International trade in food and agricultural products
International trade in agricultural products: A commentary on polish international trade in agro-food products
Group discussion on "international trade in agricultural products"
by Aart de Zeeuw
A discussion of trade policy should start with the understanding that for most countries, and certainly for Western Europe, agricultural trade policy is an extension of domestic agricultural policy. We have discussed the economic and social values that Western Europe has placed on the maintenance of a family farm system and viable rural areas. This explains why certain agricultural policies have been developed in the past with the aim of protecting farm incomes.
In general one can say that low cost producing countries (favourable agricultural conditions and/or big farms often with a high level of technology), in particular when they depend on export, defend an open market policy, because they can compete easily on the world market with countries with a high cost agricultural structure (less favoured areas and/or many small farms often with a low level of modem technology). Western Europe has viewed most of its farmers as being unable to compete and has maintained a trade policy that has helped maintain its domestic policies designed to protect its farmers.
A different approach for agricultural and industrial sectors
In most countries of the EU the prevailing belief has been that the farm population could not survive without protection from low cost imports; substantial pauperisation of rural areas could take place with all the negative consequences, both socially as well as with regard to nature and environment. Countries with higher cost agriculture have been unwilling to open their agricultural sectors to liberal trade without support. The easiest way to protect the agricultural sector was through border measures such as high, variable levies or tariffs that maintained internal prices at some politically determined level above world prices. If domestic production exceeded domestic demand export subsidies are used to bridge the gap between the world market price and the higher internal price. For some products in some countries there was a total ban on imports.
Another way of protecting farm income was to use deficiency payments if the internal price dropped below the price guaranteed by the government. This results in large government expenditures when world prices are low.
Both methods distorted competition and trade and the consumer paid the price; either as taxpayer or as a consumer paying high prices.
In the past, most countries in the developed world followed a policy of guaranteeing prices to farmers. Protection using border measures was, and still is, quite common. It is believed in countries like Switzerland, Norway and in quite a few member states of the EU, like Finland, Italy, Greece, Spain, Portugal, the southern part of France and Germany, part of Great Britain (in the north in particular), agriculture cannot survive without high protection. This is also the case in quite a few countries in Central and Eastern Europe. Other European countries, or parts of countries, like Ireland, Denmark, The Netherlands, the Flemish part of Belgium, the northern part of France and Germany and part of Great Britain, can compete. With the start of the EC and during its lifetime, agricultural policy has always been discussed on the basis of the EC's not being able to compete on world markets. High guaranteed prices were deemed necessary for farmers in less favoured areas and were welcomed by farmers in better areas. During the 1980s it became very clear that a rapid growth of production per hectare and animal, partly due to the high price support and partly explained by productivity increases, led to such overproduction, that market distortions (low prices) created trade wars and very high governmental expenditure for price supplements and surplus removal.
The developed world, during the Uruguay Round of negotiations, finally accepted the need to change its agricultural policies in such a way that more open trade would become possible in the future. Direct income support will gradually replace price support. This makes it possible to lower tariffs substantially (other measures of border protection like quantitative restrictions are now forbidden), to replace price supports with income payments and to get rid of export subsidies. The new farm bill in the US is an example of this development; as is, clearly, the change of agricultural policy in the EU for certain products (cereals and oilseeds).
The fanning communities are not happy with this change in agricultural policies. The agricultural sector is confronted directly with changing world market prices and becomes more dependant on the willingness, or even the financial ability of government to support farm incomes directly. On the other hand, the new policy orientation will certainly stimulate a more efficient market-oriented agriculture, more focused on consumer wishes, less dependant on governmental support and more capable to compete in the markets with other suppliers.
To focus our discussion, it seems useful to address some questions on the beliefs and values underlying EU trade policy in agriculture:
· Is international trade in food and agricultural products viewed as a way to dispose of excess production and supplement production deficits, or as a way to benefit from specialisation and comparative advantage to achieve more goods at lower resource costs?· Is it believed that trade works to the disadvantage of domestic producers and should be limited to insure domestic producers protection against foreign competition? Is international competition viewed as fair, and if not, why not?
· Are imported food and agricultural products viewed as improving consumer choice and well-being, or are they viewed as a threat to food quality and safety?
· Are imported food and agricultural products viewed as threats to domestic food security, and if so, why?
Coming back to the questions, mentioned in the beginning of this paper it is worthwhile to remind ourselves that the background of every agricultural policy lies in the fact that production conditions differ from region to region and that in every country most of the land needs to be cultivated.
First question:
Is International trade in food and agricultural products viewed as a way to dispose of excess production and supplement production deficits, or as a way to benefit from specialisation and comparative advantage to achieve more goods at lower resource costs?
In the past foreign markets and international trade were viewed as the least expensive way of disposing of surpluses that could not be used domestically at the internal market price. The reason that this happened lies in an agricultural policy based on keeping internal market prices at a high level. This led to surplus production that could not be used internally without depressing internal prices and could not be exported without subsidies. One may expect that as a result of a change of agricultural support from price support to direct income support, these trade distorting measures will disappear.
The second part of the question concerns the economic benefit of specialisation and comparative advantage in a complete open market without trade distorting support. One cannot deny the logic of this statement and the values that underlie it, but there are other values that say that agriculture must continue to exist in many disfavoured areas (by climate, topography, fertility) for social and environmental reasons (see other papers). The answer to this value conflict lies in an open market policy which forces the agricultural sector to become as competitive as possible, given the physical conditions; and at the same time allows governments to give permanent income support as a compensation for the economic disadvantages in disfavoured areas; as a payment for keeping the environment in good condition or as a temporary support when restructuring of the agricultural sector in certain regions is necessary. This is the direction in which the EU policy is moving.
Second question:
Is it believed that trade works to the disadvantage of domestic producers and should be limited to insure domestic producers protection against foreign competition?
Many farmers in the EU still hold the value that it is their right to produce for the domestic market and that imports should only be permitted if the domestic producers do not produce certain products or when there is a shortage. Many agricultural producers believe that having to compete with producers that have more favourable structures or cost levels is unfair, and they oppose the removal of all border protection.
Third question:
Are imported food and agricultural products viewed as improving consumer choice and well being, or are they viewed as a threat to food quality and safety?
It is the duty of every government, including the EU, to guard the health of the consumers from the importation of unsafe products, and governments are responsible for trade policies to allow for the availability of enough food and a diverse food supply, so that the consumer can be sure of buying the food he wants. Imported food and agricultural products will, in general, improve consumer choice and are not a threat to safety if governments maintain internationally agreed upon health standards (Codex, e.g.). Concerning technical food quality, the consumer is normally able to control that himself.
However, this does not always cover all the related aspects. In particular, the question of quality and safety in relation to the production method are becoming increasingly important values for EU consumers. Internationally agreed upon food standards concern the quality of the products and not production methods used to produce the products. Consumers, in particular in developed countries, demand more and more food products, which are produced in a natural and/or environmentally friendly way (e.g. without the use of chemicals or hormones). In some cases they put pressure on their own governments to limit the use of chemicals (quantity as well as quality), although one cannot prove that the use is dangerous for human health.
In general, one can solve this problem through labelling. The consumer can make his own choice, whether he accepts the normal international standards or special ones. However, it becomes difficult when in response to consumer values on food standards governments develop legislation on food standards which go beyond those that are internationally agreed upon and refuse to allow imports of products which do not meet the higher standards in spite of the fact that they meet the internationally agreed upon standards. A good example is the refusal of the EU to import meat that comes from beef which are treated with natural hormones during their lifetime, in spite of the international agreement mat the use of these hormones is no threat to health. The EU uses the argument that the consumer does not want meat from animals that are treated with hormones. From a legal point of view, this is not a very strong argument, and it is better not to refuse imports and to solve this problem through labelling.
Fourth question:
Are imported food and agricultural products viewed as threats to domestic food security, and if so, why?
The answer to this question depends on the definition of domestic food security. If one defines food security as the possibility to produce domestically enough food to be able to cover the minimum food requirements of the population in times when the import of food is almost impossible, it is an argument to protect domestic production facilities necessary to produce that minimum amount, even when this is only possible with high costs. The consumers in some countries have placed a high value on food security, and producers have used it to support their demands for high levels of protection. For a period after World War II this was a major value held by people in Western Europe, but it seems to have declined in importance in recent years as memories of war-time hunger disappeared into the past.
One can also define food security as the possibility to have enough food available by having access to necessary imports and/or carrying stocks to bridge unexpected periods of shortages. With this definition, it is not necessary to support and maintain costly domestic production.
The choice between the two policies regarding food security depends very much on two aspects. The first one concerns the question of whether we really believe that any country can survive a possible major modem war by producing enough food to meet consumption needs year by year. It would appear better to maintain the capacity to expand production in case of international emergency.
The second one concerns the question of whether food security requires an international trade rule ensuring that it is no longer possible to block food exports. If so, there is no argument to secure the food situation through high cost production of food in normal times, and trade liberalisation does not threaten food security.
During the next five years, the discussion on future agricultural policy in the EU will take place on the basis of papers, prepared by the Commission. The very important Agricultural Strategy Paper (ASP) of December 1995 on the future development of the CAP, also in relation to the expected enlargement of the EU to include the CEE countries, will be followed by papers on different subjects. One may expect that in these papers the favoured option of the Commission in the ASP, in which it is proposed to extend the changed grain policy (lower prices, compensated by income support) to other products, will be the basis for changing the existing policies on different agricultural products.
There are two good reasons for this expectation.
· These policy changes will be consistent with a further liberalisation of world trade of agricultural products.· They also fit into the expected further integration of agricultural policy with rural policy, including social and environmental issues.
Income support instead of price support is a better tool with which to realise this integration, because one can more easily focus the support on the difference in needs of the agricultural sector in various regions (e.g., necessary support in disfavoured regions differs in kind and amount from the more favoured areas).
Expected changes in EU agricultural and rural policies will certainly influence the development of agricultural and rural policies in the CEE countries for the simple reason that as soon as they join the EU, they must be prepared to accept the EU regulations. Seen in that light, it seems worthwhile for the CEE countries, before shaping their own policies, to look very carefully at what happens in the EU.
In summary, beliefs and values regarding the need to maintain and protect farms and rural areas from conditions that would destroy them have led to a number of domestic agricultural policies in the EU. The form of those domestic policies was to maintain high domestic farm prices supported by restrictive trade policies that limited competition from lower cost imports. These restrictive trade policies were supported by values that called for food security through domestic production and for the elimination of unfair competition, which was defined as competition from producers with lower costs.
Now EU domestic policy is putting less emphasis on maintaining high internal prices to assist small farms and disadvantaged areas. Changing beliefs and values shift programmes toward income supports based on environmental protection and rural development. This allows the EU to move toward a more liberal trade policy with less emphasis on high levels of border protection.
by Leszek Klank
The paper on trade policy in the EU raises the most important issues related to international trade in agro-food products. Let me concentrate only on selected issues, which are very strictly connected to the topic of the seminar. I would like to concentrate on competitiveness of Polish international agro-food trade and on changes of values in this area.
For many years exports have had a significant influence on economic development of the Polish economy. This includes agro-food trade too. International trade, and particularly exports, is believed to be one of the main factors of the development of the Polish economy. It is even called an engine (locomotive) of development. Polish trade policy has as its chief aim expansion of exports.
The reason for such a policy is as follows. Growth in agricultural exports would cause the incomes of farmers to rise, which in turn would improve agricultural productivity and production.
In the last six years of the transformation of the Polish economy there have been rapid changes in international trade. In 1995, the value of exports increased by almost 33 percent and imports by 35 percent over 1994. In 1994, exports rose by 22 and imports by 15 percent, compared to the previous year. In the years 1992-1996 the value of international trade was as follows (Table 1).
TABLE 1. Value of Polish international trade - 1992-1996 (billion US$)
|
|
1992 |
1993 |
1994 |
1995 |
1996 |
|
Export |
13.2 |
14.1 |
17.2 |
22.9 |
23.8 |
|
Import |
16.1 |
18.8 |
21.6 |
29.1 |
28.8 |
|
Balance |
-3.1 |
-4.7 |
-4.4 |
-6.2 |
-5.0 |
Source: Ministry for International Economic Co-operation, MWGzZ, Warszawa, 1996.
According to recent information provided by the government, the trade balance at the end of 1996 reached minus 12 billion US dollars. This is the largest trade deficit in recent Polish history. Polish exports slowed down in the years 1992 and 1993, mainly due to economic recession in Western Europe. At the same time imports increased as a result of Poland's growing integration into the world economy and growing domestic consumption. Exports strongly recovered in the period 1994-1996 in line with European recovery. These tendencies prove that Poland's economy is not closed anymore.
Since 1993, there has been a systematic increase in the trade of agro-food products. In 1995, Polish agro-food exports increased by 20 percent to US$ 2.5 billion while imports amounted to almost US$ 3 billion and increased by 23 percent over the previous year. The trade deficit in agro-food products increased in 1995 by about 45 percent (US$ 476 million from US$ 327 million in 1994). The share of agro-food exports in total exports decreased from 11.9 percent in 1993 and 12.1 percent in 1994 to 11.0 percent in 1995. The same tendency occurred in the imports; the share of agro-food imports dropped from 11.9 percent in 1993 to 10.3 percent in 1995. Comparing official data on international trade, one has to take into consideration very important non-registered, cross-border trade, especially between Poland, Germany, Russia and the Czech Republic. According to estimates made by the Central Statistical Office in 1995, the value of total cross-border trade amounted to US$ 5.8 billion; for 1996, this trade is predicted to reach US$ 7.2 billion. We can assume that 10 percent of the cross-border trade is attributed to agro-food trade. Despite rapid growth in trade, the integration of Poland with the world market is still relatively low. The share of Polish exports in world exports is about 0.5 percent, whereas Poland accounts for 0.7 percent of the world population. The value of exports per capita is still very low compared to other European countries.
The European Union is still the major trade partner of Poland. The share of the European Union both in exports and imports remains about 55 percent.
There has been a declining trend in the trade between Poland and the European Union in recent years. However, there is a completely different trend in trade with Former Soviet Union (FSU) countries. This trend also shows the changes in values. After the break-up of the Soviet Union in 1989, there was a drastic reduction in the trade with the FSU. The share of Polish trade with FSU was reduced to less than 10 percent. One has to remember than until 1989 the Soviet Union was Poland's major trade partner. In early 1950s, the Soviet Union was the almost exclusive trade partner for Poland. Polish society was against any trade with the Soviet Union. The society believed that trade with the Soviet Union was unfair, unjust. There is some evidence that society was right to some extent (e.g., low prices for Polish coal paid by Russians during so-called Stalinism period). These unfair low prices for Polish exports were somehow regulated by N. Khrushchiev, and in 1989, Poles still remembered the times of exploitation.
TABLE 2. Value of exports per capita in selected European countries 1995 (billion US$)
|
Country |
|
|
Poland |
600 |
|
The Czech Republic |
1,388 |
|
Spain |
1,616 |
|
France |
4,029 |
Source: Ministry for International Economic Co-operation, MWGzZ, Warszawa, 1996.
It is interesting that the Soviet society believed that the Soviet Union supported all communist countries, including Poland via trade agreements. The Russian people believed that that they had to pay a contribution to keep the communist system running in other countries. All of this created special values, and led to unpleasant relationships between Poles and Russians. Poles believed that trade with the Soviet Union led to worsening their standard of living. Similar beliefs were held on the Russian side. The quality of exported goods within Comecon countries was extremely low.
The best quality products were from Yugoslavia and East Germany. After liberalisation in 1989, trade with the Soviet Union decreased dramatically. The solidarity government went along with society's values and beliefs. At that time there was an official policy of the state to minimise trade relations with the Soviet Union. This policy has changed since 1994. The figures below illustrate the relations with the Soviet Union and Former Soviet Union countries in agro-food trade (Table 3).
TABLE 3. Polish trade with the Soviet Union/Russia and FSU countries (million US$)
|
Year |
Export |
Import |
|
1986 |
170 |
40 |
|
1990 |
70 |
15 |
|
1994 |
600 |
100 |
|
1995 |
800 |
100 |
Source: Ministry for International Economic Co-operation, MWGzZ, Warszawa, 1996.
In the years 1994 and 1995, the share of the FSU countries in total agro-food exports was 28 and 31 percent, respectively. Now, nobody in Poland talks about unfair trade with Russians. Poles want profitable export business irrespective of the nation buying the goods. In their business they do not pay attention to history and bad experiences. Money is the key value for them.
Another important issue is the competitiveness of the Polish agro-food sector. Competitiveness is a very complex and dynamic issue. The rapid transformation of the Polish economy and changes in the world's economy are, for example, resulting both in a gradual rise of domestic input prices and changes in price relations. Some factors often noted for Poland's competitiveness in agro-food products are still low costs of labour and land. They have a significant influence on costs of farm products, as raw materials for the food processing industry.
As already mentioned, competitiveness is a dynamic process influenced by many factors. The most important are:
· Appreciation of domestic currency.· Economic growth causing increase of input prices, especially labour.
· Production efficiency improvement resulting from the economy restructuring and adoption of new technologies.
· Improvement of distribution efficiency that leads to lower transaction costs, trade margins, etc.
· State policy towards international trade, e.g., protection of the domestic markets, promotion of agro-food exports on the foreign markets, etc.
A majority of Poles believe that Polish agro-food trade is competitive on the international markets, not only because of low costs of manufacturing, but also because of special taste, good quality, specific methods of production (e.g., pigs fed with potatoes). Also international trade has a positive influence on the competitiveness of Polish agriculture. It has forced our producers to compete both in domestic and foreign markets. This leads to the improvement of the quality of products, better preparation of products for sale (packaging), and enlargement of the products offered for trade (variety).
Increased imports have had a significant impact on consumers, who now have better access to new products, a larger variety and higher quality products. The Polish currency (zloty) exchange rate to foreign currency, especially the dollar, is particularly important for the competitiveness of Polish international trade, and agro-food trade as well. One has to remember that about 45 percent of transactions in Polish international trade are made in US dollars. Thus, appreciation of Polish zloty against the US dollar leads to a decrease of Polish exports. Such a situation existed in 1995.
Although the main goal of Polish policy is political and economical integration with the European Union, our trade relations in the near future are in CEFTA, the Former Soviet Union countries and probably the Far East (China). The quality of Polish products is still not very high, making it extremely difficult to compete within European Union countries. This applies mostly to industrial products (e.g., textiles), not to agricultural products.
The discussion focused on the trade policies and trade activities in Central Europe under the old central planning system and the impact it has had on current policies and trade patterns. There was general agreement that under the old system the purpose of trade was to fulfil the plans. Producers of the various traded products had no decisions as to what was produced and traded, and often they did not know who the final consumers were of the products they produced. Under the old system there was no value placed on product quality and quantities needed to fulfil consumption plans were most valued.
Since most of the agricultural exports under the planned system were to the Soviet Union there was a general belief that the exports were at the expense of domestic consumers, and there was a belief that the terms of trade with the Soviet Union were unfair. Trade policy under the old system was basically protectionist. Imports were for the purpose of filling consumption targets, and internal competition was not allowed. Thus, neither import nor export trade served the purpose of improving domestic efficiency or of improving the use of resources by taking advantage of the comparative advantage of the country.
The movement to a sophisticated market-driven trade system is proving difficult. Among the difficulties is the fact that government officials in the Central European countries do not understand the new system and how to negotiate effectively within it. Two cases were cited to illustrate this point. The first is the experience of the Hungarians, who are being threatened with action in the World Trade Organization for failing to comply with the limits on export subsides that they agreed to in their country schedule filed as part of their Uruguay Round commitments. There was some discussion that the Hungarian commitments were made without understanding their implications and that it is unfair for countries such as the United States to insist they honour the commitments. However, it was agreed mat if the Hungarians were allowed to ignore their commitments to limit export subsidies, other countries would do the same, including the EU.
The second issue was the belief that the EU had taken unfair advantage in negotiating the association agreement with Central European countries by negotiating import quota systems whereby the EU importers control all of the imports and obtain all of the quota rents.
Despite the misgivings about the fairness of trade with the Soviet Union under the old system, trade with the FSU is growing rapidly in recent years. One reason is that the products from Eastern Europe often are not competitive in EU markets in terms of processing or packaging, but they are competitive in the FSU as their consumers move to higher quality products. There apparently is a widespread feeling among producers and processors in Central Europe that they do have a comparative advantage in food and agricultural products, and they expect to become fully competitive in the EU when the trade barriers into the EU are dropped.
There was a discussion about the status of trade policy in Central Europe. It was suggested it has gone through three stages. The first stage was liberalism, with open borders and little protection. The second stage has been reality that came when they recognised that the trade policies and practices of other countries could create serious internal problems and pressures for domestic producers. They became especially conscious of the impact of dumping and export subsidies into their markets, and the barriers and tactics used by others to impede their exports.
This has led to the third stage of trade policy, which is pragmatism. The Central European countries are now moving to policies that are responses to the trade policies of other countries, such as dumping or export subsidies, but they have not yet developed coherent trade policies that are consistent with and related to their domestic agricultural policies. This may be in large part due to the fact that the Central European countries have not developed comprehensive agricultural policies.
Finally, there was a discussion of the fact that the EU is moving away from a trade policy that is entirely an extension of domestic agricultural policy. The decoupling of domestic subsides allows this change. In addition, new values are becoming import in EU trade policy. These include values relating to production processes, and the desire of animal rights groups and others to bar imports produced in certain ways or from certain countries. As yet, these values have not become major policy determinants in Central Europe.
