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Background documents

Trade issues facing Small Island Developing States

I. Introduction

1. It is frequently argued that small island developing states (SIDS)1 suffer specific handicaps arising from the interplay of factors such as smallness, remoteness, geographical dispersion, vulnerability to natural disasters and a limited internal market, in addition to the general problems faced by developing countries.2 The changes that are occurring in the international trade environment for agriculture, including inter alia changes arising from the Uruguay Round (UR) Agreements, are presenting particular challenges for the SIDS. The objectives of the UR Agreements are to curb the use of policies that distort agricultural production and trade and to promote greater transparency and harmonization in the application of technical product standards and measures to protect human, animal and plant life and health. These changes are creating opportunities for all countries to benefit from more competitive and fairer trade, but some of the specific characteristics of SIDS may constrain their ability to take advantage of the new opportunities.

II. Economic and trade profile

2. As with developing countries as a whole, SIDS are a diverse group in terms of their levels of economic development and their competitiveness in global markets for agriculture, fish and forest products. In the higher income SIDS with per caput GDP above US$ 6 0003 (Antigua and Barbuda, Bahamas, Bahrain, Barbados, Cyprus, Malta, St. Kitts and Nevis, and Seychelles4), the agricultural sector (including fisheries and forestry) typically plays a relatively small role in the economy, supplying less than 10 percent of GDP and employing less than 20 percent of the work force. At the opposite end of the scale, the least developed countries (LDCs) in the group (Cape Verde, Comoros, Guinea-Bissau, Haiti, Maldives, Samoa, Sao Tome and Principe, Solomon Islands and Vanuatu) have per caput incomes below $1500 and rely on agriculture for as much as 50 percent of GDP and 75 percent of employment.

3. Most of the SIDS in this study are net importers of agriculture, fish and forest products but several are net exporters. The agriculture, fish and forest product exports of SIDS as a group cover a little more than 100 percent of the value of their imports (1994-96), but this ratio ranges widely, from less than 5 percent for Antigua and Barbuda to more than 200 percent for Cuba (exports twice the value of imports). Ten SIDS are net exporters (Belize, Cuba, Fiji, Guinea-Bissau, Guyana, Mauritius, Papua New Guinea, St. Vincent and the Grenadines, Solomon Islands and Vanuatu). Cuba accounted for 45 percent of all SIDS exports of agriculture, fish and forest products in 1994-96, and along with Cyprus, Dominican Republic, Fiji, Mauritius and Papua New Guinea, the top six exporters supplied almost 80 percent of all SIDS exports.

4. The value of total agriculture, fish and forest product exports from the SIDS has stagnated over the past decade, reaching $8.2 billion in 1994-96 compared with $7.9 billion in 1984-86, while the value of their imports almost doubled from $4.3 billion to $8.0 billion. The exports of SIDS tend to be concentrated in a small number of commodities such as cane sugar, bananas, tropical beverages and forest products, many of which have suffered from a long run decline in real world market prices and slow growth in demand. The index of real prices (1980=100) for sugar fell to 25 by 1990. During the same period, the real price index for bananas fell to 92, and for tropical beverages it fell to 37. Since the early 1990s, the downward price trend for these commodities has slowed or reversed so that by 1998 the estimated real price indices were 23, 90, and 51, respectively.

III. Competitiveness of SIDS in agricultural trade

5. Competitiveness in international markets for agriculture, fish and forest products is a complex concept and one that is difficult to measure empirically. The economic concept of comparative advantage holds that for the most efficient allocation of resources at an international level, and hence for the greatest global gains from trade, each country should produce and export the goods and services which use intensively its relatively abundant resources. Thus a country that is relatively abundantly endowed with labour, for example, will have a comparative advantage in the production and trade of labour-intensive goods. International competitiveness, however, results not only from a country's natural comparative advantage, but from other factors as well including, inter alia; transportation and communication infrastructure; regulatory and financial institutions; and macroeconomic, trade, commercial and sectoral policies. Further, international competitiveness is a dynamic concept, depending on the evolution of conditions within the country and in the global economy. Issues of sustainability and human resource development are important for competitiveness in the long-run. The international trade environment faced by a country - the institutions and agreements governing trade such as the Uruguay Round Agreements, regional trade agreements, and preferential trade arrangements - is a critical factor for its competitiveness.

6. SIDS face a number of challenges, many of which are shared by other developing countries, in achieving and retaining competitiveness in international markets for agricultural products. The small size and geographic isolation of many SIDS present particular challenges in terms of achieving sufficient economies of scale to enable producers to compete in international markets or, in many cases, to compete with imported commodities in the domestic market. Many SIDS depend on a single export commodity and/or preferential access to a single market for a high proportion of their export earnings, making them particularly vulnerable to changes affecting that market. Inadequate transportation and communications infrastructure and weak institutional capacity pose additional challenges for many SIDS in responding to the changing international trade environment. Nevertheless, several SIDS have made significant strides in these areas, and the international community, including FAO, is actively engaged in supporting them with technical assistance. A first step is to identify the areas in which SIDS may have opportunities for improving their competitiveness in international agricultural markets.

7. Given the difficulties in measuring competitiveness, available data are used to examine a simple measure of revealed comparative advantage (RCA) for SIDS in agricultural trade. The RCA is an indicator of trade performance suggesting the tendencies for a country's trade. It is defined as the ratio (in percentage terms) of the country's net exports of a commodity to its total trade in that commodity.5

RCA= (Xi-Mi)/(Xi+Mi)


Xi = exports of product i; and
Mi = imports of product i

8. A value of 100 indicates that the country only exports this commodity, while a value of -100 implies that the country only imports this commodity. Intermediate values imply that the country has both exports and imports of the commodity and a value of 0 indicates that exports and imports are evenly balanced. A ratio greater than 0 suggests that the country may have a comparative advantage in the production and export of that commodity.

9. This indicator has several weakness as a measure of competitiveness, the most serious being that it does not measure a country's "natural" comparative advantage. In other words, it does not indicate what trade would occur in the absence of artificial trade distortions such as import barriers and preferential trade arrangements. Another short-coming is that it does not indicate how important the country's exports are in the world market. Its greatest strength lies in its simplicity, as it requires a minimum of data and is easily understood. Looking at changes in a country's RCA over time in combination with changes in the commodity composition of its exports can indicate where improvements in competitiveness may be occurring and suggest areas for further action.

10. Table 1 contains the RCA calculations for the 33 SIDS, based on FAOSTAT trade data for 1984-86 and for 1994-96, along with the share of each commodity in the country's total exports of agriculture, fish and forest products. For each country, the table includes the commodities having a positive RCA index and an export market share of more than 1 percent in at least one of the time periods covered. For illustrative purposes, the RCA indexes and export market shares are reported for the aggregate categories of agriculture; fish and fish products; forest products; and total agriculture, fish and forestry for each country even if the RCA index was negative and/or the export market share was less than 1 percent.

A. Improvements in competitiveness

11. Ten SIDS were net exporters of agriculture, fish and forestry products in 1994-96, having positive overall RCA indexes, and six of those (Belize, Fiji, Guinea-Bissau, Papua New Guinea, Solomon Islands and Vanuatu) show a stronger overall RCA in 1994-96 than in 1984-86, suggesting that their competitiveness in agricultural markets may be improving. The RCA indexes for another group of seven SIDS suggest that improvements in their overall competitiveness may be occurring. These countries (Bahamas, Bahrain, Barbados, Jamaica, Seychelles, Tonga and Trinidad and Tobago) have negative RCA indexes in both periods but of a smaller magnitude in the latter period.

12. For the countries showing improvements in overall competitiveness, the gains can often be traced to particular sectors and commodities, indicating areas where further opportunities for diversification and growth may be found. Trinidad and Tobago provides a good example of such dynamism. Their overall RCA, although negative in 1994-96, was substantially smaller in magnitude than a decade earlier, declining from -79 to -28, with the biggest changes occurring in the agriculture and fishery sectors. The RCA for fish and fish products strengthened dramatically, from -85 to 29, while the export market share increased from 2 percent to 5 percent. For agriculture, the RCA strengthened from -75 to -19. Within the agricultural sector, Trinidad and Tobago had increasing RCAs and larger export market shares for an array of processed products including pastry, breakfast cereals, beer, non-alcoholic beverages and condensed milk. These products combined accounted for less than 5 percent of Trinidad and Tobago's exports in 1984-86, while a decade later they accounted for almost 35 percent. In contrast, sugar and distilled alcoholic beverages accounted for 60 percent of Trinidad and Tobago's exports a decade earlier but only 25 percent in 1994-96. During the same period, the RCAs for these products increased, indicating that although diversifying its export profile, Trinidad and Tobago remained competitive in these traditional products.

13. Thirteen SIDS demonstrated a comparative advantage in fish and fisheries products in 1994-96 (Bahamas, Bahrain, Belize, Cape Verde, Cuba, Fiji, Guinea-Bissau, Guyana, Seychelles, Solomon Islands, Suriname, Tonga, and Trinidad and Tobago), and several have shown remarkable dynamism in this sector since the mid-1980s. Bahrain, for example, had a RCA of -83 for fish and fish products a decade before compared with 9 in 1994-96, while fish exports increased from 5 percent to more than 30 percent. Similarly, Tonga's RCA for fish and fish products strengthened from 5 to 61 and its export market share increased from just over 5 percent to almost 20 percent. In total, eight SIDS demonstrated strengthening RCAs and export market shares in fish and fish products.

14. Forestry is an important sector for a number of SIDS, and several have shown dynamism in this sector. Eight SIDS had a revealed comparative advantage in 1994-96 and each of them showed strengthening RCA indexes and export market shares over the study period (Belize, Fiji, Guinea-Bissau, Guyana, Papua New Guinea, Solomon Islands, Suriname and Vanuatu). Guyana, for example, increased its RCA for forest products from 22 to 93, while the share of forest products in Guyana's exports increased from less than 5 percent to 15 percent.

15. Relatively few SIDS demonstrated a comparative advantage in agricultural commodities in 1994-96 (Belize, Fiji, Mauritius, Papua New Guinea, Solomon Islands and Vanuatu) and only two (Belize and Vanuatu) had strengthening RCAs over the study period. Several SIDS demonstrated increasing competitiveness in the fishery and forestry sectors, with less dynamism in the agricultural sector. Fiji, for example, showed an overall RCA increase from 26 to 30 during the study period, reflecting large gains in the fish and forestry sectors (from 6 to 32 and from -14 to 24, respectively) while the RCA for agricultural commodities was unchanged. Examination of the commodity composition of Fiji's trade reinforces the impression that the fish and forestry sectors are relatively dynamic compared with the agriculture sector, as their export market shares increased (from 9 to 14 percent and from 4 to 10 percent, respectively) while that for agriculture fell. Despite the gains in fish and forest product exports, sugar remains the dominant commodity in Fiji's trade, accounting for 66 percent of total exports in 1994-96 compared with 68 percent a decade earlier.

B. Problems in competitiveness

16. Despite the successes of some SIDS in international markets for agriculture, fish and forest products, the typical case is less sanguine. Twenty-two SIDS had negative overall RCA indexes and negative RCA indexes for at least two of the three sectors (agriculture, fish and fish products, and forest products). Of these, 16 SIDS experienced a worsening of their overall competitiveness during the last decade (Antigua and Barbuda, Cape Verde, Comoros, Cook Islands, Cyprus, Dominica, Dominican Republic, Grenada, Haiti, Maldives, Malta, Samoa, Sao Tome and Principe, St. Kitts and Nevis, St. Lucia and Suriname). While some of these countries have made gains in particular commodities, several have made little progress. Cape Verde, for example, had an overall RCA of -92, and sector RCAs of -98 for agriculture and -100 for forest products, and even though its RCA for fish and fish products was positive in 1994-96, as noted above, it was lower than a decade earlier (from 93 to 74) while fish as a share of exports increased from 75 percent to more than 85 percent.

17. Several SIDS that depend on a single commodity for most of their exports have shown little diversification since the mid-1980s, and in some cases the situation seems to be worsening. Dominica and St. Lucia still rely on bananas for 80-85 percent of their exports, virtually unchanged from a decade ago, while their previously positive RCAs for agriculture have eroded from 17 to 0 and from 15 to -8, respectively. Similarly, Mauritius and St Kitts and Nevis remain highly dependent on sugar (92 percent and 83 percent, respectively), as does Sao Tome and Principe on cocoa beans (92 percent) and Comoros on vanilla (75 percent), and in each of these countries, their RCAs for agriculture have weakened substantially during the past decade.

18. In general, the larger islands tend to demonstrate revealed comparative advantage in a broader array of products, and more dynamism in moving into new sectors and commodities. Several of the smaller islands remain dependent on exports of a single commodity and have demonstrated little ability to diversify their agricultural sector. Nevertheless, this analysis suggests that there is scope for the further development of agricultural production and exports for an array of products in many SIDS.

IV. SIDS in the international trading system

A. Trade preferences in favour of SIDS

19. The international trading system has not given SIDS any particular consideration as a group, however most SIDS receive some form of preferential access to developed-country markets as beneficiaries of other agreements. Most developed countries including, inter alia, Australia, the EU, Japan, New Zealand, and the United States provide trade preferences for developing countries under the Generalised System of Preferences (GSP).6 Further, many countries provide more favourable preferences to particular groups of developing countries, including many SIDS, on the basis of regional agreements, historical relationships or level of economic development.

20. The EU grants additional trade preferences to 26 SIDS through its Lomé Convention for African, Caribbean and Pacific (ACP) countries; to the Maldives and Samoa as LDCs;7 and to Malta and Cyprus under association agreements. Thus all but three of the SIDS in this study (Bahrain, Cook Islands and Cuba) receive preferential access to the EU market on more favourable terms than those granted to most developing countries. Under Lomé IV, the ACP countries have duty free access to the EU markets on all manufactured products and most tropical products, while their exports of temperate products which fall under the EU's Common Agriculture Policy (CAP) receive more preferential treatment compared to that under other schemes, such as the GSP. In addition to its general provisions, Lomé IV provides special market access under its commodity protocols, three of which are important to SIDS: sugar, bananas and rum. For St Vincent, St Lucia and Dominica, revenues linked to banana exports to the EU generate 40 to 70 percent of all agricultural export revenues, one third of the GDP and half of all employment according to a recent FAO study.8 The US also grants preferential market access to most SIDS under its GSP program, which provides duty-free treatment for a wide range of products from eligible developing countries. The Caribbean Basin Initiative covers a wider range of products than the GSP, providing additional preferences for 22 countries, and the US sugar program grants import quotas to several SIDS. Most Caribbean SIDS receive preferential access to the Canadian market as well, while many SIDS in the Pacific region receive preferential access to markets in Australia, Japan and New Zealand.

B. Uruguay Round Agreements9

21. The UR Agreements represent a milestone in the multilateral trading system: for the first time, agriculture has been incorporated under operationally effective rules and disciplines. The UR commitments in agriculture, forestry and fisheries cover improved market access and disciplines on domestic support and export subsidies. The commitments regarding market access are central to the broader package of interrelated liberalizing commitments aimed at significantly improving conditions of competition and opportunities for trade in agricultural products. The UR Agreements also provide for limiting the scope for circumvention of the new commitments.

22. The UR achievement is contained in a series of agreements and ministerial decisions and declarations annexed to the agreement which established the World Trade Organization (WTO). The 1947 General Agreement on Tariffs and Trade (GATT) is an integral part of the UR. Among the numerous components of the UR Agreements, five have particular relevance for agriculture in SIDS. They are the:

The Agreement on Agriculture

23. The main provisions of the Agreement on Agriculture (AoA) are aimed at improving market access (Article 4), disciplining domestic supports (Article 6), and reducing export subsidies (Article 9). In all three areas the main thrust is to reduce past production- and trade-distorting practices and to facilitate a fair and market-oriented agricultural trading system. The specific commitments of each WTO member are contained in the Country Schedules that form an integral part of the AoA. Within each of the three main provisions of the AoA, developing countries are given special and differential treatment usually in terms of wider latitude in their policy options as well as longer implementation periods. A number of agricultural commodities (e.g. rubber and jute) as well as fish and fish products and forestry products are not covered by the AoA, however these products are covered under other provisions of the UR Agreements, including the Agreements on TBT, SPS, and TRIPS, and of course by the GATT itself.

24. The market access provisions of the AoA include two main features: bound and reduced tariffs and minimum access commitments. The AoA prohibited the use of trade measures other than ordinary tariffs, including such non-tariff barriers as quantitative import restrictions, variable import levies, minimum import prices, discretionary import licensing, non-tariff measures maintained through state trading enterprises, voluntary export restraints and similar border measures except in specific circumstances.10 Countries using non-tariff barriers were required to convert the average rate of protection provided by non-tariff barriers during the base period (1986-88) into a tariff equivalent using a prescribed methodology known as tariffication, thereby establishing a base rate of duty for each product covered by the agreement from which agreed reductions were taken. Where a product was already subject to a bound tariff duty during the base period, that bound rate or the bound rate prevailing on 1 September 1986 (whichever was higher) became the base rate of duty. Members then agreed to reduce their base tariffs by prescribed amounts, resulting in a schedule of bound tariffs for each product covered by the agreement. Member countries agreed to reduce the base rate of duty for each product by a minimum of 15 percent for developed countries (10 percent for developing countries) and the unweighted average of all base rates by at least 36 percent (24 percent for developing countries) during the six-year implementation for developed countries (10 years for developing countries). Alternatively, developing countries relying on unbound tariffs during the base period had the option of offering ceiling bindings on these products. Most developing countries followed this option. Developing countries that offered ceiling bindings and all least developed countries are exempt from the requirement to reduce their base rates of duty. Most SIDS offered ceiling bindings and therefore have no tariff-reduction commitments.

25. Countries undergoing tariffication on commodities for which no significant imports occurred in the base period were obliged to provide minimum access commitments that would allow exporters to supply at least 3 percent of domestic consumption at the beginning of the implementation period, rising to 5 percent at the end of the implementation period, i.e. by 2004. Compliance with minimum access provisions has generally involved the specification of tariff rate quotas (TRQs) at a relatively low tariff rate for each tariffied product involved to be available according to the Most Favoured Nation (MFN) principle. Because current access to developed country markets by developing country exporters has frequently been provided under bilateral trade arrangements in which specified countries are offered market access at preferential tariff rates, these arrangements have been included within the minimum access quotas specified in the Country Schedules of some developed countries, which has occasioned some discussion on the compatibility of such arrangements with the MFN principle. This and other issues surrounding the allocation of minimum access quotas remain unresolved at the WTO.

26. The disciplines on domestic supports in the AoA seek to lessen the distorting effects of domestic agricultural support policies on production and trade. The AoA recognizes the close link between domestic agricultural policies and trade policies, and it enshrines the principle that limitations may be placed on the formation of domestic policy. While in principle the AoA may constrain the policy options of developing countries, in fact it is unlikely to do so both because of the nature of their agricultural support policies and because of specific terms of the Agreement. The AoAprimarily addressed policies in certain developed countries where domestic agricultural subsidies, often used in conjunction with export subsidies, were seen as unfairly distorting world commodity markets to the detriment of producers elsewhere. In contrast, the AoA recognizes that domestic agricultural support policies in developing countries are often justified as being part of a broader economic development agenda.

27. Scheduled reductions in the base total Aggregate Measure of Support (AMS) constitutes the basic mechanism through which the AoA exerts disciplines on the use of domestic agricultural policies. The AMS is calculated according to a detailed methodology which specifies the types of policies which must be included in the figure and which are exempt. Policies that are exempt from inclusion in the AMS and therefore exempt from reduction commitments include, inter alia:

28. As mentioned above, AoA commitments on domestic support are expressed in terms of reductions from the base total AMS. Most developing countries, including most SIDS, reported a base total AMS of zero in their Country Schedules because they had no support policies of the sort required to be included in the AMS during the base period (1986-88). In principle, having a zero AMS in the base period could constrain future agricultural policy formation in developing countries; however, given the wide range of policies that are excluded from the AMS, particularly the 10-percent "de minimis" provisions and other exceptions for developing countries, a considerable degree of flexibility remains in providing support to domestic production, if the countries have the means to do so.

29. Commitments on export subsidies11 were introduced into the AoA principally in response to policies in certain developed countries. Export subsidies have not played an important part in the agricultural policies of most developing countries, and therefore commitments on export subsidies in the AoA generally have few direct policy implications for them.12 Developing countries that did not use export subsidies in the base period are barred from introducing them, except for some temporary and limited measures permitted during the implementation period; specifically, developing countries are permitted to encourage exports with subsidies aimed at reducing the cost of marketing, processing and transport, provided they are not applied in a manner which would circumvent reduction commitments.

30. Export policies of developing countries have tended to concentrate more on export restraints than on export subsidies. These policies have taken the form of export taxes, quotas and prohibitions. The use of such measures on trade in foodstuffs is disciplined in the AoA, but developing countries are exempt from the disciplines unless they are net exporters of the particular foodstuff in question. The country instituting an export restriction or prohibition must give due consideration to its effects on the food security of importing countries, and must notify the WTO Committee on Agriculture as far in advance as possible regarding the nature and the duration of the restraint.

31. Measures for the prevention of circumvention of export subsidy commitments (Article 10) address the issue of food aid shipments. Specifically, donors may not tie the provision of food aid directly or indirectly to commercial exports to the recipient country, should carry out food aid transactions in accordance with the FAO "Principles of Surplus Disposal and Consultative Obligations," and should provide aid to the extent possible in fully grant form or on terms no less concessional than those provided for in Article IV of the Food Aid Convention 1986.

The Agreement on the Application of Sanitary and Phytostanitary Measures

32. The SPS Agreement concerns the application of measures associated with the protection of human, animal and plant life and health in such a way that they do not constitute a means of arbitrary or unjustifiable discrimination between WTO members where the same conditions prevail or as a disguised restriction on international trade. This Agreement recognizes that governments have the right to adopt sanitary and phythosanitary measures but that such measures must be based on scientific principles, should not be maintained without sufficient scientific evidence and should be applied only to the extent necessary to achieve the required level of safety. The SPS Agreement promotes the harmonization of sanitary and phytosanitary measures on the basis of international standards, where they exist; however governments may apply more stringent measures if there is a scientific justification. In the interest of facilitating trade and promoting transparency, the SPS Agreement requires members to publish their sanitary and phytosanitary measures affecting imports and notify the WTO of any changes made to those measures. Developing countries were given two years, and least-developed countries five years, beyond the entry into force of the UR Agreements (the deadline for developed countries) to bring their sanitary and phytosanitary measures affecting imports into compliance with the SPS Agreement. Members agreed to give developing country members special consideration, including technical assistance, in the preparation and application of sanitary and phytosanitary measures.

The Agreement on Technical Barriers to Trade

33. The TBT Agreement seeks to ensure that technical regulations and standards, including packaging, marking and labelling requirements, and procedures for assessing conformity with technical regulations and standards do not create unnecessary obstacles to international trade. It recognizes that a country has the right to take necessary measures, at a level it considers appropriate, to ensure the quality of its exports; the protection of human health or safety, animal or plant life or health and the environment; and to prevent deceptive practices. A country may also take the necessary steps to ensure that those levels of protection are met, as long as the measures or actions taken to implement them do not create unnecessary obstacles to international trade. The TBT Agreement encourages, but does not require, countries to adopt international standards.

The Agreement on Trade-Related Aspects of Intellectual Property Rights

34. The TRIPS Agreement recognizes that widely varying national standards in the protection and enforcement of intellectual property rights and the lack of a multilateral framework of principles, rules and disciplines dealing with international trade in counterfeit goods have been a growing source of tension in international trade relations. Accordingly, the TRIPS Agreement encompasses relevant international intellectual property agreements, provides for adequate intellectual property rights and includes effective enforcement measures to protect those rights. It establishes minimum standards of protection that each WTO member is required to apply in the areas of intellectual property, including the definition of the subject-matter to be protected, the rights to be conferred and permissible exceptions, and the minimum duration of protection. The TRIPS Agreement obliges Members to ensure that intellectual property rights can be effectively enforced by foreign rights-holders as well as by nationals; and permit effective actions against the infringement of intellectual rights that are fair and equitable, not unnecessarily complicated or costly and do not entail unreasonable time limits or unwarranted delays. Of particular interest to agriculture is the obligation under Article 27.3 (b) of the Agreement to provide for the protection of plant varieties either by patents or by an effective sui generis system or by any combination thereof. Other provisions related to agriculture are those on geographical indications (Articles 22-24) and on patent protection for agricultural chemical products (Article 70.8 and 70.9).

The Decision on Measures Concerning the Possible Negative Effects of the Reform Programme on Least-Developed and Net Food-Importing Developing Countries

35. Ministers of countries taking part in the Uruguay Round recognized that the overall results of the liberalization of agriculture would generate increasing opportunities for trade expansion and economic growth for all participants. They also recognized that, during the reform programme leading to the liberalization of agriculture, the least-developed and net food-importing developing countries might experience negative effects with respect to the availability of adequate supplies of basic foodstuffs from external suppliers on reasonable terms. The Ministers agreed to establish appropriate mechanisms to ensure that the implementation of the Uruguay Round in the area of trade in agriculture would not prevent food aid being available at a level sufficient to assist in meeting the food needs of developing countries. To this end, the Ministers agreed to review the level of food aid under the Food Aid Convention; to ensure that an increasing proportion of basic foodstuffs is given to affected countries in fully grant form and/or on appropriate concessional terms; and, in the context of their countries' aid programmes, to give full consideration to requests for the provision of technical and financial assistance to least-developed and net food-importing developing countries so as to improve their agricultural productivity and infrastructure.

C. SIDS Commitments in the Uruguay Round Agreements

36. Twenty-four SIDS are members of the WTO, four have observer status and are seeking membership, and another, Cape Verde, has observer status but is not currently seeking membership. Of the current WTO members, 19 participated in the Uruguay Round of negotiations and submitted "Country Schedules" of commitments under the Agreement. As noted above, in the Uruguay Round of negotiations, developing countries had a choice between tariffying non-tariff measures at their tariff equivalents or offering bound tariff ceilings without regard to tariff equivalents. Countries offering bound tariffs were not required to make reduction commitments. Most SIDS chose the latter option of binding their tariff ceilings, often at very high levels. Only one (Cyprus) made commitments on domestic supports or export subsidies. Notwithstanding the generally light commitments by SIDS in the UR Agreements, a number of SIDS have undertaken significant economic reforms including trade policy liberalisation since the 1980s through regional agreements, structural adjustment policies or unilaterally. All SIDS, whether or not they are actively engaged in policy reforms themselves, face challenges and opportunities in the emerging global trading environment.

37. In the AoA, nine Caribbean SIDS adopted bound 100-percent tariff ceilings for most agricultural products, effective in 1995. Each of these countries identified certain exceptions which typically carry much higher base tariffs, often exceeding 200 percent, to be reduced 25 percent over the ten year implementation period. The lists of exceptions vary from a few items having base tariffs only slightly higher than the general level of 100 percent (e.g. Belize, Dominica, Guyana and Trinidad and Tobago) to virtually the entire tariff schedule for agricultural products with base tariffs approaching 300 percent (Antigua and Barbuda, Barbados, Jamaica, St Lucia, and St Vincent and the Grenadines). The other Caribbean SIDS that made commitments in the UR adopted much lower tariff bindings: Suriname - 20 percent or less; Dominican Republic - 40 percent; Haiti - 50 percent or less. Cuba established a 40-percent bound tariff for most products with others to be reduced to 40 percent by the end of the implementation period. As an LDC, Haiti was not required to make any commitments on tariff reductions, and none of the Caribbean SIDS made commitments on domestic supports or export subsidies.

38. The two Mediterranean SIDS submitted schedules of commitments that reflect their close association with the EU. Cyprus adopted ceiling bindings on its ad valorem and specific tariffs, ranging from the equivalent of 30 percent for wheat and rice to 245 percent for olive oil, and agreed to reduce ad valorem and specific tariffs 25 percent over 10 years. Cyprus also agreed to reduce domestic supports 12 percent and export subsidies 22 percent over ten years. Malta adopted similar tariff bindings and agreed to eliminate state trading and import quotas for agriculture, but made no commitments on domestic supports or export subsidies.

39. Fiji, Bahrain, and the Maldives adopted tariff bindings in the range of 30 to 60 percent for almost all agricultural products, with much higher tariffs for a few sensitive products (e.g. alcoholic beverages). Mauritius bound most agricultural tariffs in the range of 50 to 100 percent, with rates up to 140 percent for some products. These bound tariffs are not subject to reduction commitments, and these SIDS made no commitments on domestic supports or export subsidies.

V. Impact of the Uruguay Round on trade13

40. While the UR commitments made by the SIDS are relatively light, the commitments made by other countries may have implications for SIDS. At the global level, the impacts of the UR Agreements are expected to be modestly positive, as the policies that distort agricultural production and trade are reduced. The UR Agreements are creating opportunities for all countries to benefit from more competitive and fairer trade in primary commodities as well as in higher value processed products,14 however many the SIDS may not fully share in the benefits of trade liberalisation. Because most agricultural exports from SIDS depend on preferential access to developed country markets, the reduction in trade barriers faced by other exporters in those markets may reduce the value of the trade preferences currently enjoyed by SIDS. Further, the AoAis also imposing disciplines on the use of domestic supports and export subsidies in many of the major producers and exporters of temperate-zone agricultural commodities. This may result in world food prices being higher than they would otherwise have been and reduce the availability of subsidised food imports for some SIDS.

41. The overall outlook for agricultural commodity markets in the 1990s, and possibly beyond, is one of a slowdown in growth rates compared with the 1980s, despite the Uruguay Round. On the whole, assessments by FAO and other organizations show that the net impact of the Uruguay Round on commodity markets at the global level is likely to be modest. This is more so for most primary tropical commodities produced and exported by the developing countries, as protectionism was already relatively low prior to the Uruguay Round. As for temperate products such as cereals, meats, vegetables and fruits which are also produced and exported to a more limited extent by developing countries, trade liberalisation could make larger impacts but the Uruguay Round is not expected to impact much as the degree of liberalisation actually effected was generally quite small.

Impact on Commodities of Interest to SIDS

42. Tropical beverages (coffee, cocoa and tea) are not import-competing products in the developed countries and their market access conditions were already relatively good before the conclusion of the Uruguay Round. But during the past 15 years or so these commodities faced declines in real world market prices, for a number of reasons which include the relatively inelastic import demand for these commodities, a sizeable potential for increased output in major producing countries and technological improvements. These factors will continue to dominate the future trends in these markets with the Uruguay Round playing a relatively minor role.

43. The global demand for agricultural raw materials also expanded less rapidly over the past two decades. These commodities suffered more from the growth in the use of synthetic substitutes than from other factors. However, with increasing consumer awareness of environmental issues, they enjoy an advantage for being "natural" products, and therefore the demand for them should hold up better. With virtually nil or very low import duties in most major markets, the impact on trade of tariff reductions on these raw materials has been assessed to be small. The demand for cotton textiles, however, is expected to be positively affected with the lifting of the Multi-fibre Arrangement, even though some SIDS may well lose quota rents from the liberalisation of the trade in textiles.

44. The world banana market is demand driven with very few import barriers in major importing countries other than the EU, where imports are regulated through tariff quotas. As regards sugar, the Uruguay Round changed very little the import regimes in both the EU and the United States, the two largest import markets. World market prices are projected to rise somewhat, but largely due to increased demand for sugar in the developing countries.

45. With the post Uruguay Round import tariffs in the developed countries estimated to fall only modestly, but from already low levels, the impact of the Uruguay Round on the global trade and world prices of processed hides and skins and leather products is assessed to be very small. However, the current trends in increased processing of hides into leather and further into products in the developing countries, in part due to cost advantage but also due to less restrictive environmental constraints, is expected to be sustained.

46. By contrast, several non-traditional agricultural commodities, particularly but not exclusively in the horticultural area, are among the fast growing commodities exported by developing countries, including the SIDS, to the developed country markets.15 Exports have grown rapidly in recent years for a number of reasons, which include consumer preferences, and rising incomes as well as the ability of supplying countries to raise their capacity to supply adequate amounts of these commodities at competitive prices. A recent FAO study16 has shown additional export opportunities for these products as a result of the Uruguay Round. For a selected list of commodities, it has estimated that the value of exports are likely to be 9.8 percent higher in the year 2000 due to the Uruguay Round, compared with a situation without the Agreement.

Loss of Trade Preferences

47. Assessing the value of trade preferences for agricultural products is fraught with difficulties due to the complex nature of the various schemes. Analysing the impact of the AoA on these preference margins is further complicated by the nature of the Agreement because it includes disciplines on market access, domestic supports and export subsidies, all of which may directly or indirectly affect the value of trade preferences. A more fundamental question than the loss of trade preferences is the aggregate effect of trade liberalisation, accounting for the potential gains from liberalisation as well as the potential preference losses. Leaving aside the question of potential gains from trade liberalisation, a number of studies have attempted to measure the value of trade preferences for developing countries and the degree to which multilateral trade liberalisation may affect them. The answer depends on the extent of preferences available initially, the degree to which preferential access opportunities are used, and the depth of multilateral tariff reductions. A recent OECD study finds that the benefits accruing to developing countries from the various preferential trading schemes have been concentrated among a few countries and a few commodities and in many cases the beneficiaries have not fully exploited the opportunities available to them.17

48. A recent FAO study estimated that the AoA could be responsible for a potential loss of preferences worth US$632 million in 1992 dollars for all developing countries, about 25 percent of the total value of preferential margins on agricultural products in that year, with the biggest losses being in fruits and nuts, and tropical beverages and spices.18 Another recent FAO study estimated that the AoA could reduce the value of ACP preferences in the EU market by 122 million ECU, about 17 percent of the value of ACP agricultural preferences and about 2 percent of ACP agricultural exports to the EU.19 These and other studies find that the estimated loss in tariff preferences due to the AoA is not large overall, because the initial benefits attributable to trade preferences are rather modest, the tariff reductions for agriculture are small and, as discussed above, preferential market access for traditional suppliers may be maintained through tariff-rate quota allocations.

49. Although the overall losses due to preference erosion are generally believed to be small, for some SIDS the trade preferences associated with two products, sugar and bananas, are of overwhelming importance. Sugar accounts for more than 30 percent of the agricultural exports20 of the Dominican Republic and Jamaica, more than 50 percent for Barbados and Fiji, and more than 80 percent for Mauritius and St Kitts and Nevis. Bananas account for more than 75 percent of the agricultural exports of Dominica and St Lucia. The value of the sugar preferences arises from the difference between the EU intervention price and the world price for sugar. It is difficult to estimate how this margin might change as a result of the AoA, although in the near term changes are expected to be small. The AoA had little bearing on the banana market, however the EU banana regime which provides duty free access for ACP bananas has been challenged in the WTO. Furthermore, some of the basic premises underlying the Lomé have been questioned. At a more general level, the current trend towards a freer trade in agriculture is likely to hurt countries which fail to improve their competitive position in the market.

International Commodity Prices

50. Regarding the changes in international food prices expected as a result of the Uruguay Round, neither the sharp increase in cereal prices during 1995/96 nor the sharp decrease in 1998/99 can be much related to the AoA.21 The major causes of the 1995/96 price hike have been identified as reduced stocks in the EU and the US (which were related to the policy reforms that were compatible with UR agreed changes), production short-falls related to droughts in the US and Australia, expanded imports by China, and the entry of financial funds into commodity markets. The current low prices have been attributed mainly to bumper harvests and reduced import demand in Asia and some other countries. The food import bills of SIDS appeared to be increasing until the current marketing year, with a decline of as much as 10 percent estimated for 1998/99 because of a combination of factors including lower world prices and higher food aid shipments.

VI. Conclusions and areas for action

51. The challenge faced by the SIDS has several facets including adapting to the potential erosion of tariff preferences currently available under preferential trade arrangements; and responding to the new challenges and opportunities as world trade in agricultural products becomes increasingly free and competitive. The rest of the paper makes some suggestions toward that end, covering some short-run measures aimed at maximising the benefits from existing preferential trade agreements and actions directed at facing the new challenges in the longer run. For the short run, the strategy should focus on taking full advantage of the current preferential trade opportunities, and also of the Uruguay Round openings. For the longer run, the SIDS need to focus their efforts on raising their competitive position in their traditional agricultural exports and diversifying into other fast growing commodities and higher value products. Much can be learnt from other developing countries that successfully transformed the composition of their trade from primary commodities to diversified exports. In-depth review of the implications of the Uruguay Round for agriculture and food security at the individual country level is necessary in order to formulate policy responses to the emerging challenges. Finally, the SIDS should review their food production policies in light of the Uruguay Round and ensure that policies are in place to allow domestic producers to respond to the expected higher agricultural prices in the world markets.

Review the national implications of the Uruguay Round

52. This paper did not consider specific problems of individual SIDS and how they may be affected by the Uruguay Round and WTO issues. Although all countries will feel the consequences of the changing global trading environment, some will be affected more than others. Therefore, in responding to the new challenge, a first step would be to conduct a more thorough assessment of the implications of the UR Agreements for agriculture and food security for individual SIDS so as to be able to identify both the short-term adjustments and a long term strategy to deal with the expected changes. FAO is experienced in providing its members with technical assistance concerning a wide range of UR-related issues.22 In the area of agriculture and food policy, FAO is being asked for assistance in capacity building for agricultural policy analysis concerning trade issues. More detailed advice is being sought about specific policies, analytical methodologies and ways in which policies might be implemented so that countries can take advantage of trade opportunities and make necessary adjustments to domestic food and agricultural policies. Some FAO members that are not members of WTO have been assisted in policy preparation before formal entry negotiations have taken place. The obligations of WTO members associated with the SPS and TBT Agreements have resulted in a significant increase in requests for FAO technical assistance in this area, including legal assistance for the drafting/revision of the legislative instruments necessary to comply with the UR Agreements.

Undertake in-depth analysis on diversification and export competitiveness

53. Faced with the challenge of global competitiveness, the SIDS would benefit from in-depth studies on their comparative advantage in the production and export of agricultural products, including diversification possibilities in commodities and in higher value processed products as well as in new markets. Such reviews should draw from the experiences of other countries and seek to identify factors that have hampered competitiveness. Given the position of many SIDS as net food importers, the importance of creating an environment in which domestic producers can increase food production where economically justified should be emphasized. Several international organizations, including FAO, provide technical assistance in this area.

Learn from the experience of other developing countries

54. There is an untapped knowledge base in developing countries not only with regard to agricultural exports but also to import substitution, including food production. There are successful examples of export diversification and rapid growth among the SIDS, such as Trinidad and Tobago, which provide good examples where appropriate policies created a conducive environment for high growth in the production and export of agricultural products. Several factors have contributed to this, including, inter alia: the ability to effect technological change, thus reducing the cost of production; sound macro economic and sectoral policies that ensure that export commodities are not put at a disadvantage; a tariff structure that ensures that imported inputs are not unduly expensive; investments in infrastructure to reduce the cost of production and exports; a conducive environment for the private sector to take initiative; appropriate legal and other regulatory framework that ensures competition. It is beyond the scope of this paper to discuss all these elements of competitiveness in detail. There is much to be learnt from these success stories, which should be considered by the SIDS.

Take full advantage of current preferential access opportunities

55. While some of the problems behind the under-utilisation of trade preferences are of a more structural nature related to supply constraints, they are in part also due to problems in implementing the various provisions of the preferential arrangements. Many of them can be solved through better understanding of the rules and through consultations with the with the preference granting countries. Second, there remain many products on which MFN tariff rates in the developed markets continue to be high, even after the Uruguay Round. The SIDS may wish to negotiate better preferential access terms for some of these products which they can produce and export. Third, there is the potential in terms of a broad range of currently little-traded products. For example, about one half of the total EU imports of agricultural products, on which there exist potential preferential margins for the ACP, are sourced from non-ACP countries. Fourth, the SIDS export very little in terms of processed products. Recent trends in these exports are encouraging and the scope for such trade has expanded further as tariff escalation has fallen. And fifth, the Lomé IV and other preferential arrangements in favour of developing countries have provisions for technical assistance aimed not only at raising the general awareness of the agreements but also at product development and diversification for export in order to expand the benefits from the agreements. These are not fully exploited. Moreover, it is important that if these opportunities are to be further utilised, it would seem advisable to extend them to the traders and other economic agents within the beneficiary countries.

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