Multilateral Trade Negotiations on Agriculture: A Resource Manual I. Introduction and General Topics

This module provides a brief overview of recent trends in trade in general and agricultural trade in particular as a background to the policy discussion in later modules.

KEY POINTS

1.1 RECENT TRENDS IN WORLD TRADE

1.1.1 The volume of trade flows

Trade has been a common activity since the Stone Age. From exchanging animal furs for grain, to the development of currencies and the first bonds in the Middle Ages, trade has increased throughout history along with transportation improvements. Trade development gained a new impetus after the Industrial Revolution. Between 1720 to 1971 world trade increased 460 times or 2.7 percent annually.

Between 1948 and 1997, trade grew at an annual rate of 6 percent while world production only increased at 3.7 percent per annum. The ratio of imports and exports to GDP in developed and developing countries increased from 17 percent to 24 percent and from 23 percent to 38 percent respectively between 1985 and 1997. Trade also increased at a faster annual average rate than the world economy. The latter grew annually at a rate of 3.1 percent and 2.0 percent during 1980-90 and 1990-95 respectively while trade increased by 5.3 percent and 6.8 percent over the same periods. The increase in trade has been accompanied by a shift from bulk commodities to more processed commodities which have a greater share of value-added.

Figure 1: World trade and industrial production growth rates

1.1.2 The structure of world trade flows

Trade between developed countries represents the bulk of international exchange. Trade between United States, Japan and the European Union (EU) accounts for around one-third of world trade while one-fifth of world trade occurs among EU members. Asia has seen its share increase since the 1980s.

Africa and Latin America have a much smaller share of trade than other continents. Internal trade within these continents is minimal, their trade taking place mostly with developed countries.

The establishment of regional economic blocs has increased trade between neighbouring member countries. Regional blocs facilitate the flow of commodities among members by reducing trade barriers and increasing the speed and quantity of transactions. This has been especially the case of MERCOSUR in Latin America, ASEAN in East Asia, NAFTA in North America and the EU in Europe.

Box 1: Export flows in 1994 as percentage of world exports

	Destination
Exports in % of world Exports	World	Eastern Europe	Western Europe	North America	Japan	Australia New Zealand	Africa	Latin America	Asia (excl. Japan)
Eastern Europe	3.3	1.0	1.5	0.1	0.1	0.0	0.0	0.0	0.3
Western Europe	41.5	1.6	27.8	3.4	0.9	0.3	1.2	1.1	4.0
North America	15.4	0.1	2.8	5.7	1.4	0.3	0.2	2.2	2.6
Japan	9.4	0.0	1.5	3.0	0.0	0.2	0.2	0.4	4.0
Australia/ New Zealand	1.4	0.0	0.2	0.1	0.3	0.1	0.0	0.0	0.5
Africa	2.2	0.0	1.2	0.3	0.1	0.0	0.2	0.0	0.2
Latin America	4.5	0.0	0.8	2.1	0.2	0.0	0.1	0.9	0.3
Asia (excl. Japan)	21.4	0.4	3.5	4.4	2.6	0.3	0.4	0.5	8.8

Source: UNCTAD. 1995. Handbook of International Trade and Development Statistics.

Figure 2 illustrates export flows in 1994. Box 1 shows export flows between some major groupings as a percentage of total world exports. The importance of the three main trade poles is confirmed not only with respect to their trade with other groups but also in terms of their internal trade flows.

Trade growth has been stronger in developing than in developed countries during the 1970s and since 1990. Figure 3 depicts this evolution. Even during the world recession of 1992-93, developing countries continued to increase their trade while world trade, and particularly trade by developed countries, contracted. In contrast to this relatively good performance of developing countries, the least developed countries have seen their trade grow slower than world trade. Their share in total trade was reduced from around 0.9 percent in 1980 to below 0.5 percent in 1995.

Figure 3: Recent evolution of trade for various country groupings

1.1.3 Institutional aspects of world trade

The development of world trade has been accompanied by the establishment of a number of international institutions.

At the global level, trade issues have long been discussed at the General Agreement on Tariffs and Trade (GATT) and at the United Nations Conference on Trade and Development (UNCTAD).

GATT was created in 1948 to establish the rules for international trade. In the framework of GATT, a number of negotiation rounds were organized, the last of which, the Uruguay Round, culminated with an agreement that led to the creation on January 1, 1995 of the World Trade Organization (WTO).

Created in 1964, UNCTAD is the main UN arena for discussing in an integrated manner problems related to development, trade, international finance and investment, technology and sustainable development.

At the commodity level a number of organizations have been created to regulate markets. The most well-known inter-governmental organization of this type is OPEC, the organization of oil producing countries.

As regards agriculture, a number of commodity agreements have been concluded to regulate markets. The objective of these agreements has often been to seek to stabilize prices and limit competition by establishing quotas for member countries.

The development of world markets has also been accompanied by the emergence of new mechanisms such as futures markets which have contributed to the reduction of market fluctuations.

1.1.4 The role of transnational companies in world trade

Concomitant with rising trade and the establishment of these intergovernmental institutions, there has been a major expansion of transnational corporations.

A transnational corporation is a private profit-making organization that performs activities of production, distribution, and research in more than one country. The flexibility to move production around the globe is one of its key features. The WTO estimates that, in 1995, one-third of international trade was conducted by transnational corporations. This proportion is believed to have reached 40 percent today.

Globalization of the world economy, liberalization processes, measures to attract foreign direct investment (FDI), structural adjustment policies and the decline in international transport and communication costs have been crucial in assisting the spread of transnational companies. These favourable conditions enabled transnationals to grow fast and acquire a prominence in production and international trade. This has contributed to increased interdependence of economies. Freer and speedier capital transfers have also contributed to this development. Trans-national corporations are also a way to respond to imperfect international markets where transactions are very costly because of the need to ensure the quality of the produce purchased and the difficulty to enforce contracts signed with foreign operators.

A large proportion of international exchange by transnational companies takes place inside a given corporation (or between branches of this corporation). It therefore does not use the mechanisms of competitive international markets. The prices used in these transactions are often substantially different from market prices and can be used as an instrument to transfer income to countries where tax rules are more favourable.

A rapidly growing share of international trade is therefore de facto taking place outside the scope of WTO and may not be in conformity with the principles that determine its rules. Some WTO members have already raised this issue - several reports have been prepared by WTO experts - but no decision has yet been taken by the Organization on this important matter.

Box 2: Transnational companies - some figures

It is estimated that there are around 40,000 transnational corporations. The first 500 are large companies and control 70 percent of world trade as well as 80 percent of the foreign investments of transnationals. It is believed that 40 percent of world trade is conducted by transnationals.

In 1995, 29 percent of world GDP was produced100% by the 200 largest transnational corporations.

These corporations have succeeded in taking a leading position in a number of agricultural commodities: 20 control the coffee trade, six of them hold 70 percent of wheat trade, one controls 98 percent of the production of packed tea.

In recent years, transnationals have changed their strategy and shifted from production to financing, trading and research activities, subcontracting many production stages.

1.2 RECENT TRENDS IN AGRICULTURAL TRADE

1.2.1 Evolution of flows of agricultural commodities

The value of exports and imports of agricultural commodities has increased considerably after 1970. Much of this growth has been driven by increased import demand from middle-income developing countries. Policy reform implemented under Structural Adjustment Programmes supported by the World Bank and the International Monetary Fund has contributed to this trend in developing countries after 1980. Another reason for the growth of trade flows is the creation of trade blocs that led to an intensification of agricultural trade among their members. Figures 4 and 5 illustrate the evolution of trade of agricultural commodities.

Figure 4: World agricultural imports and exports	Figure 5: Share of world merchandise exports by sector (%)
Source: FAO. Statistical Database.	Source: WTO. 1998. Annual Report.

Agricultural trade has grown more slowly than that of manufactured goods, but at a similar rate to mining products. Figure 5 shows how the relative share of agriculture and mining in world merchandise exports decreased in the 1990s. Thus, while the share of agricultural trade decreased by 1.3 percentage points between 1990 and 1997, that of manufactured goods increased by 3.4 percentage points. This evolution can be in part explained by the increasing proportion of products originating from agriculture that are being traded as processed food or manufactured products.

However, as can be seen from Figure 6, agricultural trade generally grew faster than production. There is great variation among commodities in the share of output that is traded. Box 3 provides information on this share for some of the main agricultural commodities, ranked according to the value of the trade to production ratio.

Figure 6: World agricultural trade and output

Nearly all of the ten most traded agricultural commodities - relative to their production - are essentially produced by developing countries and represent for many of these countries the main source of foreign exchange. This makes these countries extremely vulnerable to variations in the markets for these commodities.

Box 3: The most traded agricultural commodities. percentage of trade to total production

Products	1961	1970	1980	1990	1996
Cocoa *	108	104	113	128	148
Coffee	60	89	85	91	94
Rubber	107	95	88	81	77
Tobacco	27	26	33	32	57
Veneer Sheets	28	27	32	41	45
Sugar (Raw Equivalent)	58	48	50	40	43
Vegetable Oils	17	21	31	37	40
Tea	52	51	46	42	38
Fish, Seafood	29	34	29	33	36
Cotton Lint	40	33	35	28	30
Soybeans	16	29	33	24	27
Peas	4	5	7	16	25
Bananas	18	18	19	20	25
Wheat	21	19	23	19	20
Milk, Skimmed	4	11	15	9	15
Bovine Meat	6	8	10	11	12
Poultry Meat	3	3	6	6	12
Cassava	3	6	15	20	10
Pigmeat	4	4	5	6	8
Rice (Milled Equivalent)	4	3	5	4	5
Potatoes	1	1	3	4	5
Eggs	4	2	3.	3	2
Plantains	0.21	0.36	0.31	0.59	0.46
Yams	0.00	0.04	0.12	0.12	0.08
Sugar Cane	0.02	0.01	0.01	0.01	0.01
* The case of cocoa illustrates the importance of re-exports of certain commodities. In this case an important share of trade is re-exports of cocoa paste and powder by the Netherlands.

The most traded basic food commodity relative to its production is vegetable oil. Wheat is the cereal whose trade represents the largest share of total production (around 20 percent). This share is small in the case of rice (around 4 percent) because the largest world producers (China, India) are also its largest consumers.

Not surprisingly, the least traded commodities, relative to their production, are bulky food commodities such yam and plantain, and highly perishable commodities like sugar cane.

1.2.2 Evolution of prices of agricultural commodities

A number of developing countries are highly dependent on exports of certain agricultural commodities (e.g. cocoa, coffee, tea or rubber) which constitute a major determinant of income and an important source of foreign exchange. This is particularly true for least developed countries for which primary commodities (mainly minerals and tropical agricultural products) make up to 70 percent of total trade.

The trend followed by prices of most agricultural commodities has been a dramatic fall with the exception of bananas during the 1980-1990 period. The prices of sugar, agricultural raw materials, beverage crops, cereals and meat fell by 50 percent or more over the same period. This implies that developing countries specializing in agricultural exports have had to export more to maintain a steady flow of income. After 1988, this negative trend came to a halt and prices have remained more stable since then.

As can be seen from Figure 7, there has been a considerable variation of prices of major agricultural commodities during the period 1980-1998. Stable and remunerative world prices for these agricultural commodities are essential in order to secure a stable and sufficient income needed by these countries to invest for their development.

Figure 7: Indices of real prices of agricultural commodities (1980=100)

Note: Basic foods: cereals, meats, dairy products, sugar, fats, oils and oilseeds
Source: Commodities Division, FAO

1.2.3 Terms of trade between agricultural commodities and manufactured products

The commodity terms of trade can be defined as the purchasing capacity of one good in terms of another. The evolution of the terms of trade between agricultural commodities and manufactured products provides information on the capacity for agricultural commodities to be exchanged favourably with manufactured products, i.e. how much can be imported of manufactured products by exporting one unit of agricultural commodity.

Between 1980 and 1998 international prices of agricultural commodities fell by about 35 percent while those of manufactured products increased by 40 percent. The terms of trade between agricultural commodities and manufactured products deteriorated considerably, falling by more than 50 percent (see Figure 8 below).

Figure 8: Terms of trade between agricultural commodities and manufactured products (MUV)

MUV: Manufacture Unit Value of industrial economies.
Source: UNCTAD, 1995, Handbook of international Trade and Statistics.

1.2.4 The largest agricultural traders

Developed countries largely dominate trade of agricultural commodities. Among the ten largest exporters of agricultural commodities, Brazil is the only developing country. The other nine are developed countries of which six are EU members. Similarly, the ten main importers of agricultural commodities are all developed countries (see Figure 9).

Consequently, it is clear that most of the trade in agricultural products occurs among developed countries, a major part being intra-EU trade (around one-fifth of world agricultural trade). In 1997, intra-EU agricultural exports had a value of US$178 billion. Meanwhile, intra-Asia agricultural trade had a value of only US$74 billion while intra-North America trade was US$30 billion.

Figure 9: Ten leading exporters of agricultural products

1.3 CONCLUSIONS

There has been a considerable increase in trade flows since the end of World War II. Today, around one-third of world output is traded internationally. Technological breakthroughs in transport and communication and international agreements leading to more liberal trade policies are some of the reasons behind this trend. Increased flows of commodities have been accompanied by the rapid growth of capital, and to a lesser extent, technology movements. Movements of labour have not followed the same trend, because of increasing barriers to the free movement of workers.

Trade among developing countries remains rather small and represents only a minor share of total world trade although it has increased.

Although trade grew faster during the 1970's and 1990's in developing than in developed countries, the latter are responsible for the bulk of international exchange. Transnational corporations have been particularly active in trade and their importance has grown. In 1998, they accounted for an estimated 40 percent of the exchanges taking place in the world.

Within this context of rapid growth of trade, agriculture has lagged behind. Despite sustained growth of trade in agricultural commodities, the share of these commodities in world trade has been progressively reduced. This evolution can be explained in part by the increasing proportion of products originating from agriculture that are being traded as processed food or manufactured products. The fact that the Uruguay Round Agreement envisages lower tariff cuts in agriculture than in other sectors may reinforce this trend.

Developing countries produce a large proportion of the most actively traded agricultural commodities. For many developing countries, these commodities are the major source of foreign exchange.

Prices of agricultural commodities have dropped dramatically between 1980 and 1998, in contrast with the increase in the prices of manufactured goods. The terms of trade between agricultural commodities and manufactured products fell by more than 50 percent over this period. This has also contributed to the relatively slower increase of trade in agricultural products compared to products produced by other sectors measured in value terms. It has also meant that developing countries dependent on agricultural exports have had to increase their agricultural exports in order to buy the same amount of manufactured products.

Forthcoming negotiations under WTO are an important opportunity for developing countries to improve their market position in order to better capture the advantages of trade liberalization. For this, they will need to be well informed and organized.

REFERENCES

FAO. 1998. FAO technical assistance and the Uruguay Round Agreements. Rome.

FAO. 1998. The Implications of the Uruguay Round Agreement on Agriculture for Developing Countries: A Training Manual, by S. Healy, R. Pearce & M. Stockbridge. Training Materials for Agricultural Planning No. 41. Rome.

FAO. 1996. Food and international trade, Technical background documents, World Food Summit. Rome.

Josling, T. 1998. Developed countries and the new round: policy trends and reform objectives in agriculture. Rome, FAO/IICA/WB.

OECD. 1998. Foreign Trade by Commodities, 1991-1996, Volume 5, Statistics directorate. Paris.

Rostow, W. W. 1978. The World Economy. London and Basingstoke, Macmillan Press Ltd.

Scammell, W. M. 1983. The International Economy since 1945. New York, St. Martin's Press.

UNCTAD. 1996. Globalization and liberalization: development in the face of two powerful currents. Geneva.

UNCTAD. 1995. Handbook of International Trade and Development Statistics. Geneva.

United Nations. 1997. 1996 International Trade Statistics Yearbook, Volume I Trade by country. New York.

United Nations. 1997. 1996 International Trade Statistics Yearbook, Volume II Trade by commodity. New York.

I. Introduction and General Topics

Trends in World and Agricultural Trade

PURPOSE

CONTENTS