V. FACTORS INFLUENCING THE EFFECTIVENESS OF PREFERENCES

A. Factors inherent in the preference schemes: preference margins, rules of origin and other systemic aspects

Preference margins

How deep must preference margins be in order to be effective? This question has become increasingly important as MFN tariffs and GSP preference margins are progressively reduced as an expected result of the new round of multilateral trade negotiations. Typical examples of small preference margins were the EU preferences for raw cocoa and raw coffee, which were scaled down from 2 percent and 3.3 percent, respectively in 1996, to zero in 2000. Individual trade transactions attained high values and high tariff savings, which amounted to $9 million for cocoa exports from Côte d’Ivoire to the EU in the last year of preferences. These margins appear nonetheless to be below the minimum threshold for effectiveness: it is doubtful whether the benefits accrued to producers influenced the farm-gate price of direct purchases by importers or TNC processors. The preference margins were too small in comparison to the recent slump in world market prices to significantly offset the widespread rise of poverty among growers. In such cases, income stabilization payments from STABEX can be more effective. Nonetheless, producer prices for cocoa, coffee and bananas represent only a small proportion of import and retail prices in developed countries: the significance of savings made through trade preferences in high-volume commodities, which maintain preferential advantages, are potentially very large for small farmers.^[57]

There has been a growing tendency for exporters not to make use of small preference margins available under the GSP. There is a widening gap between exports covered by GSP preferences and exports actually receiving GSP preferences in many beneficiary countries. In the EU scheme, for example, the small preferential margins for sensitive and very sensitive products represented only a slight reduction of 2 percentage points and often less of the MFN rate, even if the latter was relatively high. The utilization rate was only 37 percent for sensitive and 32 percent for very sensitive products, which was far below the 45 percent utilization rate for products, which received a full or a 65 percent rebate. This was the main reason that the EU changed the modulation of preferential rates in 2002.^[58] In the light of experience, the EU Commission considered that a preference margin of 3.5 percentage points (corresponding by and large to a 30 percent reduction of ad valorem MFN rates for sensitive products), had for all agricultural and industrial products, on average had been commercially relevant and led to increased preferential trade.

It remains to be seen whether this new minimum margin will be sufficient to stimulate exports of agricultural products. This question is examined below in the light of country experience for specific products, which are covered by GSP.

The analysis of Argentina’s preferential exports to the EU under the GSP in 2000 shows that one-quarter of the preferences for covered agricultural exports (amounting to over $500 million) have not been utilized. For some 40 percent of these products, margins ranged from 0.4 percentage to 2 percentage points and for most, the utilization rate varied from zero to 40 percent. Preference margins were particularly low, and utilization virtually zero, for most vegetable oils and low-preference tobacco. The combination of low preference margins with high remaining duties tended to reduce the value of preferences to producers and traders. Where preferential rates were above 6 percent, preferences were only claimed for half of the exports on average: for some products preferences were not claimed at all. Exporters made consistently high use of preferences when they amounted to 5 or 7 percentage points, such as for most fishery products, veneers and fibreboards, as well as for high-preference tobacco. The significance of the new 3.5 percent margin has also been tested: one-quarter of the GSP margins for significant export products benefited from margins around the 3.5 percent margin (i.e. from 2.9 percent to 5.2 percent); such margins were fully utilized for 6 out of 11 products, but barely for 4 others.

Extremely low preference margins and utilization rates dominated Brazil’s agricultural GSP exports to the EU. Preferences were not utilized for more than half of exports covered by GSP, amounting to $390 million in 1999. As in Argentina, the pattern of utilization varied distinctly for major sectors. High preference margins for fishery products and prepared shrimps favoured an almost full utilization. There was full utilization for vegetables, too, although the preference margin was small (2 percent to 3 percent). The bulk of exports of wood products also made high use of preferences, in the case of sawnwood, even at low margins.

On the other hand, the rate of utilization was particularly low for the fruits and other products where MFN duties were being phased out, and was close to zero for most products where GSP margins were below 1 percent. Live plants received preferences for a mere 2 percent of GSP-covered exports (of $10 million) at an average GSP margin of 2.7 percent. Only 18 percent of the exports of fresh fruit actually received preferences at an average margin of 2.7 percent. At an average margin of 4 percent, half of the vegetable oils exported used GSP. Margins averaged at 6.2 percent for various industrial acids, dextrin, protein substances and essential oils, but only half of the GSP-covered exports received preferences. The 15 percent preferential reduction was too small for the main plywood item exported under the GSP (covered exports of $130 million, but only $54 million received): at a 1.7 percent margin and a remaining duty of 5.3 percent, 60 percent of the exports did not utilize the GSP.

As regards the effectiveness of the 3.5 percent margin, one-quarter of the significant GSP-covered items carried similar GSP margins (in the range from 2.9 percent to 5.2 percent). Only a third of the products used GSP for the bulk of their exports to the EU. One-third of these products barely used GSP at all; another third used the GSP partially (the utilization varied from 20 percent to 40 percent of the exports, according to products).

Costa Rica obtained substantially higher GSP margins in the EU for larger product coverage than Argentina and Brazil. Nonetheless, the patterns of preferential trade are similar. GSP-covered exports amounted to $450 million in 1999, of which preferences were not utilized for 44 percent. Low preference margins of 2 percentage points resulted in low utilization rates of about one-quarter for plants and fruits involved. However, raw coffee was the most important single product for which the GSP was not used, even though the utilization rate reached three-quarters before the MFN duty was completely removed. Exports in Costa Rica generally required higher preferences than in large exporting countries. Even when the preference margin was 5 percent to 9 percent, only one-fourth of the exports of yuccas and other plants used GSP.

Similarly, there was a low utilization rate for canned and prepared fish, fruit and fruit juices; in spite of preference margins ranging from 14 to 24 percent, the average utilization rate reached barely 14 percent in 1999. As in the other countries, preferences were fully used for tuna, shrimps and other fish and processed products exported, which enjoyed preferences ranging from 12 percent to 24 percent preference rates. Preferential duty-free access to the EU was also used for two-thirds of pineapples and melons exports, as well as for all exports of canned palm hearts and for smaller exports of a few other preserved vegetables, fruit and fruit juices.

Bangladesh made use of the GSP for three-quarters of its covered agricultural and fishery exports to the EU, which amounted to $170 million in 2000. In spite of duty-free entry for a broad range of products during several years, preferential exports by Bangladesh consist of more than 90 percent of shrimps and other fishery products. MFN duties and preferences range from 8 percent to 12 percent for its main frozen exports and are 20 percent for prepared frozen shrimps. The utilization rate is generally high: three-quarters of shrimps exports received preferences. Pumpkins were the only other major GSP-receiving product (with exports in 1999 at $7 million: MFN duties and preferences were 12.8 percent). Exports of semi-processed tobacco of $4 million were also covered by GSP, but did not receive the preferences.

It should be further investigated to what extent the frequent under-utilization of preferences for fishery products by Bangladesh and other countries is a consequence of the strict origin rules of the EU in this sector, and whether there are also other explanatory factors with regard to fishery and tobacco products.

The 3.5 percent minimal margin has improved trading opportunities in certain agricultural sectors. Preference margins tripled for sunflower and maize oils, and widened significantly for non-tropical fruits, fresh and dried vegetables, groundnut oil and plants. The new preferential rates have lowered the import barriers for products such as dried bananas, prunes and flowers, fresh grapes, strawberries, raspberries, okra and sunflower seed oil. The new margin should be of help for products, which had already made use of smaller margins in the past, such as avocadoes, cucumbers, dried bananas, strawberries, dried flowers, groundnut oil, squids and fibreboards. The maintenance of previous GSP rates, which are lower than the rate resulting from the 3.5 percent margin, has an important incidence on GSP trade.

The examples of these four GSP-receiving countries show that traders have normally not sought GSP treatment for products with only small preferential margins, since the benefits are largely or wholly outweighed by the costs of certifying preferential origin and related customs procedures. This was certainly the case when the preference margin was less than 1 percent, except possibly for large-scale shipments. Moreover, there are procedural costs in the importing country, too. Completing the procedures for origin certification can be very time-consuming. Thus, if certificates of origin are not readily available, or if certification can only be obtained from distant offices after a waiting period, highly perishable products such as flowers or fresh vegetables will not be able to benefit from preferences. In view of the growing preference by consumers for fresh products, it would be desirable that, in place of certification for each individual shipment, a more stable annual accreditation of producers be accorded.^[59]

Apart from transaction costs, the major economic factors determining the utility of preferences are:

(a) whether the preference margins are sufficient to compensate for higher production or transport costs, which otherwise make it difficult to compete with efficient third-country producers: and

(b) at what level of residual preferential tariffs the products are able to enter the markets of preference-giving countries and compete with domestic producers.

As past studies of integration groupings have shown, even a preferential tariff reduction by one-half may not lead to any exports from a preference-receiving country if it leaves the remaining preferential duty at 30 percent ad valorem; such cases may often prevail for a tariffied food product. Trade may only start to flow if preferential rates fall to substantially lower levels, depending on the type of products, their value added, their turnover and the differential in competitiveness, in particular as regards smaller countries and exporters.

As noted in the preceding section, there have been hardly any ACP exports to the EU when duty rates payable exceeded 10 percent or beyond preferential tariff quotas. There was no significant trade for tariffied agricultural products, with one or two exceptions.

All products that were successfully exported by ACP countries to the EU, post-Uruguay Round, enjoyed duty-free access to the EU and relatively high preference margins vis-à-vis MFN suppliers. Even after the completion or agreed reductions, MFN duties still range from 8 percent for flowers to 38 percent for certain canned and prepared fruits.

Origin criteria

The value of high tariff preferences may be nullified if the rules of origin are so restrictive as to deny access to the preferences.

Typical examples where the rules of origin hamper potential exports under the Cotonou Agreement are fresh, frozen and canned fishery products. In addition to the requirement that all fish originate in ACP countries:

• vessels must be registered in and sail under the flag of one of the Member Countries of the Convention;

• vessels must be at least 50 percent owned by their nationals or by a company which has its head office there;

• the manager, the chairman of the board of directors or the supervisory board, and most members of such boards must be nationals of the Member States;

• at least 50 percent of the crew, master and officers included must be nationals;

• in the case of partnerships or limited companies, at least half the capital must belong to nationals or Member Countries.

During the negotiations of the Cotonou Agreement, ACP countries proposed, without success, to enable their processing industries to use catches made in their territorial waters and landed under the compulsory landing provisions by other bilateral fishery agreement partners.^[60] De facto, most ACP countries can therefore only export fish and shrimps caught by artisan traditional fishing boats or small vessels. Low-volume fishing implies substantially higher cost and renders competition by ACP suppliers of fishery products and canned products difficult vis-à-vis the other major competitors, which use large factory vessels in spite of EU preferences exceeding 20 percent for canned tuna, for example.^[61] Furthermore, all fish exporting countries must be inspected and certified by the EU Commission. Delays in this procedure should not be at the cost of fish exporting countries. These new procedural requirements should be accelerated, in particular in LDCs, for which fishery exports are often the single most important export and preferential product to the EU.

Rules of origin can make it unlikely that processing take place in ACP countries, if a final consumer good requires blending of different qualities and origins. This is important, for example, for roasted coffee, cigarettes and cigars (70 percent by weight of tobacco must be originating). Fruit canning and other food industries may only use fruit, vegetables, oil seeds, cereals, milk and beef, etc. wholly produced in ACP countries or the EU. For the production of fruit juices, jams, other fruit preparations and cocoa products, non-originating sugar may only be used up to 30 percent of the ex-works price of the finished product: the remainder has to be sourced from ACP or the high-price EU market.

The surveys should provide evidence as to what extent such origin requirements effectively create problems for ACP exports to the EU or hamper new export-oriented investment. The European Community is committed to considering any substantiated requests for improving the Cotonou rules of origin in the light of the relevant provisions of the Agreement and on a case-by-case basis.^[62]

B. Factors related to supply capacities

1. Enterprise capacities

Supply capacities, scale and organization of production

Size, ownership and location are major determinants for efficiency and competitiveness of export-oriented agricultural production. For certain export crops, large-scale plantations may have competitive advantages; for others, small-scale producers are the main form of production or coexist with large-scale production. An insufficient scale of farms can be remedied by alternative ways to organize production enabling large-scale export transactions.

Furthermore, management capacities are increasingly challenged as organizational requirements are becoming increasingly stringent regarding the assurance of consistent quality and product standards, freshness and food safety of the products. Conditions regarding the process of production are rapidly tightening, including the modes of raising animals, their food, environmental standards and conservation of natural resources, and labour standards. An increasingly complex issue relates to the observance of the restrictive health and sanitary safety standards, and restrictions to the use of pesticides, insecticides and additions, as well as the tight limits for residues of such substances. This requires the installation of complex systems that permit tracing each product from the producer to the final consumer. Producers need to maintain continuity and reliability of supplies in all these respects. These requirements have to be assured beyond the production stage along the whole chain of transactions, from the production to post-production treatment, handling, packaging, storage and transports. To that effect, a complex production management system of organization, information and controls needs to be set up. Heavy investment in management know-how and logistics are needed to be able to cope with customer demands and to ensure the observance of the criteria throughout the whole chain.

There is therefore a need to organize supply chains linking producers and markets, and to bridge the gap between the two ends of the chain. International and retail trade have a tendency to organize tight management and sophisticated logistics, as well as to closely monitor the supply chains. In certain cases, they provide technical cooperation to producers and exporters linked with them. The intensity of linkages between markets, trade and production may go further, as importers and some retail chains integrate part or all production required by means of contracting or participating in production. Exporters for their part tend to strengthen their contracts with farmers or to participate directly in production, as well as to establish subsidiaries or joint ventures with wholesalers in the market place.

As an effect of combined scale, management and linkage requirements, large-scale production is in progress. For example, until the early 1990s horticultural production for exports in sub-Saharan Africa had been largely dominated by smallholders, but since the mid-1990s their share declined. Few large exporters now source predominantly from large farms. Exporters own many of them. In 1992, close to 75 percent of fruit and vegetables in Kenya were grown by smallholders. By 1998, the major Kenyan exporters sourced only 18 percent of produce from smallholders, but 42 percent from independent large commercial farms and 40 percent from own production. The situation is even more pronounced in Zimbabwe, where exporters rely upon their own production for half of their supplies, and source only 6 percent from smallholders.^[63]

The question raised earlier regarding ways to diversify supplies to a wider range of export products is first and foremost an issue of appropriate supply conditions, farmers’ supply capacities and farmers’ initiatives. However, in the present context of agricultural trading and retailing, it appears unlikely that initiatives taken by farmers alone are going to succeed on the market. New initiatives for diversifying into new export products can be pursued with better prospects if growers establish prior linkages with retail trade. The launching of new products needs to be prepared, coordinated and pre-negotiated with international traders and final retailers who are close to the consumption process. They can evaluate the chances of success with consumers, the conditions to be met for the introduction of a new product or a new presentation of a product, and prepare marketing and publicity campaigns for its launching.

Although the scale, organizational and management requirements act in favour of large-scale exports, there appears to be room for continued participation of small and medium-scale producers and artisanal production in large-scale exports. This issue has important repercussions on rural income. Smaller and artisanal producers participate in exporting certain niche products in high demand, for example, fishery products, special vegetable oils, and organic products. There should remain further room for small- and medium-scale producers for many fruit, vegetable, flower, fishery and other products. Some examples of successful exports involving small-scale producers have shown that such producers can meet the quality requirements of developed countries. Small producers coexist successfully with large-scale export farmers for several African export products where production and packing are highly labour-intensive and less amenable to mechanized, capital-intensive production methods. Family farms have certain advantages, because they are more flexible and do not need the administrative structure and cost of large enterprises.

The handicap of the small scale of individual farms can be overcome by coordinating and organizing small-scale producers in a suitable way for large-scale exports to satisfy the requirements of large-scale foreign demand. This function could typically be assured by large-scale, potent export companies. Alternatively, producer associations and cooperatives could assume functions such as coordinating and assembling export supplies. These organizations can also play a major role in raising competitiveness of their members by reducing the cost of inputs by joint sourcing, provide extension services and technological advice, and organize stocking, quality and standards control. They can also be a means to enhance the bargaining power of small producers vis-à-vis trading partners and industrial purchasers, and assist in improving acceptance of smallholders’ products by retail chains abroad. The surveys should explore the actual experiences made with the effectiveness of such organizations.

The surveys should test the ex ante assumption that there is a wider scope for small- and medium-scale production for exports in agriculture and fishing. They should identify successful experiences with measures taken to enhance productivity and international competitiveness of exports by smallholders, and explore measures that may have improved the acceptance of their products by retail trade abroad.

The scale factor is particularly important for food processing industries. Major progress has been achieved in several agricultural exporting countries participating more intensively in the value added chain. Major examples include: Thailand, which achieved a major export success in the shrimp and pineapple processing industries and its pasta exports; coffee processing in Brazil and Colombia; cocoa processing and fish processing in Côte d’Ivoire and Ghana; pineapple industries in Kenya; and wood processing and vegetable oils in Malaysia, Indonesia and Argentina. Preferences reduced barriers to market access and provided starting help for achieving price competitiveness. These industries created a sizeable value added and employment in the exporting countries, and boosted economic growth. The case studies should, to the extent possible, point to new opportunities and conditions for industrial food processing in ACP countries. The survey should also collect data on the percentage of the value added and wage costs in the overall output, as well as on the importance of such factors as availability, quality and prices of raw materials in export oriented food industries.

Wages, productivity and production cost

Country reports tend to concur that costs of agricultural production in African countries are often relatively high, even in countries where wages are low. This implies low levels of productivity and/or high cost and losses of harvesting and post-harvesting operations, transports and storage.^[64]

The size of the price preferences in EU markets should enable additional ACP producers to start exporting fresh products provided that cost differentials are not excessive. To some extent such preference-based competitiveness can be achieved by organizational measures, improved management, and the use of fertilizers and pesticides. In certain cases, relatively limited investments could remove bottlenecks hampering exports, such as in establishing refrigerated warehouses at airports with government or international support. In other cases, large-scale investments would be required in irrigation schemes or the construction of new roads.

Processing industries appear to confront big problems in ACP countries. Even the larger West African cocoa processing plants meet great difficulties in coping with the competition of large-scale and efficient European factories. This has even been the case for TNCs after the loss of subsidies.

2. Government policies

Support to strengthening supply capacities

Most developing countries have fully liberalized commodity production and trade, dissolved their marketing boards and stabilization funds, and removed subsidies to processing industries. In certain sub-Saharan African countries, this process has taken place only recently, and coincided with the slump in world market prices for cocoa, coffee, cotton and other major commodities. The combined effects of liberalization and extremely low world market prices resulted in major income losses for farmers. The new government policies for these sectors are not yet fully operational. National commodity exchanges, which should provide new instruments for forward sales and income stabilization, are still at their beginnings. Further, efforts to promote commercial agricultural credit institutes have not all been successful yet. Often, agricultural producer organizations lack the capacity and means to take on increased functions. At the same time, production and trade is restructuring, and major multinational trading firms are newly entering to ensure a supply base. There are also trends towards concentrating production and exports, and forming new linkages between producers, exporters and importers in developed country markets.

Governmental sector policies continue to play a major role in the development of export-oriented production. Large-scale integrated agricultural development programmes developed important new export capacities in new regions, or rationalized and renewed production of existing export crops. Such projects were also able to attract international financial and technical support from international and regional development banks, the EU and other bilateral sources. They normally included [a coherent set of investments for developing production, irrigation, regional roads, transport and stocking facilities, energy and water supplies and other basic services. They may also extend to measures facilitating access by farmers to finance for production and exports and to extension services. Integrated projects may also set up facilities for internationally accepted quality control, observe high animal and human health standards, and promote research and development (R&D) of plant and animal varieties with higher yields and higher resistance to diseases. Regional clustering of farming together with the provision of infrastructure, utilities, commercial and production-related services, and eventual processing can provide significant benefits of agglomeration.

Government policies play a further important role in managing resources and avoiding over-exploitation in the forestry and fishing sectors. Production controls are to ensure sustainability. Export limitations for raw wood in certain countries are intended to promote exports of higher value added products with varying success. The conclusion of bilateral fishery agreements, inspection and certification remain major governmental tasks; effective control over foreign fishing vessels, a major challenge. Environmentally sustainable production methods are increasingly becoming a precondition for effective access to major developed country markets, but are not necessarily readily accepted by foreign governments for fishing in the seas of developing country.

A major task in supply-side policies is to strengthen farmers’ capacity to respond to change. After liberalization, farmers themselves now have to deal with the repercussions of rapidly changing international market and competitive situations, the rise of new exporting countries, big price and exchange rate fluctuations, new technologies and product varieties, productivity advances of their competitors or changes in standards and market access conditions. Government policies need to focus on providing advisory services, financial counselling and training to raise farmers’ capacity and enable their associations to respond to these challenges. There are substantial reserves for raising productivity, reducing harvesting, and handling losses and costs. High-quality production renders farmers more resistant against price and demand fluctuation. Farmers also need market information and advice on opportunities for diversification.

At the regional scale, free basic education, vocational training and health-care are essential for shaping informed responses, opening the gates for diversification and reducing social problems. Farmers’ capacity to adjust to change can be significantly enhanced by increasing their involvement in exports and processing, and by cooperation with other farmers and in joint ventures.

The strengthening of R&D remains a major function of government policies. The results of national and regional research institutes, as well as incentives to R&D can boost large-scale new exports of agricultural commodities, as has been shown by Indian experiences regarding rice and Malaysian experiences with rubber. The introduction of new varieties is essential to strengthen the supply base, raise productivity, and reduce plant and animal health risks. New plant varieties strengthened positions on foreign markets due to quality improvements or product innovations. New plant varieties, which are more resistant to transports, enabled exports of African papayas and mangoes by ship at much lower transport cost than air transports, and opened new perspectives for exports to Europe.

Governments have a major responsibility for education and training. In rural areas, achieving full coverage by elementary schools and removal of widespread adult illiteracy are still long-term tasks. Targeted training should be extended to farmers directly in the production areas, through courses and seminars on specific aspects of their particular products and requirements of modern production and export techniques. On-the-job-training should instruct large-scale growers and exporters in export techniques, financing and standards control, with particular reference to farm and fishery products. University training courses on farm and export management should be expanded, also including integrated production managements systems. University institutes should provide courses of easily accessible training packages to operators.

Coherent sector policies are a major policy tool for developing countries to remedy supply-side problems, lift supply constraints and bottlenecks encountered in production for exports, and develop new export production. At the regional level, agricultural growth centres could effectively complement sector policies as an effective instrument for bundling government and private sector services and support to farmers. Such centres can optimize synergies between training, advisory activities, information and financial services to farmers for exporting.

Such programmes are also amenable to obtaining international support. Under the Cotonou Agreement, governments may obtain financial support from the European Community for integrated sector-specific programmes to enhance the competitiveness of established exports and export expansion. The Community has specifically undertaken to provide sufficient funds for financing integrated sector-specific programmes for the development and increased competitiveness of ACP exports of rice, bananas, beef and veal. Financial and technical support to sector programmes for export-oriented agricultural development can also be obtained from the World Bank and the United Nations Development Programme (UNDP).

The surveys should indicate examples of interesting experiences with policy measures aimed at strengthening supply capacities in a cost-efficient manner.

Access to finance and interest costs

In several developing countries, access to finance remains a stringent problem for production and investment; high interest costs prejudice international competitiveness and export trade.

The cost of domestic operating credits is generally much higher in developing than in developed countries. Furthermore, small- and medium-scale enterprises and farmers face persistent difficulties in accessing finance, because domestic credit institutions require guarantees not readily available to them. This problem is particularly pronounced for farmers who are tenants, not owners, of the land. Initiatives to alleviate such problems include the World Bank scheme, which provides funds to some local credit institutions in African countries for on-lending to farmers and other small enterprises.

Small farmers and small-and medium-scale processing industries face high cost of domestic credit for financing exports. Unlike large-scale, established exporters, they have no easy access to foreign credits at affordable terms. Official export credit support and export credit insurance are usually underdeveloped or at high cost in African countries. Specialized regional export finance institutions, such as the Eco Bank in West Africa, therefore encounter increasing interest by larger exporters of the region.

Problems of obtaining investment finance are particularly pronounced in many ACP countries, since commercial banks do not provide long-term credits. Venture capital financing is virtually inexistent, and capital markets are little developed. National development banks, where they survived structural adjustment, lack finance, and bilateral ODA is becoming scarce. The tight situation on capital markets hampers investments into modernization, rationalization, and upgrading of technology. It also prevents expansion of production for exports and investments into new production lines.

Access to means of production and extension services

In order to be competitive on foreign markets, farmers and food industries need to have access to high-quality inputs, equipment and up-to-date technology. This implies, for example, R&D of high-quality seeds that are adapted to local soil and production conditions and of plant and animal varieties that are resistant to frequent diseases.

Technical advisory support and extension services are important to help farmers apply appropriate technologies, new equipment, fertilizers and insecticides so as to raise productivity in a sustainable manner. Decentralization of public support can bring such services closer to farmers and improve the effectiveness of government programmes in training, disseminating information and the results of research activities.

Several developing countries took initiatives to strengthen producer organizations, such as the chambers of agriculture, etc. They can be important catalyzers for raising productivity, increasing supply capabilities, providing new equipment and disseminating new technologies. Attempts have also been pursued to establish inter-professional organizations and institutions as a forum to improve the dialogue and cooperation between farmers, processors, exporters and TNCs.

Strengthening capacities to meet quality, health and environmental standards

Stringent quality and health control conditions prevail in all major markets for fresh fruit and vegetables, meat, fish and processed food products with regard to plant and animal sicknesses and pests, the control of fruit flies, hygienic standards, the level of residues of certain pesticides, insecticides, vaccines, antibiotics, and additions to food products. Exporting countries find it increasingly difficult to meet rapidly growing requirements. Only a few ACP countries have been able to meet the stringent quality conditions of the EU to qualify for high-quality exports of beef, for example. The Commission is presently engaged in a vast inspections operation in countries wishing to export fish to the EU.

A major issue in all developing countries is meeting the animal and human health requirements. Problems in this area have led to total, instantaneous disruption of some exports to the EU, the United States and other major markets. In certain cases, the United States apply even more stringent preventive regulations to protect its population and animals than does the EU. Particularly sensitive products are cattle, chicken and other meat, fresh fruit and vegetables, vegetable oils and fish.

In response to tightening requirements, some countries and/or exporters set up quality insurance schemes to document seed procurement, planting schedules, pesticides and fertilizers used, spraying, and personnel hygiene arrangements to guarantee food safety. An analogous documentation of the whole process has become indispensable for meat exports to developed countries. The building up of integrated crop management standards, including such quality insurance schemes intensifies the burden on exporters and the challenges to their management capabilities. Such systems need to be complemented by corresponding monitoring and auditing, and cause substantial costs.

Bilateral cooperation in building certification and inspection capacities can help to attain and maintain high standards of meat production. Technical and financial cooperation has also assisted in the establishment and capacity building of national standard and quality control institutes.

Developing countries, particularly ACP countries, need to strengthen their institutions and instruments for the control of standards, quality and food safety, their veterinary services and technical support to producers and traders. Strengthening the capacity to take preventive action against animal diseases is particularly important in order to avoid disruption of imports by the EU and the United States and spreading of diseases, and to prepare for quick reaction in the case of an outbreak of new epidemics. Botswana has been able to overcome a recent cattle disease. East African countries have been able to restore lake-fish exports to the EU. The capacity of African groundnut producers to cope with tightening ceilings for residual aflatoxin is yet another issue. Several earlier African groundnut and beef exporters no longer export to the EU. Other major meat products are absent from trading between ACP countries and the EU, whereas large-scale imports are made from Thailand and China, which face higher transport costs and tariffs than African countries. EU cooperation can help upgrade quality and standards controls, enhance their credibility and stabilize market access. The Cotonou Agreement provides for the possibility to conclude mutual inspection and certification agreements. Under this Agreement, it should be possible for African suppliers to develop new products for the EU market, taking advantage of the cooperation possibilities offered for building up the necessary food safety level and monitoring capacities.

Positive experiences showing how enterprises and governments can cope with increasingly stringent health and quality standards for export production, are critically needed in all

C. Export capacities and export policies

1. Enterprise capacities

Management capacity, organization of export trade, linkages and market presence

Specialized export trading companies play a major role in exports of African agricultural products. There is a trend towards a concentration and a larger scale of African exporters, due to the managerial, organizational and financial requirements for managing logistics and the supply chain. Investment in information technology can lead to significant cost savings in the procurement of transports and other services, and improve flexibility in operations.

A few large-scale international trading houses dominate world trade of major cereals and bananas. Wholesale companies continue to form part of the normal trading chain for most products. Retail chains, however, increasingly gain importance in markets of final and fresh consumer products and in sourcing decisions. In certain cases, such as fresh flowers, alternative trading channels exist in the form of international auctions. Auctions increase market transparency, but do not remove basic inequalities of market positions. In the case of the flower auctions in Amsterdam, for example, sales are made on behalf and at the full risk of producers whose production decisions are made a long time prior and who have no alternative option but to sell. Wholesalers and retailers can make their choice freely among current offers.

Direct exports by large-scale producers or producer associations can provide opportunities for participating more intensively in the value chain and for closeness of contact with consumer needs? and market requirements. Exporting through producer and exporter associations is meant to avoid atomization of a country’s offer vis-à-vis large-scale industrial firms or supermarket chains. Direct exports by producers are facilitated where wholesale markets take a dominant role in international trading. In the case of extremely perishable products, market presence is a major asset. Certain flower growing companies have established subsidiaries in major European wholesale markets in order to participate directly in auction sales. This also allows them to reduce the risks involved in sales on their behalf and to reduce the loss of produce. Direct linkages of growers with major processing companies or importers may open the way towards further processing of agricultural products.

Where direct market presence is not viable, close linkages between exporters and importers are an alternative for exports of highly perishable products Such relations have frequently taken the form of equity participations by exporters in import companies or vice versa. Producer organizations may rely upon contractual arrangements to ensure closeness of contacts and confidence. Closeness of relations facilitates downward decentralization of certain responsibilities of monitoring, organization, and the control of quality, standards and food safety. Closeness also favours initiatives by exporters or producers to innovate, because intimate market knowledge is a precondition for proposing the launching of a new product, a new assortment, or a different presentation. Exporters are increasingly required to take on market development and advertising functions in final consumer markets.

New initiatives by exporters could remedy under-utilization of market opportunities. There is a substantial unexploited scope for geographical diversification of exports. Production links and exports in many cases follow the traditional patterns: Anglophone African countries continue to be the main suppliers to the United Kingdom; Francophone countries to France and Belgium. These markets absorb an abnormally high proportion of African exports, whereas the other EU markets are under-exploited, even if they have higher income levels. Products offered on European markets could be diversified. This would also ease mutual competition for the same success products (such as green beans). New market shares could be grasped when seasonal products on European markets are not yet available. European assemblers of packaged, cleaned, cut or assembled fresh vegetables or fruit can achieve more than ten times the value of the basic ingredients. African producers would in principle have the advantage of direct access to the fresh products and low wages for these labour-intensive processes to offset partially high air transport costs.

In spite of trends towards producer associations, exporter and producer concentration, a severe asymmetry persists between importers and supermarket chains in the consumption centres and African suppliers. A significant proportion of production and exports is still scattered. A large number of countries, producers and exporters compete for market shares for the same products among themselves, as well as with producers from Mediterranean and other countries. There is a recurrent intensive debate on the sharing of the value added of farm products between producers, traders and retailers. Producers in developing and developed countries claim that retail trade receives a much larger share of the final consumer price than the portion accruing to actual production.

The dominant role of TNCs in international trade of major agricultural products and in food industries has not been reflected in particular export dynamism from African and other developing countries. The reasons are uncertain: There are claims for lack of export and investment dynamism by TNCs and for use of asymmetric bargaining power; there are also indications that TNC processors paid higher prices to farmers than exporters, or provided technical assistance or financing to growers.

The survey should look into experiences with various types of trading channels for the products of the countries surveyed and the actual working of linkages with trade in the importing countries.

Transport and storage

Transport conditions and cost are particularly sensitive factors for ACP exports, especially for the numerous land-locked and island countries. Organizing logistics is a core competency for most exporters from ACP countries.

Numerous bottlenecks continue to affect the availability of adequate transport for fresh fruit and vegetables in certain countries, such as bad conditions of feeder roads and lack of refrigerated trucking capacities and cold storage at airports. The assurance of a continuous refrigerated transport chain from production to consumption remains a major challenge for successful exports of fresh fruit, vegetables, meat, fish and flowers.

There is also the question to what an extent exports of fresh fruit and vegetables can be further expanded by ways of air freight, given the high incidence of air transport cost on consumer prices. A study prepared by Société Générale de Surveillance for UNCTAD in 1998 concluded that the cost of produce air freighted into Europe was in the $1.25 to 1.50/kg range. For African exports, the rates ranged between $0.65-1.00 in Ghana, and up to $1.55 to $1.65 in Zimbabwe. Only Ghana’s air freight rates were fully competitive with other major competitors from Israel and Jordan, whereas rates from Côte d’Ivoire and Cameroon were somewhat higher (in the $0.90 to $1.00 range). When targeting the European market, it was generally regarded that any country that has an air freight rate of under $1/kg should have excellent potential for exporting fruits and vegetables. When the rates go above $1.50/kg, the range of products that can be successfully exported becomes extremely limited, even during periods of high demand.^[65] By comparison, effective freight cost of moving fruits and vegetables by road from Spain to the main consumption centres in the EU can be of the order of $0.15 to 0.25 per kg.

Shipments by sea are much cheaper (generally the cost of sea freight was about 9 cents to 44 cents per kg in 1998) but require substantially more time and complete reorganization of the transport chain. This mode of transport is not easily accessible for countries and regions far away from those major seaports, where appreciable export advances for fresh vegetables have been made. Containerized sea freight of refrigerated vegetable and fruit exports from Kenya to Northern Europe may last up to five days longer than those of Costa Rican suppliers. Port organization and port charges cause longer turnaround time and additional costs.

There are also organizational issues, such as frequent road traffic controls in and between some countries, which have been a cause of delays and costs for decades.

2. Government policies

Exchange rates

The level and fluctuations of exchange rates are major factors influencing ACP export performance, even after a general move toward market-oriented or floating exchange rates. Considerable overvaluation of currencies still occurs in developing countries. Apart from exceptional cases, the margins ranged between 5 and 25 percentage points in such ACP countries as Ghana, Cameroon, Côte d’Ivoire, Malawi, the Dominican Republic, and Trinidad and Tobago.^[66] On the other hand, in some countries, the real effective exchange rate was substantially below the official rates, which provided additional support to export competitiveness.^[67]

The FCFA is the common currency of several ACP countries, which is now moving in parallel with the Euro. Should the Euro regain part or all of its preceding European currency unit (ECU) level, this would amount to a substantial revaluation vis-à-vis the US dollar and other regional, Latin American and Asian currencies, and reduce export competitiveness of FCFA countries.

Major exchange rate changes result from large changes in world market prices for dominating staple exports. Foreign investments or sales of companies under privatization programmes put upward pressure on the national currency.

Large changes in exchange rates of other countries can also seriously affect exports from individual developing countries. The changes of the value of the Euro, the Yen and other currencies altered the relative competitive positions among suppliers to the EU and among ACP countries. In principle, depreciation of the Euro would raise the profitability of exporting to alternative destinations, but in reality? it has not encouraged African countries to export to alternative markets. Depreciation of the exchange rate of a leading world market supplier of a specific product also strengthens its export competitiveness at the expense of market shares of other exporters.^[68]

Major currency fluctuations confront central banks and governments of developing countries with the challenge of cushioning the resulting shocks for national producers and exporters. Costs, risks and lack of knowledge may contribute to little use of hedging and similar instruments against exchange rate risks.

Fiscal policies

Fiscal and financial policies set the conditions for the availability and cost of finance for production, exports, and investment. High demand by the government on local credit markets may weigh heavily on the access and cost of domestic finance. The country’s credit ranking, which determines access to foreign capital for export and investment financing, may also be affected by recurrent large budget deficits.

Export incentives and export promotion

Governmental support in these areas can make a big difference for export success. Most developing countries have customs drawback schemes in place. Problems still occur due to the way in which they are applied and delays in reimbursements.

Smaller companies exporting agricultural and food products depend more than others on market intelligence and support to export marketing by government institutions. In view of high protection levels, governments have an important role in negotiating appropriate market access arrangements and defending acquired trading rights. Scattered production for exports requires support in the form of appropriate logistics, credible institutes to carry out standards and quality control.

Special investment sites and agricultural growth poles can cluster all the infrastructure, services and utilities required for export development in agricultural and processed products and enable the participation of small farmers. Fruit canners and other food processing plants, veneer and plywood mills can draw important benefits from industrial investment parks, which concentrate the necessary infrastructure and services required, especially if they are close to agricultural and forestry production sites. Export processing zone status may be conferred to individual exporting enterprises throughout the country, not only in port areas. It is questionable, however, to what an extent EPZs have actually attracted much export-oriented investment in food production in recent years.

D. Effective market access

1. Market structure and competitive conditions

International trade of wheat, rice and other commodities is highly concentrated in a few international trading companies. In the case of bananas or coffee, the entire chain from production through to transports to consumption is controlled or integrated into TNCs

Large supermarket chains in developed countries increasingly govern trade in fresh consumer products. Such chains hold a market share of around 80 percent of the EU retail trade and their importance continues to grow throughout the EU. Even if these chains rely on wholesalers for conducting the import transactions, they often designate the countries and firms of supplies. Trust relations built up over time may be difficult to break in by new suppliers in the normal course of trade. However, supermarket chains may also readily and abruptly abandon their suppliers in the case of a default in quality, food safety or delayed delivery.

Most developing countries face difficulties entering these markets because they are new to their structures. While some early starters were able to capture important market positions in major developed countries, in some cases with the help of preferences, latecomers are in a less favourable position because market positions are taken and international traders have their established supplier connections. The investment budgets required to develop a new market or a new product, or to innovate can be large.

Many developing countries’ food industries face major difficulties in penetrating major world markets. The market positions of established worldwide companies are entrenched and well secured by intensive brand policies, combined with high publicity budgets, which in certain cases exceed the wage cost of production. Leading companies and their brands of canned beef and fruits, fruit juices, beverages and tobacco products are represented worldwide. Regional brands are equally important and include a few developing country producers. Even if these companies did not deliberately apply measures distorting competition, such market structures themselves represent strong barriers against access of new exporters. They can effectively prevent larger scale expansion of exports under preferences. In addition, large budgets are required for launching new products on the market for R&D to develop new products and for continuously adjusting to new standards, quality and varieties. The disparity in market positions between small- and medium-sized producers in developing countries and worldwide industries or trading companies bias the level-playing field, the distribution of production between countries, and the distribution of earnings between the different participants in production and trade.

Nonetheless, chances exist for late coming African producers to gain a foothold in food industry exports for new products in dynamic demand. Furthermore, demand growth is changing between products over time. Market entry is easier for market niches. Exports could be further developed outside major standard exports of canned pineapples, orange juice or instant coffee.

Cooperation with foreign investors can also be an effective means for penetrating world markets for new products and expanding or establishing export-oriented food, beverage or tobacco industries in developing countries. Appealing operating conditions, long-term stability and attractive incentives are necessary conditions, but do not guarantee success, because TNCs take their investment decisions under corporate perspectives. The complementary investment measures under the Cotonou Agreement and AGOA could help to encourage investments in African and Caribbean countries.

2. Government policies in developed countries.

In addition to tariffs, there are a number of other important barriers in place in developed countries, which act as barriers to market access and detract from the capacity of producers and exporters to make actual use of preferences. They take mainly the form of:

• subsidies granted to domestic agricultural producers and food industries (including income and price support, regional subsidies, research and energy subsidies, export subsidies, special export and domestic credit schemes);

• restrictive import measures motivated by concerns for plant animal and human health;

• increasing use of anti-dumping and countervailing duties against competitive exports from developing countries spreading to food products. Examples are the anti-dumping duties imposed by the United States against frozen concentrated orange juice exports from Brazil; and the countervailing duties against flower imports from Colombia;

• a range of technical standards and product specifications difficult to meet by developing country exporters, or reclassifying products in high tariff categories. Subsidies and the restrictive sanitary and phytosanitary (SPS) standards and accompanying measures are dealt with in more detail below.

Sanitary and phytosanitary (SPS) import restrictions and other standards

Standards have a pronounced trend toward increasing restraint with regard to human, plant and animal health, as well as environmental requirements and quality. The new WTO Agreement on SPS established new disciplines for the application of import restrictions for health and sanitary reasons. The Agreement stipulates that health and sanitary restrictions should not be used as disguised means of trade protection and demands that effects on trade should be taken into account. Scientific proof must be established before new measures are introduced; any import measures should be limited to the particular producer regions and the extent actually required. In spite of this Agreement major trade problems continue to persist and arise newly, due to sweeping application of import prohibitions disrupting trade. In most cases, the applicable standards were set by a small group of major developed countries with the highest health standards. Developing countries were absent from past decision-making in the specialized international standard setting organizations, and now face extremely stringent criteria, the requirement of zero default, and extensive country lists to which import prohibitions may still be applied several years after a disease is eliminated.

Governments of developing countries should, individually or as groups, strengthen their trade defence against excessive import restrictions for health and sanitary reasons. Furthermore, they should activate their participation in international standard setting organizations on plant and animal diseases and food standards.

“Grandfathering” of previous import restrictions was allowed under the SPS Agreement and is a major cause for concern over food exports from developing countries. The old rules and restrictions can continue to apply, which particularly affects traditional diseases highly relevant to developing country exports. In the course of the new Round, an agreement should be sought to subject all SPS restrictions to full examination and justification under the rules of the SPS Agreement.

ACP countries also face important problems with their exports to the EU, in spite of the new WTO rules and special provisions for ACP-EU cooperation. A case in point was the imposition of new quality standards and procedures by the EU for fishery products.^[69] Exports of groundnut oil and other groundnut products by African countries risk facing great difficulties if the ceiling for aflatoxin contents is drastically reduced further. Certain infestation treatments widely used in international trade with tropical fruit were banned, although there are no alternative treatments available as yet. This could significantly curtail prospects for growth of tropical food production and exports.

Implementation can imply hidden protection for domestic producers against imports. Individual import shipments are regularly controlled on a sampling basis regarding health and phytosanitary standards, residues and hygienic conditions. While the same standards are valid for domestic products, standards controls are far less frequent for domestic producers and are carried out only a few times per year. Bio-products escape government control in EU countries altogether. Controls of product and process standards have been entrusted to certification organizations without further control by state agencies. As a result, effective application of standard controls may be far less stringent for “bio-products” than for normal domestic products and imports. “Bio-food” may be more easily an issue of health problems for consumers than one of imports. Protection of food safety, fairness vis-à-vis domestic consumers and farmers, and neutrality of application regarding imports would call for government control of the application of product food safety standards for bio products, to avoid cases of poisonous substances in “bio-food”.

Other changes in standards may affect certain ACP producers, even if they are neutral, due to the need for production adaptation or reorganization of sourcing.

In addition to legal standards, consumer requirements become increasingly demanding on quality, safety, and environmental conditions of production. Even where no legal requirements exist, consumer activism may influence standard-setting and purchasing practices by traders with respect to countries of production.

On the other hand, the capacity to meet high quality and high environmental standards can be an asset to acquiring niche markets in developed countries. Consumer preferences provide rapidly growing outlets for organic products.^[70]

Developed countries have committed technical under the WTO Agreements on Agriculture, SPS Measures and the Transfer of Technology (TOT). Such best endeavour commitments have largely remained unimplemented. They should be converted into action programmes with financing plans attached. Support under the TOT Agreement should enable developing country exporters to develop their own identity and brands on international markets. The new Round should not render developing countries’ food exports more difficult by setting a precedent for restrictive use of geographical designations.

The field surveys should provide information on specific debatable cases of SPS import restrictions that hamper exports and indicate the rationale advanced for such restrictions.

Subsidies

In spite of the elaborate disciplines on subsidies agreed upon in the WTO Agreement on Subsidies, huge agricultural subsidies continue to distort international trade and production in agricultural and fishery products. For developing countries, the playing field has not become more levelled than before the Uruguay Round. Forms and composition of subsidies shifted from tariffs and direct price support to other forms of subsidization, but the overall volume has not decreased significantly. Price and export subsidies have even increased again more recently as an effect of governmental policies to smoothen farmer income in periods of declining world market prices.^[71]

Subsidies impact heavily on the sugar^[72], rice, meat and dairy markets of the EU, the United States, Canada, Japan, Switzerland and Norway. Subsidies limit market access through granting high protection and restrict overall consumption and imports, as the combined effect of tariff and cash subsidies may lift domestic prices by 50 percent to 100 percent above international prices. Surpluses are frequently exported with export subsidies in form of cash, export credits or free supplies.

The EU and other fishing nations grant important subsidies for the fishery sector. The EU budget provides on average about €600 million per year for such subsidies, including those granted for the construction and modernization of fishing vessels.^[73] Many fishery products further enjoy high price subsidies through tariffs (see section IV.A. above).

Since 1996, the EU slightly raised its subsidies for the vegetable and fruit sector, amounting to €1.6 billion in 2001;^[74] market subsidies for fresh fruit and vegetables increased from €0.7 billion to €1 billion. This was mainly due to the subsidies granted to producer organizations for withdrawals of products from the market and free distribution. In major exporting countries, the size of market interventions and the amounts of subsidies declined for most fruits and vegetables. Bananas were the major exception, because subsidies rose by half to €330 million. Subsidies for the processing of fruit and vegetables have decreased by 17 percent on average since 1996, and amounted to €0.6 billion in 2001, mainly for the processing of tomatoes, citrus fruit and grapes (including subsidies to pineapple canners of about €8 million annually).

Export subsidies are declining for fresh fruit and vegetables and canned products. To compensate for higher material prices, they amounted to €40 million in 2001 for fresh products and €10 million for processed products. The high subsidization of sugar reflects on the subsidization of domestic and foreign sales of fruit juices, marmalades and other preserves, as well as other sugar-containing products. When the sugar content is high, the sugar tariffs are applied to imports of such products as marmalades or cocoa products.

As stated above, the United States has reversed its earlier policy and substantially increased its farm subsidies since 1998. The Farm Security and Rural Investment Act of 2002 consolidated these increases for the period up to 2007, reformed some types of subsidy, introduced new ones and extended their scope to new products. The products eligible for producer and price subsidies in the United States schemes now generally include rice, wheat, maize, sorghum and other cereals, sugar, dairy products and various types of cotton, as well as recently soybeans, sunflower seeds, peanuts and other oilseeds, wool, mohair, peas and lentils, etc.

The 2002 Farm Bill basically provides for three types of commodity subsidy programmes, as well as several large general and partly new support programmes:

1. Fixed direct payments are paid to farmers, which are newly based on the acreage planted in the past with eligible products (at fixed rates stipulated in the Farm Security and Rural Investment Act of 2002), independently from the actual production of specific crops, the amount, and the price obtained.

2. A new programme provides counter-cyclical payments when market prices are below the target prices set by the Bill. (It replaces the ad hoc market loss assistance payments that has been provided to farmers each year since 1998.)

3. The marketing assistance loans and direct deficiency payments were extended and expanded. The Commodity Credit Corporation (CCC) continues to provide loans at the beginning of the season to farmers, who may pledge the crops of eligible products as collateral. Loans can be repaid at less than full principal plus interest when prices are below loan rates or the crop may be forfeited. Loan deficiency payments provide an alternative way for farmers to receive such price subsidies directly (which minimizes accumulation of stocks by the government).

4. Direct price support for dairy products is continued through government purchases, additional market loss payments when prices are low, export subsidies, and high import protection.

5. Price support for sugar (at twice to three times the world market prices in 1999-2002) is basically provided under the loan programme, as well as through the maintenance of high import protection coupled with tariff rate quotas and inventory management.

A major increase in subsidies for land-conservation programmes allows for the gradual idling of an additional 3 million acres of cropland. In addition, environmental subsidies for funding part of the investment costs for environmental projects at farms were raised from $200 million to $1.2 billion annually, and a new programme provides annual payments to farms that use environmentally accepted practices. The Bill also sets out programmes providing grants and loans at subsidized interest rates for rural development projects and processing, subsidized research and nutrition programmes, and has substantially increased subsidies for crop insurance. The Bill also authorized administration, under the provisions for animal health protection, to prohibit or restrict imports of any animal or related material if necessary to prevent the spread of any livestock pest or disease (as well as exports, where necessary).

According to an available preliminary evaluation, the overall actual spending on the three commodity programmes was not likely to increase substantially compared to the years 1999 to 2001, if one takes into account the steep rise of ad hoc subsidies in those years.^[75] On the other hand, if one compares the level of subsidies of the 2002 Farm Bill with that under the 1996 bill, and in the wider perspective of all types of farm subsidies, there seems to be a substantial increase. While subsidies subject to Aggregate Measures of Support (AMS) ceilings under the WTO Agreement have been reduced by $4.0 billion to $19.1 billion since 2000 (mainly by declining support prices for dairy products)this reduction is more than compensated by the introduction of new programmes and the expansion of subsidies to new products. The new counter-cyclical payments alone may reach between $5 billion to 6 billion for eligible products (including soybeans and other oilseeds), in addition to sizeable direct payments, commodity loans and loan deficiency payments for newly covered products (e.g. soybeans, sunflower seeds, peanuts, wool, peas and others), as well as a new loan deficiency payments for acreage used for grazing by livestock. Large price support programmes that were originally to be eliminated by 1999 were extended, and the budget for crop insurance subsidies has been raised by an additional $8.2 billion since 2000, for example. As in the EU and other countries, subsidies not subject to strict control under the WTO Agreement on Agriculture have been substantially increased for land conservation, environmental purposes and research, etc.

From the combined result of the commodity subsidy programmes, farmers may obtain payments reaching up to $180 000 annually (and up to twice that amount if farmers hold two or three farms), without taking into account environmental, insurance and similar subsidies. These payments enable farmers to sell products that compete relatively freely with imports at substantially lower competitive prices on domestic and foreign markets. In such cases, subsidies are likely to result only partly in higher income. For many other products, high import protection and other restrictions on imports from major exporting countries maintain high domestic prices. Also, subsidies consequently accrue, mainly in higher incomes to United States farmers. The commodity schemes act as a further incentive to continue planting crops eligible for preferences, thus artificially conserving production structures and excess production. Most farm subsidies hamper structural adjustment to the detriment of efficient producers in other countries, only few foster that process.

Various proposals for a substantial reduction or removal of agricultural subsidies are under negotiation in the Doha Round. Declared priorities for the agricultural exporting countries are the removal of export subsidies and a substantial reduction of other agricultural subsidies. Progress in that direction would improve market access, remove distortions and reduce costs of production worldwide, diminish cost to consumers, and widen markets for competitive producers (see also Section IV.B. above).