What you will learn

• The trading opportunities arising from the commitments made by developed and developing countries with respect to market access, export subsidies and domestic support.
• The extent to which the commitments made in the round will have an effect on global agricultural liberalisation.

The implications of the loss in preferential access for developing country exports into developed country markets.
• The impact of the Agreement on specific agricultural commodities.

• The implications of the new external trading environment on food security.

The Punta Del Este Ministerial Declaration stated that there was :

"an urgent need to bring more discipline and predictability to world agricultural trade by correcting and preventing restrictions and distortions, including those related to structural surpluses so as to reduce the uncertainty, imbalance, and instability in world agricultural markets."

In this section we will examine the extent to which this might be achieved through the Agreement on Agriculture.

The share of developing countries in world agricultural trade is relatively small (25% of world exports in 1992), but of more importance is their growing share of world imports of agricultural commodities. The commitments undertaken in the Agreement are likely to have a significant impact on this trend, with the most significant impact resulting from the commitments undertaken by developed countries with regard to export subsidy reductions. If implemented in accordance with the letter and spirit of the agreement, the commitments in each of the following three areas should in principle contribute to an expansion of market opportunities at the global level.

• Reductions in domestic support reducing high cost domestic supply, should create one of two effects: a reduction in the supply available for exports, or an increase in import demand.
• The reduction in export subsidies should increase the opportunities on world markets (in terms of volume and/or prices) for non-subsidising exporters.
• Market access commitments in terms of specific tariff quota commitments provide an assured access to markets; the reduction of existing tariffs can provide improved access opportunities; and the tariffication process results in the binding of all agricultural tariffs.

4.1.1 Market access: Tariffication, tariff cuts and bindings

The Box above provides a quick review of the commitments undertaken with respect to market access, detailed in chapters 2 and 3, with the focus on the commitments required from developing countries.

The commitments undertaken with respect to market access by developing countries highlight three elements which warrant particular attention.

• First, the process of tariffication shall leave virtually no Non-Tariff Barriers affecting agricultural trade, with clearer transparency for agricultural traders and policy makers. This will be reinforced by the binding of virtually all tariffs. The extent of binding prior to the Uruguay Round are highlighted in Table 4.1. From this we can see that prior to the Agreement 18% of agricultural products were bound by tariffs. This figure is almost 100% with the implementation of the Agreement. Table 4.2 highlights the gains to developing countries through tariff reductions in developed countries.

Table 4.1 Pre- and post-Uruguay Round scope of bindings for agricultural products (Number of lines, billions of US dollars and percentages)

Source: GATT Secretariat.

Table 4.2: Tariff reductions on agricultural products (% reductions, unweighted reductions)

Source: GATT (1994a) Table 11.

• Second, the tariffication process has resulted in a number of very high bindings among developing countries. In some cases they represent only minimal cuts. The products affected are similar to those in developed countries i.e. cereals, oilseeds, meat and dairy products but also include some tropical products e.g. coffee, tea and spices. These reflect the "Ceiling Bindings" afforded to Developing Countries which on the whole reflect higher rates than previously applied but unbound MFN rates (not taking into account the effect of NTBs).
• Third, of particular interest are the tariff quota commitments. The highest commitments are provided for cereals, followed by vegetable oils and oilseeds. The countries with commitments in this area are shown in Table 4.3. In many cases tariff quotas have simply been a means of converting voluntary export restraints (VERs), with the quotas being allocated to the same countries. This implies no significant impact initially since exports would enter under the same price structure giving the exporter the same quota rents. The benefits with tariff quotas are that they will not be reduced under the terms of the Agreement, and will provide greater market security for the beneficiary. A final point of note is that many VERs were represented as current access commitments in country schedules.

Table 4.3 Developing countries with commitments in respect of access quotas and export subsidy and domestic support reductions

Source: Part IV of Schedules of Concessions annexed to the Marrakech Protocol of April 1994.

4.1.2 Domestic support reductions

The commitments for domestic support reduction have been detailed in Part I of this manual. The stipulation that it is the aggregate AMS which must be reduced means that there are no commitments to reduce support for individual commodities. This removes from the agenda the politically contentious areas of internal support such as rice in Japan, sugar in the EU and US, and dairy products in most of the OECD countries.

The impact of these reductions in the AMS are more likely to be felt in the longer term following the implementation period

• In future, countries will have to consider ways to assist farmers via policies that are not trade distorting. This will be reinforced by the fact that the effect on domestic support levels is in nominal terms and this will thus be eroded with inflation.

Reductions in support to agricultural producers in both OECD and developing countries are highlighted in Table 4.4.

Table 4.4 Reductions in Domestic Support to Agricultural Producers
(Millions of US dollars)

Source: GATT Secretariat.

The countries that have applied non-exempt forms of domestic support were listed in Table 4.3 and highlighted in Table 4.6 above. The developed countries included in the Table are those of export interest to developing countries. The reduction commitment (13.3%) applies to a base period total level of support to agricultural producers e.g. Mexico $9.7 billion and Venezuela $1.3 billion. Thus, by the end of the implementation period the levels of support in these countries will be reduced to $8.4 billion and $1.1 billion respectively.

As in the case of market access there is debate over the extent to which the commitments undertaken represent real reductions. As we have seen the calculation of the base AMS, to which the cuts apply, is based on levels of support between 1986-88, a period characterised by relatively low world market prices for agricultural goods and hence high levels of support to farmers.

• The combination of higher world prices in the current period and domestic reforms undertaken during the Uruguay Round years, means that any reductions in domestic support may have little significant impact in the short to medium term.
• In any case, the reduction commitments are of more significance in developed than in developing countries. The main concern for developing countries will be the avoidance of policies which increase their AMS in the future.

• Unlike the commitments made with regard to market access and domestic support the commitments on export subsidy reductions are most likely to be achieved and probably have the most significant positive impact on developing countries. This is because the subsidisation of domestic over-production onto the world markets was one of the most contentious issues during the negotiations and are thus most likely to be scrutinised by the WTO members.

Table 4.3 indicated the developing countries with export subsidies that are subject to reduction commitments. The products most affected by the export subsidies across developing regions include sugar, rice and vegetables. However, with the exception of Mexico and Colombia, export subsidies amongst developing countries are low or not maintained.

The extent of export subsidy reduction commitments is shown in Table 4.5 while Table 4.6 shows country specific commitments.

During the implementation period the value and quantity of direct export subsidies will be reduced by 36%. This represents a fall from $22.5 billion to $14.5 billion, half of which will be accounted for by the EU. These reductions will have a positive impact for developing exporting countries in traditionally heavily subsidised markets: wheat, beef, coarse grains, dairy products and sugar.

The reduction in the use of export subsidies, although presenting some potential difficulties for net food importing developing countries, should prove beneficial for developing country exporters.

Table 4.5: Export subsidies: Aggregate quantities and reduction commitments of OECD countries for selected commodities

Source: UNCTAD secretariat compilation based on Part IV of Schedules of Concessions annexed to the Marrakech Protocol of April 1994.

Table 4.6 Export subsidy reduction commitments by country (Millions of US$)

Source: GATT Secretariat.

Notes:
1. Commitments converted to US dollars using 1990-91 average exchange rates. Reduction commitments apply to individual product categories as defined in this table.
2. Countries having submitted schedules which do not maintain export subsidies include: Algeria, Antigua and Barbuda, Argentina, Bahrain, Barbados, Belize, Bolivia, Brunei Darussalam, Cameroon, Chile, Congo, Costa Rica, C�te d'Ivoire, Cuba, Dominica, Dominican Rep, Egypt, El Salvador, Fiji, Gabon, Grenada, Gambia, Ghana, Guatemala, Guyana, Honduras, Hong Kong, India, Jamaica, Japan, Kenya, Korea, Kuwait, Macao, Malaysia, Malta, Mauritius, Morocco, Namibia, Nicaragua, Nigeria, Pakistan, Paraguay, Peru, Philippines, St Kitts and Nevis, Saint Lucia, St Vincent and the Grenadines, Senegal, Singapore, Sri Lanka, Surinam, Swaziland, Thailand, Trinidad and Tobago, Tunisia, Zambia and Zimbabwe. Least-developed countries are exempt from export subsidy reduction commitments.

The gains through the reduction in export subsidies are significant but should be tempered with the knowledge that at current levels subsidised exports will still account for a third or more of the trade in beef, wheat and vegetable oils, while a fifth of poultry and course grains can still be subsidised. There will still be considerable distortions despite the achievements made by the Agreement.

4.2 The loss of preferential trading agreements

4.2.1 The general impact

The commitments made towards the greater liberalisation of world trade and the trade in agricultural products will clearly have an impact on developing countries with regard to the level of preferences they will enjoy.

The rationale behind the granting of preferences was the recognition that developing countries needed concessions to be able to compete, even in traditional markets, with more technologically advanced and competitive suppliers.

• In practice this enabled the recipient to sell products into the preference giving country either at a lower price than non-preference receivers and consequently capture higher sales, or sell at the same market price and receive higher returns because of lower tariffs.

African countries have been the main beneficiaries of preferential arrangements. Table 4.7 shows the level of tariff concessions for a group of sub-Saharan countries which are particularly reliant on provisions. The potential value of preferences given by the EU, Japan and the United States in the agricultural sector in 1992 were estimated at US$1.9 billion, with one third going to developing countries in Africa, 40% to Latin America and the Caribbean, and the rest primarily to the Far East and Oceania. The reduction in MFN rates after the UR will lead to a fall in value of preferences by US$0.8 billion: 0.2 billion in Africa, 0.3 billion in Latin America and the Caribbean. (FAO 1995)

Table 4.7 Tariffs faced by least developed Sub-Saharan African countries

* Negative sign indicated positive preference
Source: Lal (1994 Table 5) as cited in Harrold (1995).

Table 4.8 indicates how small the level of preferences are now. In many cases, we can observe that the MFN rate is below the GSP. In some cases it has fallen to zero. The focus of the negotiating rounds is the reduction of MFN tariff rates. MFN tariff rates are now low and will become lower at the end of the implementation period of the Agreement: tariffs were 6% on average at the beginning of the Round and will be 4% at the end across all sectors.

• The importance of the MFN rates is that their level determines the size of benefits from a preference: the lower the tariffs the less the preference is worth. For example, most African countries enjoyed duty free access or tariff rates of 0-5% through GSP or Lome Convention Agreements which have been eroded via a loss in their margin of preference and loss in competitiveness.

Table 4.8 Erosion of GSP

Notes: No account has been taken of special rates applicable to LDC's in Japan.
Averages: Weighted averages are calculated from lines for which preferential rates (ACP and GSP) exist and total import value for the tariff line is not less than $1000.
Loss of Preference is calculated as the difference between the old and new preferential margins at the end of the adjustment period.
Sources: UNCTAD (1994), Review of the Implementation, Maintenance, Improvement and Utilisation of the Generalised System of Preference, Geneva: UNCTAD, Organisation of African Unit (1994), Report of the Secretary General on Preliminary Evaluation Results of the Uruguay Round of Multilateral Trade Negotiations of the General Agreement on Tariffs and Trade (GATT), Addis Ababa: OAU.

The impact of the loss of preferential margins is likely to be felt most by the least developed countries. 48 countries are identified as least developed of which 39 are in receipt of ACP preferences from the EU. Table 4.9 reflects the particular situation faced by the Least Developed Countries in the Quad markets, i.e. those of EU, USA, Japan and Canada. The table takes into account, on a tariff line basis, the most favourable treatment applicable to LDCs in agricultural markets. It is estimated that the erosion in preferences is most significant in the case of tropical products imported by the EU, where the loss of preferential margins for non-tropical and tropical agricultural products are 29% and 45% respectively. The loss in non-tropical products in the Japanese market is as high as 63%.

Table 4.9 Average erosion of preferential margins for imports from the Least Developed Countries in Quad markets (percentages)

Note:
a = margin prior to MFN tariff reductions
b = margin after MFN tariff reductions
c = margin loss (percentage points)
d = erosion of preferential margin (percentage)
Source: UNCTAD Trade Control Measures Information System.

• Overall the erosion of preferences is significant. There are likely to be losses of export market share for some least developed countries where the trade creation gains do not overcome the loss in preferential access.

It is the extent of trade creation which is subject to most debate. In the next section we draw on one source of data estimating the impact of the Agreement in this respect. Commentators are divided on the issue but there has been substantial concern expressed regarding the implications for food security. This issue will be considered later.

4.3 The impact of the Agreement on Agricultural Trade Liberalisation

4.3.1 Overview of the agricultural trading environment after the UR

A range of quantitative studies have been undertaken analysing the implications of the Agreement for international trade. The models have used different assumptions, but have in general overestimated the extent of liberalisation in this respect, and thus overestimated the impact on the net food importers. In this section we will examine the impact of the Agreement on the trade balances of developing countries in general, and on key food commodities of significance for developing countries.

Our discussion on the implementation of the market access commitment emphasised that it is unlikely to result in any significant gains for developing countries. In fact, the overall impact of the Agreement is barely significant. Developing countries as a group are net-food importers: higher world prices will lead to a higher import bill, but higher by $240 million from a total import bill of $18 billion. There will be gains for a few exporting countries in Latin America and for Thailand, as a result of these higher prices, but these will also bring difficulties in import finance for many countries, especially in sub-Saharan Africa. This issue is discussed below, and the numbers warrant special attention.

In this section we will draw heavily from the recently published FAO projection to the year 2000. There have been a number of quantitative studies regarding the impact of the Agreement, and the FAO projections represent the most recent.

The FAO model accounted for 59% of the agricultural commodities traded excluding cotton and horticultural products. It takes into account the Uruguay Round changes as well as changes in national policies, and estimates the impact up to the year 2000. The commodities studied include wheat, rice, coarse Grains, oils and fats and oilmeals, sugar, meat, milk and milk products, coffee, cocoa, tea, bananas, hides and skins.

4.3.2 The general impact

The general findings of the FAO study estimated that

• The global value of world trade of the principal agricultural commodities is expected to rise by US$55 billion between 1987-89 and 2000, US$15 billion of this increase can be attributed to the UR.
• The overall growth in production is projected to decline slightly compared to the 1980's. The impact of the UR on production is negligible.
• The growth rate in global consumption of agricultural commodities is projected to decline. Per caput consumption is likely to decrease for dairy products, grains, beef and coffee, while there will be increases for vegetable oils, some meat, tea, bananas, cocoa and rubber.
• On balance, the Agreement will lead to a small reduction in consumption growth in low income, food deficit countries.
• Developing countries import growth rate will decline for cereals, oilseed, dairy products, and some meat and tropical products. Bovine meat and banana imports are likely to accelerate.
• Export growth is likely to be more rapid than in the 1980's for rice, coarse grains, dairy products, tea, sugar and bananas.

4.3.3 The regional impact

Africa

In general, African countries tend to be importers of food, particularly wheat, rice and dairy products. The region consists of over 50 countries of which 28 are classified as least developed and 43 are low income food deficit countries.

Based upon the FAO projections Table 4.10 highlights the impact of the Agreement on commodity imports and exports.

Table 4.10 Developing countries in Africa: Projected agricultural trade balances to the year 2000

a Estimated effect of the loss of export subsidies on the imports of the subsidy receiving countries
b Estimated loss of the potential value of preferences provided by the major preference giving countries
Source : The Impact of the Uruguay Round, FAO 1995.

• The increases in projected prices of temperate food commodities indicate that the food import bill will rise from US$8.4 billion to US$14.9 billion by the year 2000, although only US$0.9 billion (17%) of this increase can be attributed to the Agreement. The increase is largely due to other factors, most notably population growth.
• There is a likely US$100 million gain as a result of export subsidy reductions, but the underlying cause for concern is the growth in the consumption of basic foodstuffs particularly in rice, maize, oilseeds and poultry which is not by growth in domestic production. These trends would exist with or without the Agreement.
• Overall, the value of agricultural exports will rise from US$7.1 billion to US$10.2 billion by 2000. US$800 million can be attributed to the Agreement. But the loss in preferences is expected to reduce this by US$200 million.

• Increase food production
• Promote the diversification of their export sectors

Latin America and the Caribbean

The region as a whole prior to the UR was a net importer of cereals although several countries in the region are net exporters, e.g. Argentina and Uruguay. One country in the region is classified as least developed and 9 are low income food-deficit countries.

Table 4.11 highlights the trade gains and losses for developing countries in Latin America with, and without, the Agreement.

Table 4.11 Latin American and Caribbean developing countries: Projected agricultural trade balances to the year 2000

a Estimated effect of the loss of export subsidies on the imports of the subsidy receiving countries
Source : The Impact of the Uruguay Round, FAO 1995.

• Higher international prices for most agricultural commodities are expected to increase the food import bill although a large part of the increase in imports can be attributed to income and population growth. The overall impact of the Agreement is to boost the value of imports by US$0.9 billion, although import volumes are expected to stay the same or show a small decline.
• Unlike for Africa, there are substantial gains in the export of agricultural commodities. For the commodities covered in the analysis, growth is expected to be 3.8% per annum. Assuming a similar growth in commodities not included in the study, exports could reach US$46 billion, the effect of the Agreement is estimated to be US$3.0 billion despite the loss in preferences. The gains lie in grains, oilseeds, oilmeals and some livestock products. But these gains are highly concentrated: i.e. in Brazil, Argentina and Uruguay.
• The overall trade balance is estimated at US$29 billion by the year 2000 with US$2.1 billion attributable to the Agreement. But as we highlighted, this masks regional differences. South America will make significant gains whilst Central America will make some gains without any major shifts. The net loser in the region is the Caribbean which relies on a narrow base of exports reliant upon preferential access.

The Far East

The Developing Countries in the Far East are overall net exporters of rice, fats and oils and tropical products, and net importers of other cereal and milk products. Import increases are forecast to be significant for feed commodities as a consequence of a thriving livestock sector where output is expected to grow by 5% per annum to the year 2000. The projected trade balance is highlighted in table 4.15.

Table 4.12 Developing countries in the Far East: Projected agricultural trade balances to the year 2000

a Estimated effect of the loss of export subsidies on the imports of the subsidy receiving countries
b Estimated loss of the potential value of preferences provided by the major preference giving countries
Source : The Impact of the Uruguay Round, FAO 1995.

• The effect of the Agreement is likely to result in a higher import bill by US$4.1 billion as agricultural imports rise by 56%. The economic growth in the region will stimulate consumption growth in products such as meats, fats and oils and feeds, as well as in tropical products.
• Agricultural exports are expected to overcome the growth in consumption with growth projected at US$29 billion between the base period and the year 2000. Notable export increases are in rice (+US$2 billion), bovine hides and skins (+US$3 billion), fats and oils (+US$4 billion), cocoa, sugar and rubber (+US$1 billion). Overall, export earnings will be boosted by US$3 billion.

The Near East

The Far East is predominately a net importer of agricultural products. Only two countries in the region are classified as Least Developed and only a minority of the countries of the region are members of the WTO. Thus, their agricultural policies will not be subject to the commitments of the agreement, but nevertheless they will be affected by them. The region earns little from agricultural products and the bulk of these were outside the commodities analysed. Table 4.13 details the gains and losses and the trade gap is forecast to widen from US$11 to US$19 billion by the year 2000.

Table 4.13 Near East developing countries: Projected agricultural trade balances to the year 2000

a Estimated effect of the loss of export subsidies on the imports of the subsidy receiving countries
Source : The Impact of the Uruguay Round, FAO 1995.

4.3.4 The impact on agricultural commodities

The impact of the Agreement is primarily likely to affect international trade in temperate products. These form the main focus of the Agreement, and it is likely that there will be a reduction in world output of these commodities as production in some major developed countries falls.

In this section we detail the effects on the world prices and trade in specific agricultural commodities. The implications are likely to be strongest in those products where protection among OECD countries was substantial, namely cereals (in particular, wheat, rice and coarse grains), meat, dairy products and sugar.

It is expected that the effects of the Agreement will:

• Reduce the quantity of these commodities which are sold on the world market at subsidised prices;
• Increase the imports of these commodities by some developed countries.

4.4 The impact on food security

The preceding section highlighted that the losers from the Agreement are likely to be the Net Food Importing Countries. This adverse impact was expected to be a short to medium term phenomenon.

Developing countries will be affected both as importers and exporters. The impact on the latter was discussed briefly with respect to the erosion of preferential access agreements.

• Developing countries are generally net importers of the agricultural products most affected by the Agreement.

A rise in international prices for major food items such as cereals, dairy products, meats, edible oils and sugar is likely.

• As a result it is expected that the food import bill will rise for several developing countries.

• The impact on the food bill will be accompanied by the loss in export market access as a result of the erosion in preferences discussed earlier.

In light of the likely negative effects of the changes in the external agricultural trading system, there was a special arrangement in the Final Act to provide some amelioration. The Decision on Measures Concerning the Possible Negative Effects of the Reform Programme on least-Developed and Net Food Importing Countries attempts to deal with the issues relating to food security that arise from the Agreement. As implied, the decision was taken to offset higher world food prices caused by agricultural trade liberalisation, a factor reinforced by the fact that export subsidy reductions will , in some cases, raise the effective price paid by importers.

We will examine the details and implementation issues that arise from the Decision in Chapter 7 when we examine the implications for national policy response to deal with food security after the Agreement.