These changes will be crucial to the future of agricultural trade policy reform. In a world where farmers produce for the market, improvement in access to overseas markets can compensate in part for less domestic support. For those developing countries that can take advantage of the opportunities provided by the changing food habits of middle-class consumers, this could offer a way to use the food trade system as an engine of development.

9.5.2 The need for a consistent regulatory framework in global food trade

The process of globalization will increasingly require a consistent regulatory framework within which national regulations can be developed. At one level this is a technical task. National regulators need to iron out arbitrary differences that unnecessarily impede trade. But domestic bureaucratic and political pressures often complicate the technical task of avoiding incompatible regulations. Some vested interests exploit regulatory differences for the sake of furthering protectionist interests. Others, in the name of reducing costs, push for a degree of harmonization that may be inappropriate. Complicating the task of devising technical regulations for global markets is the tendency to see such issues as touching upon national sovereignty. Politicians are not keen to cede authority to regulate their domestic food supplies to outside agencies or other governments. Domestic regulatory agencies also cling to accepted practices and standards, in part out of inertia and in part as a way of ensuring bureaucratic survival.

The debate about the regulation of food supplies has been given increased prominence in recent years by a wide range of public-interest groups. Some have focused on issues of consumer health, both the prevention of diseases and the promotion of better nutritional habits. Others focus on social and political implications of food production systems or identify food consumption with lifestyle choices. Food issues have thus become part of a broader social discourse among groups with different objectives, particularly in the debate over globalization.

Coherence in global food regulations can be achieved more easily if national food regulations are reformed in a way that reduces the scope for trade conflicts. Technical trade barriers will play an increasing role in this context. Agricultural exporters may be required to demonstrate that native species or human health are not endangered by their products, while simultaneously complying with standards that stipulate everything from ingredients to packaging materials. The regulatory environment for agricultural and agro-industrial producers is likely to become more complex in coming years, even though reform initiatives are currently under way in many countries to reduce the number and the rigidity of regulations faced by the private sector. With rising per capita incomes, demands for food safety, environmental amenities, product differentiation and product information increase among developed and developing countries alike. More and more, regulators are being asked to provide these services when markets fail to do so (Josling, Roberts and Orden, 2002).

Measures that regulate imports of new agricultural products, ranging from new animal genetics to new disease-resistant seeds, have also spawned disagreements between trading partners. New products, particularly GM commodities, have been at the centre of the most prominent recent debates over technical barriers to trade, as some importing countries consider genetic modifications to pose a risk to consumers or to biodiversity, or to violate ethical norms. Trade officials are drawn into the debate when exporters believe that lengthy regulatory review of new products is motivated by a desire to protect the commercial interests of domestic producers in importing countries, rather than by concerns about the safety of consumers or quality of the environment. There is reason to expect that in the near future the number of agricultural product and technology innovations, and the number of measures to regulate their entry into importing countries, will increase. Technical barriers will therefore remain an important topic of discussion in the international regulatory and trade policy arena well into the foreseeable future.

Food trade regulation is also becoming a major issue for developing countries and their role in the global economy. In particular, trade in processed food products will be of growing interest to developing countries. Exporters are finding the increase in value added a useful way of avoiding the “raw-material” trap, while importers need processed food products to meet the increasing demand for them. Decisions about the use of agricultural biotechnology to increase productivity, and the provision of technical assistance to permit developing countries to meet the high food standards in developed countries can have a major effect on their opportunities for trade and development.

9.5.3 Trade and international standards

As traditional market access barriers such as tariffs and quotas are reduced, the restrictions caused by safety and quality standards will become more apparent and important in determining an exporter’s ability to gain access to markets. The WTO SPS Agreement governs the use of safety regulations in agricultural trade. Other quality attributes are covered under the Agreement on Technical Barriers to Trade (TBT) and the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). Environmental protection measures, which were given the same status in the Doha Declaration as the protection of the life and health of animals, plants and humans, may be proposed during the negotiations as a basis for restricting trade. The SPS and TBT Agreements will not be renegotiated in the current talks (see Box 9.1 for an explanation of the SPS and TBT Agreements), but implementation issues related to these Agreements will be taken up, such as the need for longer transition periods and technical and financial assistance for developing countries.

These Agreements attempt to strike a balance between the concerns of importers and exporters. Importers wish to enforce quality and safety standards to protect the life and health of their people, plants and animals. Exporters have the right to expect such standards to be transparent, science-based and no more trade restrictive than necessary to meet the stated objective. In practice, balancing these concerns is very difficult. Science is not static, since knowledge evolves. Moreover, even where risk levels are known with scientific accuracy, their acceptability varies over time and between societies.

Since the WTO Agreements came into force, 18 separate cases involving safety or quality attributes of agricultural products have been filed under WTO dispute settlement procedures. Of these, five were settled bilaterally, three have been resolved through dispute settlement Panel and Appellate Body decisions, and the remaining ten are awaiting final resolution. Of the three “resolved” cases, the most contentious was the one launched by the United States and Canada over the EU’s ban on the use of hormones in beef production (both for imported beef and beef produced within the EU). The Panel and Appellate Bodies found that the EU’s ban on imports of beef produced using artificial growth-promoting hormones was not justified under the SPS Agreement because it was not based on a scientific risk assessment and there was not enough scientific evidence to support the ban. Since the EU has continued to ban such imports despite the results of the dispute settlement process, the complainants have the right to seek compensation by imposing higher tariffs on their imports from the EU equal to the value of the trade impairment suffered as a result of the ban. Thus, while this case has officially been resolved, it clearly has not resulted in a satisfactory solution either from the point of view of the parties to the dispute or from the institutional perspective of promoting a fair and transparent trading system.

Considerable time and cost are involved in pursuing a case through the WTO dispute settlement procedures and, as the beef hormone case illustrates, the final result of the process may be unsatisfactory. A number of countries have suggested that importers are increasingly using SPS and TBT measures as disguised protectionism. This point was raised in several FAO country case studies (FAO, 2000e) and has been mentioned in proposals submitted to the ongoing agriculture negotiations (WTO, 2000f and 2001c). On the other hand, a number of countries have indicated that consumer safety and the protection of traditional food applications are increasingly important for them (WTO, 2000c and 2000e). This suggests that issues related to food safety and quality will become a source of increasing tensions in the agricultural trading system.

Health and safety standards. All governments accept responsibility for guarding the safety of the nation’s food supply and the health of its plant and animal populations, and many also undertake to ensure food quality and to provide information to consumers as they make food-purchase choices. Yet countries face very different circumstances in their markets for food, and consumers can have vastly different concerns and susceptibilities. As a result, countries have developed quite diverse systems of regulations to safeguard plant, animal and human health, to ensure food product quality, and to provide consumer information (for a more comprehensive discussion, see Josling, Roberts and Orden, 2002).

As economies open up to trade there is increasing potential for conflicts to arise from the different ways of providing for food-related health and safety and from the differing levels of health protection afforded by food systems among countries. Trade conflicts can also arise from those aspects of food regulations that are not directly related to health. Firms selling processed farm products are motivated to seek protection for their trademarks and the image of their products, setting up potential conflicts with new entrants in the market. Many consumers expect basic nutritional or other information to be readily available, although this again can lead to charges of protection for domestic producers. Affluent consumers have also begun to take a greater interest in how their food is produced, i.e. whether the farms use environmentally sound practices, whether pesticides and other chemicals are used, and how animals are treated. Demands for regulations that impose standards in these areas add to the pressures on governments and increase the potential for trade conflicts. The emergence of new methods of production, such as the use of advances in biotechnology to “design” plants and animals, poses further regulatory challenges.

Trade conflicts over health, safety and quality standards are not new, but increased globalization of the food and agricultural sector has made these conflicts more visible. Governments need to handle these conflicts in a way that both upholds public confidence in food safety and product standards and preserves the framework for trade and the benefits of an open food system.

Environmental and labour standards. As noted in previous chapters, the production increases in prospect at the world level for the period to 2030 are significant. Thus, almost another billion tonnes of cereals must be produced annually by 2030, another 160 million tonnes of meat, and so on. This also means that pressure on resources and the environment will continue to mount. The challenge is how to produce the required increases of food in sustainable ways, while keeping adverse effects on the wider environment within acceptable limits.

The agro-ecological environments of individual countries differ in their ability to withstand adverse effects associated with increasing production, either because they are inherently more or less resilient or have more or less abundant resources or because such resources at present are more or less stretched from the past accumulation of stresses. Countries also differ as to their technological and policy capacity for finding solutions and responding to emerging problems.

Trade can help to minimize adverse effects on the global resource system, if it spreads pressures in accordance with the capabilities of the different countries to withstand and respond to them. Whether it will do so depends largely on how well the prices of each country reflect its “environmental” comparative advantage. This requires that, in addition to the absence of policy distortions that affect trade, the environmental “bads” generated by production be embodied in the costs and prices of the traded products. If all countries meet these conditions, then trade will contribute to minimizing the environmental “bads” globally as these are perceived and valued by the different societies, although not necessarily in terms of some objective physical measure, e.g. soil erosion, loss of biodiversity, etc. This latter qualification is important, because different societies can attach widely differing values to the same environmental resources relative to those of other things, such as export earnings, employment, etc. In the end, the values of environmental resources relative to those of other things are anthropocentric concepts and countries at different levels of development, of different cultural backgrounds and resource endowments are bound to have differing priorities and relative valuations.

Attempts to impose uniform environmental standards can stand in the way of countries profiting from trade based on their relative endowments of environmental resources. This may happen as agricultural policies are “greened”, and pressure increases for multilateral rules that constrain countries with less restrictive environmental standards. This could act as a further hindrance to developing country exports, many of which might not face the same environmental pressures that agriculture in, say, northern Europe may have to contend.

Environmental regulations are likely to have the strongest impact on those agricultural activities that have the closest links with broad transnational environmental objectives, such as mitigating climate change and conserving oceanic resources. Thus fisheries and forestry may be more directly affected than agriculture. But more localized pollution issues such as pesticide runoff and water quality could still be important issues for crop and livestock agriculture in the future. Intensive livestock rearing may well have to absorb significant extra costs as countries strengthen their environmental regulations, and attempt to restrict trade from those countries without such regulations. And if the environmental impact of GMOs turns out to be more serious a problem than many scientists now assume, the next two decades could see a raft of new restrictions on the use of this technology that may prevent its spread and adoption.

At present it looks unlikely that the Doha Round of trade talks will establish any significant new rules on environment and trade. More likely is an agreement that clarifies the relationship between disciplines under WTO and those that might be undertaken in the context of a multilateral environmental agreement (MEA). The potential conflicts have been increased by the attraction of trade sanctions as ways of enforcing MEAs. Eventually one of these conflicts could have a damaging impact on the credibility of WTO and the trade system. Attempts to agree on the areas of overlap, such as allowable sanctions, are likely in the next few years.

The Doha Round has not included the contentious issue of labour rights on its agenda. Countries have been reluctant to do so since the Seattle Ministerial meeting, at which labour standards played a role in the collapse of the talks. The likelihood is, however, that a closer relationship between the International Labour Office (ILO), with its “core labour standards”, and WTO will be established. One would expect the debate on the extension of the ILO core standards away from human rights towards economic rights to be contentious, and it is possible that agriculture could be caught up in this debate. Currently there have been few conflicts that have emerged on the international agenda (as opposed to the domestic political landscape) on the issue of labour standards in agriculture.²³ But this situation may not last for the next three decades.

Trade and the conditions of competition. A new area on the Doha agenda is the issue of trade and competition. With increasing globalization it is clear that pressures will continue for some degree of harmonization in these policy areas. If the Doha Round were to establish some basic rules in this area, it could take another ten years thereafter to have them in place. Thus, within the timeframe of this study, the emergence of a set of rules governing the competitive behaviour of governments and firms is quite possible. Intellectual property protection was introduced in the Uruguay Round.

A global trade system may need global competition rules. But the way in which those rules will develop is not clear at present. While some are calling for full-scale negotiations on international competition policy, others maintain that the most that can be done is to make sure that each trading country has its own antitrust policy in place. But the minimalist approach is unlikely to be satisfactory for very long. The best policy for curbing misuse of market power in any one country is an open trade system. But the very openness of the trade system allows large firms to develop market power in the world market. Global competition policy should be more about market power in world markets than about enforcing competition policy in each national market.

An emerging competition issue is the concentration of market power in the agrofood distribution chain. This has two separate but related aspects. One is the use of market power by public agencies or by parastatals, given their ability to act in a restrictive way. This issue of “state trading” is coming to the fore in trade talks. It represents a concern among those countries that do not practise state trading that those that do can gain an “unfair” advantage through hidden export subsidies and import barriers. The issue of competition is also at the heart of another potential problem facing the agrofood system. Concentration of economic power is not only confined to public agencies that have monopoly rights in importing or exporting. Private firms can have significant market power to influence prices and the pattern of trade through restrictive business practices. Should there be any rules relating to the use of market power in international markets? What dangers should such rules try to prevent? Is the problem the withholding of supplies to raise the price of commodities? This seems relatively unlikely in the case of basic foods, but could happen with vital supply components. Or is the problem one of dumping and market disruption? The incorporation of antidumping rules in a set of more comprehensive competition regulations is the object of many trade economists. Whatever is agreed will have significant implications for global agriculture.

Trade-related aspects of intellectual property. Less central than the SPS and TBT Agreements but still important in the framework of multilateral food regulations is the TRIPS Agreement. The Agreement imposes on member countries an obligation to provide a minimum standard of protection to a range of intellectual property (IP) rights, including copyrights, patents and trademarks.²⁴ Two aspects are particularly important in the global food regulatory framework, namely the requirement to respect geographic indications, which are widely used in the wine and spirit sector as well as in cheese and other processed food industries, and the obligation to provide protection to new plant varieties (although not necessarily by patents) and to innovations in the area of microbiology.

The issue of the patentability of plant and animal varieties, as well as of GMOs, raises questions beyond the mere protection of IPR, such as questions concerning the rights of local communities and indigenous peoples, and the sovereign rights over natural genetic resources, biosafety and food security.²⁵

The TRIPS Agreement is having a marked effect on the shape of domestic IP regulations, as it was designed to do. Although it is not harmonizing these regulations, it is establishing a template into which domestic regulations must fit. The objective is to avoid trade conflicts that inevitably arise if different countries have different coverage and use different instruments for IP protection. The provision of IP protection does not always facilitate trade since, by providing protection to existing rights holders, new entrants are discouraged. Overprotection can be a problem in this area of food regulation as well as in health and safety issues (see Box 9.2). In addition, IP protection holds significant implications for access to and transfer of technology, particularly to the developing countries. Access to most protected technologies and products, particularly in the seed and biotechnology area, is subject to the terms of licensing agreements dictated by a very small number of enterprises.

Multilateral disciplines for labelling regimes are set out in both the SPS and TBT Agreements of WTO. The TBT rules apply to all safety and quality labelling regimes, except those defined as an SPS measure, i.e. “labelling requirements that are directly related to food safety”. Article IX of GATT establishes rules for marks of origin. The international rules for protection of IPR in the form of geographic indicators are also germane to understanding the WTO framework for the governance of information provision. The TRIPS Agreement sets out importers’ obligations to protect geographic indicators, which are increasingly used to differentiate agricultural products in domestic and international markets. Resolution of conflicts under the TRIPS Agreement is subject to the WTO Dispute Settlement Mechanism.

9.6 Summary and conclusions

The agricultural trade of developing countries has seen a number of important changes. Agricultural exports grew much more moderately than exports of manufactures, resulting in a dramatic decline in the share of agricultural exports from about 50 percent of total exports in the early 1960s to less than 7 percent by 2000. Despite this overall decline in importance, some countries continued to rely heavily on agricultural exports whereby single commodities such as coffee, cocoa or sugar can account for more than half of total foreign exchange earnings.

The surplus in the overall agricultural trade balance of developing countries has virtually disappeared over the past 40 years, and the outlook to 2030 suggests that, as a group, they will increasingly become net importers of agricultural commodities. The group of LDCs already underwent this shift 15 years ago. Their agricultural imports are already twice as high as their agricultural exports. The trade balance of the LDCs will further deteriorate, and their current trade deficit will quadruple by 2030. Within agricultural trade, developing countries recorded a growing trade deficit for temperate-zone commodities, while their trade surplus for tropical products grew only moderately. The trade balance for competing products remained largely unchanged.

These shifts in trade flows have been brought about by market factors and policy influences. On the market side, income and population growth have fuelled robust growth in demand, which could not fully be matched by domestic supply. On the policy front, subsidies and protection in developed countries as well as taxation and industrial protection in developing countries augmented the effects that arose from the market side. Numerous studies suggest that the importance of policy effects is small relative to the effects of market forces and that policy reforms, at least if limited to the developed countries only, would not significantly alter the overall trade picture. These studies also show that the largest portion of welfare effects from freer trade and policy reform in developed countries would accrue to the developed countries themselves.

An analysis of the impacts of OECD policy reform confirms the rather limited impacts of policy factors, at least if policy changes are limited to the agricultural sector of developed countries. If developing countries also embarked on comprehensive reforms reaching beyond agriculture, the benefits could be more significant, with the major part of the additional gains going to developing countries. Farmers in developing countries could benefit the most from domestic reforms that encompassed a removal both of the direct bias against agriculture through taxation, and of indirect bias caused by macroeconomic distortions and industrial protection.

The reduction of OECD farm support may not be sufficient and may perhaps be of only limited benefit to developing countries. However, developing countries are likely to gain substantially from other reform measures, like a move towards a “de-escalation” of tariffs; abolition of consumer taxes; further reduction of the bias against agriculture in their own countries; more and deeper preferential access for the poorest of the poor (LDCs); and open borders for foreign direct investments (FDIs) to enable developing countries to compete more efficiently in international markets (see Chapter 10).

High priority should be given to investments in infrastructure to lower transaction costs for exports, and to investments that help enhance the quality of goods and allow developing countries to meet rising quality standards in international markets. Such investments could be most beneficial for products where developing countries have a comparative advantage, such as fruit and vegetables.

Future developments in the international trade policy agenda will be strongly affected by the speed and extent of farm policy reform in OECD countries. Most developed countries are currently modifying the method of giving protection to farmers in the direction of less trade distortion, although overall support levels remain high. But the crucial questions are to ascertain to what extent the reforms will be permanent, and whether they are the manifestation of a new paradigm, which takes government out of the game of supporting commodity prices and making farming decisions.

The next 30 years may also see a shift in focus within the overall trade agenda. As traditional market access barriers such as tariffs and quotas are reduced, the trade agenda is likely to shift away from traditional issues such as export competition or enhancing market access towards trade restrictions caused by safety, quality or environmental standards. Moreover, as a growing share of trade will be handled through ever larger and more transnationally active companies, there will be a growing need to establish global competition rules. A global marketplace will also augment pressures to work on global rules for the protection of IPR and of geographic indications. In parallel with the shift towards these new trade issues, the importance of the various WTO agreements is likely to change. Future trade negotiations will focus more on details in the SPS, TBT or TRIPS Agreements, and less on the rules and regulations set out by the Agreement on Agriculture.

This shift in the focus of the trade agenda will be accompanied by a change in the relative importance of countries within the multilateral trade negotiation process. Hitherto, the importance of new and emerging issues was largely confined to developed countries and thus the agenda has mainly reflected developed countries’ trade concerns. Now developing countries are having an increasing influence on WTO and its deliberations. But at the same time the cohesion among developing countries is itself being weakened. Some see advantages in firm rules on intellectual property protection, while others fear that they will lose the ability to pursue traditional farming practices. Splits have also arisen over traditional trade issues, notably between those countries that import agricultural goods and those whose main interest is in expanding export markets. Some developing countries wish to retain preferential access to developed country markets, while others see such arrangements as mainly harming other developing countries. Over the next 30 years there is a danger that these divisions may become more pronounced. Countries that are not integrating within the mainstream of the world economy may find themselves poorly served by the global trade system. By contrast, those that play a full role in the global economy will increasingly make use of trade facilitation in such areas as services, intellectual property and investment rules.

¹⁶ Serious doubts have been raised about the plausibility of these estimates. For example, an analysis by Dorman suggests that the estimates only measure the benefits, without fully accounting for the costs associated with the reallocation of resources, etc. (Dorman, 2001).
¹⁷ The dynamic gains often account for the major part of all welfare gains. Estimates for these gains are particularly high when they are based on additional productivity gains that are assumed to emerge when firms start to penetrate world markets and they are forced to adopt new technologies. In addition, firms can benefit from scale economies and a larger market. The assumed underlying relationship between openness and productivity growth applied in these models is econometrically estimated. It should be noted that even the authors of these studies underline that "much more work needs to be done in this area" (World Bank, 2001c, p. 167).
¹⁸ These additional gains are assumed to emerge from "increased savings and investment as policy distortions are removed, and from the opportunities for increased productivity that are linked to more open economies" (USDA, 2001d, p. 6). This means that the gains would only be forthcoming if developing countries embark on domestic policy reform as well.
¹⁹ A detailed description of the underlying model is provided in Schmidhuber and Britz (2002).
²⁰ No allowance is made for possible de minimis provisions that would afford individual countries a subsidy limit of up to 5 and 10 percent of the value of production for developed and developing countries, respectively.
²¹ The scenario also assumes the removal of some US$2 billion of agricultural subsidies (OECD, 2001f) in economies in transition.
22 Negative support is not subject to reductions in multilateral trade negotiations. In fact, there are proposals to maintain negative support and receive credit for negative support in the calculations for the total AMS. In practice this could be implemented by adding up negative non-commodity-specific support with positive commodity-specific AMS and vice versa. The easiest way to remove the bias against agriculture, however, would be to remove taxation on agriculture. It may also be the cost-effective way for many developing countries. Taxation often works through procurement price systems that are easy to administer. Keeping both taxes and subsidies would also add to the administrative burden of policy implementation, an important advantage for many developing countries that often lack the necessary administrative system for more targeted policy measures.
²³ One recent example is that of the use of child labour in the harvesting of cocoa in Africa. Firms are instituting voluntary schemes to avoid such practices, in large part to avoid the consumer reaction that took place in the footwear and clothing industries.
²⁴ The three main intellectual property instruments are copyright, for artistic and literary works; patents and similar devices for inventions, industrial designs and trade secrets; and trademarks, signs and geographic indications for commercial identification. The rights holder is given exclusive ownership or user rights for a specified (in some cases indefinite) period of time. The TRIPS Agreement incorporates and extends previous intellectual property arrangements including the Berne Convention and the Paris Convention, as well as those administered by the World Intellectual Property Organization (WIPO).
²⁵ The Convention on Biological Diversity deals with most of these issues. In addition, the International Treaty on Plant Genetic Resources for Food and Agriculture provides for the conservation and sustainable use of genetic resources for food and agriculture as well as for the fair and equitable sharing of benefits arising from their use, in harmony with the Convention on Biological Diversity.