Chapter 8 :International Trade Issues and Policies

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8.1 Introduction
8.2 Policy adjustments affecting agricultural trade: major country groups
8.3 Global adjustments: the agreement on agriculture of the Uruguay round
8.4 Beyond the Uruguay round

8.1 Introduction

This chapter discusses current and future trade policy issues in the context of the likely developments in international trade of the major commodities presented in Chapter 3. It was noted there that these developments could lead to the agricultural (crop and livestock products) trade balance of the developing countries turning from positive to negative, i.e. the developing countries as a whole are likely to become growing net agricultural importers.

The reasons for these expected developments may be summarized as follows. First, the developing countries as a whole import food products with relatively high income elasticities in their markets and, with a few exceptions (e.g. fruit and vegetables), their exports to the mostly saturated markets of developed countries comprise products with low income and, for some of them, also low price elasticities. Increasing competition among developing countries for agricultural export markets in developed countries often leads to small increases in volumes exported and price declines with the net result that real export earnings from some commodities fall rather than increase.

Second, policy interventions through international commodity agreements (ICAs) have tended to fail in their objective of preventing price declines. Resort to other instruments, e.g. futures markets, use of options, etc., may help to cope in part with the problems of price fluctuations but these instruments are not designed to counteract the more fundamental factors determining the long term evolution of prices. Third, the consumption by the developing countries of their export commodities tends to absorb an increasing share of their production (e.g. tobacco, rubber, cotton) and reduces the extent to which supplies are available for exports to developed countries.

Fourth, the expected trade deficit on agricultural account is likely to be offset at least in part by a growing net surplus of manufactures based on agricultural raw materials, e.g. cotton. Increasing net imports of raw cotton or hides and skins is a desirable development because it serves the input requirements of their rapidly growing and increasingly export-oriented textile, clothing and leather goods industries.

Fifth, developing countries are likely to continue to face significant market access barriers in the developed countries for some of their produce, e.g. sugar, as well as for processed agricultural products and manufactures. The policy reforms in prospect under the Uruguay Round Agreement on Agriculture (AOA) provide some scope for reduction in protection and other trade distorting practices, but will not eliminate such practices (see below). The rest of this chapter is devoted to discussing the policy issues and the policy reforms currently under way or in prospect which have a bearing on the agricultural trade environment of interest to both developing and developed countries.

8.2 Policy adjustments affecting agricultural trade: major country groups

For many developing countries the typical policy reforms under way are those in the general category of structural adjustment programmes (SAPs), as discussed in Chapter 7. Of interest to this chapter is the orientation of these policies towards deregulation, corrections of exchange rate misalignments, opening of the economies to foreign competition and promoting export expansion. They favor sectors producing tradable commodities. As such they could contribute to create a more favourable environment for the development of both agricultural and non-agricultural trade. As discussed later, the AOA offers considerable flexibility to the developing countries for adopting border measures in their agricultural trade, including the possibility, of which many have taken advantage, of setting bound tariffs for the future at relatively high levels, sometimes above the tariff equivalents prevailing in the base period.

Systemic reforms in the ex-CPEs are having profound influences on the environment and prospective evolution of agricultural trade. A significant change in this direction has been the shift from semi-barter or clearing arrangements to trade in "convertible currencies and at world market prices", stimulated by the dissolution of the Council for Mutual Economic Assistance (CMEA) and an increasing trade orientation towards the market economies, especially towards Western Europe. Hungary, Poland and the former Czech and Slovak Federal Republic signed Association Agreements with the EC, which reinforced the new trade relationships (FAO, 1993c; Rollo and Smith, 1993). In parallel, export credits and assistance programmes became more common in the agricultural trade of the former USSR. With the prospect of some countries of Eastern and Central Europe joining eventually the European Union, there will be enhanced scope for further agricultural policy changes in both Western and Eastern Europe to create conditions for future convergence of policies (Nallet and Van Stolk, 1994).

The longer term prospects for the agricultural trade of Eastern Europe and the former USSR were discussed in Chapter 3. Such prospects point to the direction of Eastern Europe becoming a modest net exporter of cereals and dairy products and the former USSR becoming a much smaller net importer or fully self-sufficient in cereals. But the materialization of this prospect is not for the immediate future. Some studies make a case that a combination of reduced domestic consumption and the potential of productivity gains in the former USSR could ultimately turn it into a net exporter of cereals (Mitchell and Ingco, 1993; Johnson, D. G., 1993).

For the OECD countries there have been, or are in the making, important reforms in policies for agriculture which, in combination with those required by the Uruguay Round Agreement on Agriculture (AOA), will have significant impacts on agricultural trade. The main thrust of such reforms is to shift provision of support to agriculture from market measures (essentially maintenance of producer prices at levels considered necessary for farm income support) to alternative means of supporting farm and rural incomes, mainly payments per hectare. It is not the object of this chapter to describe in any detail the intricate combinations of the many policy instruments through which the objective of reforms is pursued. This objective may be generally defined as: (a) allowing an enhanced role for market forces to determine production, consumption and trade outcomes; (b) containing the budget and wider economic costs characteristic of the agricultural support and protection policies; (c) relaxing trade frictions, particularly those conflicts waged with export subsidies; and (d) reaffirming the commitments of societies to pursue rural development, though by means other than market support to increase production. Whether the new policy measures are largely or only partly neutral as incentives to production is an open question. It is fair to say that not many of them can be considered as completely decoupled, i.e. as not influencing at all the production decisions of farmers, or even the decision to continue to be a farmer.

The first signs of the reforms are already visible in most countries in the form of significantly reduced real producer prices for major commodities. But the wedges between effective producer prices and world prices resulting from the agricultural policies persist at high levels in most OECD countries. The relevant estimates are shown in Table 8.1. At the same time, the total support, as measured by the producer subsidy equivalent (PSE) and the consumer subsidy equivalent (CSE), has continued to increase in recent years (measured in current dollars). The relevant data are also shown in Table 8.1. The most recent OECD evaluation brings this out clearly when it states that "an estimate of total transfers, based mainly on the PSE and CSE calculations, indicates that the combined transfers from consumers and taxpayers in the OECD as a whole (excluding Iceland) declined in 1993 by less than one percent, to just over $335 billion when compared to 1992" (OECD, 1994: 15); and this after increases of about 2 percent in 1992,10 percent in 1991 and 15 percent in 1990 (OECD, 1994: 122). Some of the countries with the highest PSEs will be joining the European Union. This will likely lead to their rates of protection being reduced, at least the ones making for high divergence between domestic producer and world market prices.

Table 8.1 Developments in agricultural support and real producer prices, OECD countries

Source: OECD (1994); 1993 data are provisional.

*Total PSE as percentage of the total value of production (valued at domestic prices) adjusted to include direct payments and to exclude levies.
^†Total CSE as percentage of the total value of consumption (valued at producer prices), including transfers, such as consumer subsidies.
^‡Indicators of the wedge between world prices and effective producer prices created by agricultural policies (ratio of border price plus PSE to border price).

8.3 Global adjustments: the agreement on agriculture of the Uruguay round

The conclusion of the Uruguay Round of the Multilateral Trade Negotiations in December 1993 is the major policy development that affects the rules governing the conduct of agricultural trade. The provisions of the Agreement on Agriculture (AOA) and the related one on Sanitary and Phytosanitary Measures are reviewed briefly below.

The agreement on agriculture

The AOA prescribes rules for "permitted" policies that have effects on agricultural trade. They may be classified in three broad categories. First, there are policies having an impact on market access, i.e. those that determine the rules under which domestic buyers may provision themselves in world markets. These are for the most part "border" measures, e.g. tariffs, variable levies, quotas, etc. However, other measures not in the "border" category, e.g. intervention purchases, determine the price at which domestic producers sell and compete with imports. It is for this reason that the AOA also disciplines the policies of domestic support to agriculture as expressed in an aggregate measurement of support (AMS). The third broad category concerns the extent to which exports may be subsidized (export competition rules), defined in terms of limits to the total amount of subsidies (monetary terms) as well as in terms of quantities that may be exported with subsidies.

The major AOA provisions in these three broad categories are summarized in Table 8.2. The following comments may be made by way of explanation. Non-tariff barriers (NTBs), including variable levies, have to be converted into their tariff equivalents for the base period specified in the AOA. These equivalents are to be roughly equal to the difference between reference domestic and world market prices, expressed either in absolute money amounts per unit of product (specific tariff) or as percentage of the world market price (ad valorem tariff). The resulting tariff equivalents have then to be reduced by the percentages and over the periods indicated in Table 8.2 and the resulting level is to be "bound", i.e. it should not be increased. Developing countries that had unbound tariffs were allowed, and indeed have done so, to offer "ceiling bindings" on their tariffs without necessarily setting these bound tariffs equal to the tariff equivalents of their NTBs in the base period.

Two particular features are worth noting:

1. The average reduction of 36 percent is to be understood as the simple arithmetic average of the individual "tariff lines", but no tariff line may be reduced by less than 15 percent. This offers considerable flexibility to countries to choose which tariff lines to reduce by how much, provided they respect the two overall constraints of 15 percent minimum reduction per tariff line and a simple average for all tariff lines of 36 percent.

2. The resulting bound tariffs are the maximum permitted. Countries may apply lower tariffs at any time. In principle, this creates the flexibility for countries to vary tariff levels in pursuit of domestic policy objectives, e.g. to mitigate the transmission to the domestic economy of world market price fluctuations. In practice, and subject to the constraint that tariffs may not exceed the bound levels, countries can vary the level of tariffs up and down.

The other aspect of the market access category of measures concerns the obligation for countries to maintain existing access conditions including existing preferential access arrangements granted to specific exporting countries and, in their absence, create conditions for minimum access of imports to their markets, 3 percent of their domestic consumption initially, rising to 5 percent later. For these quantities countries are to open "tariff quotas", i.e. defined quantities of imports on which minimal tariff rates will be applied, and in any case at rates lower than the "bound" levels. The idea is that the minimal or lower tariffs will induce importers to buy in world markets the quantities in the quotas, but there is no implication that countries should oblige their importers to do so. However, it is reasonable to expect that if the general bound tariff is high, the wedge between domestic and world market prices will also be high. For example if the former is 100 percent, domestic prices will be roughly double those in world markets. The opportunity to import up to 3 percent of domestic consumption at a tariff of, say, 30 percent will probably provide sufficient incentive for importers to do so.

The other two categories of AOA provisions (export competition and domestic support) are fairly straightforward in their interpretation from the information provided in Table 8.2. It is noted that domestic support as measured (in absolute money amounts) by the AMS need not include support provided under: (a) measures which have "no or minimal trade-distorting effects on production" such as resource retirement schemes, domestic food aid, safety net programmes, advisory services and the like (the so-called "green box" measures); (b) direct payments under production-limiting programmes, provided they are based on fixed areas and yields, are made on 85 percent or less of the base level production or, for livestock, are made on fixed number of head ('`blue box" measures); and (c) measures which result in support not exceeding 5 percent (10 percent for developing countries) of the total value of a product (de minimis clause). For export competition the reductions in export subsidies and in the quantities exported shown in Table 8.2 are to be applied to each commodity exported with subsidies in the base period. Commodities exported without subsidies in the base period may not receive export subsidies in the future.

The Final Act incorporates two Agreements with the potential to lower substantially technical or non-tariff barriers to trade. The Agreement on the

Table 8.2 Agreement on agriculture summary of major provisions

*The least developed countries are exempt from reduction commitments, but should tariffy all NTBs and may not increase their support to agriculture beyond the 1986-88 level.
^†If 1991-92 subsidized exports exceeded 1986-90 subsidized exports, 1991-92 may be used as starting point. Volume and budgetary commitments to be reached at the end of the implementation period (2000) are however based on the 1986-90 situation.
^‡Countries seeking special treatment regarding tariffication can in certain circumstances opt not to tariffy but should offer minimum access of 4% rising to 8% of domestic consumption over the period. For developing countries a similar special clause is applicable and access opportunities of 1 % in 1995 rising to 2% in 1999 and to 4% in 2004 should be created.

Application of Sanitary and Phytosanitary Measures will provide a uniform interpretation of measures relating to food safety and animal and plant quarantine. It establishes a framework for mutual recognition of food control and quarantine regulations and inspection procedures on the basis of equivalence of performance, taking into account the assessment of risk associated with the application, or non-application, of each measure. The Agreement provides for the use of international standards developed by or under the FAD/WHO Codex Alimentarius Commission (food safety), the Office International des Epizoöties (animal health) and International Plant Protection Convention (plant health and quarantine). The other Agreement, on Technical Barriers to Trade, covers other aspects of governmental and nongovernmental technical regulations and requirements. The implementation of the two Agreements will require the development of national skills and infrastructures in a number of developing countries if they are to reap the trade benefit from them.

Implementing the AOA and extent of movement towards freer trade ountries have submitted their reduction commitments under the AOA in the form of "schedules", e.g. showing what is base period tariff equivalent and what will be the bound level in the future, the domestic support reduction commitments and the level of subsidized exports in the base period together with the target level to be achieved by the terminal year of the implementation period. At the moment of writing the "schedules" had not been published, but some information from various sources gives useful indications of the magnitudes of changes involved. Thus, an UNCTAD document (UNCTAD, 1994b) gives the scheduled reductions in the AMS of the USA, the EC, Japan and Canada. Their aggregate AMS in the base year is given as US$143 billion and it will be reduced to US$117 billion by 2000. Likewise, Agra Europe (1993) estimated the EC tariff equivalent in the base period for common wheat to be ECU 149/tonne when the reference world price was ECU 93/tonne. If this tariff equivalent were reduced by the full 36 percent of the AOA, the future bound tariff would be ECU 95/tonne or, under a special provision, a duty that essentially did not exceed 55 percent of the domestic intervention price (see Agra Europe, 17 June 1994). In the same source, the base period subsidized exports of wheat and wheat flour are given as 17 million tonnes; 79 percent of it, or 13.4 million tonnes, would be the permitted level in 2000.

The above examples give an idea of the extent to which the AOA may be taken as representing a movement towards freer agricultural trade. It is fair to say that strong protection will continue to prevail. But the movement towards agreed principles to discipline the conduct of trade (in particular as regards export subsidies) represents decisive progress towards a more certain and transparent trading environment, less subject to erratic interventions and attendant distortions.

Naturally, there is no guarantee that the different provisions of the AOA will prove to be compatible with each other in all countries. The situation is one resembling a problem subject to multiple constraints. In principle only one of these constraints will prove to be the binding one in any particular country situation. For example, reduction of subsidized export quantities by 21 percent may not imply reduction of the value of the relevant subsidies by 36 percent or more. In this case subsidized quantities may have to be reduced by more than 21 percent and down to the level required to reduce the corresponding value of subsidies by at least 36 percent. In the same vein is the issue of the compatibility of the impacts of the AOA concerning imports and exports and those concerning reductions of domestic support, in particular when the latter are viewed together with the other measures foreseen in domestic agricultural policy reforms, e.g. shift of support from price to direct payments. In brief, the issue is whether the changes in domestic support would generate production, consumption and trade outcomes that would be compatible with the application of the trade policy measures of the AOA.

Some of these issues had been investigated for the EC on the basis of what was known about the CAP reform, the provision for the AOA contained in the Draft Final Act of the Uruguay Round of December 1991 and the subsequent "Blair House Accord" between the EC and the USA. The conclusions of the relevant studies (e.g. Tangermann, 1992; Frohberg, 1993) seemed at that time to indicate that these reforms would be largely compatible with each other, in the sense that their impacts on net trade of the EC in the major temperate zone commodities would be fairly similar. Naturally, the results of these studies differ from each other and many of their assumptions, methods and degree of coverage of agriculture can be questioned. For example, uncertainty persists as to the future growth of cereal yields in the EC. If such growth were to be stronger than assumed in these studies, the surpluses generated by the CAP reform may exceed those that would be compatible with the trade policy provisions of the AOA.

The AOA and the policy environment for the developing countries

Under the AOA, the developing countries have received "Special and Differential Treatment" (SDT). It provides for less demanding policy changes on the part of the developing countries, e.g. smaller reductions in the AMS, longer implementation periods, etc. The essence of SDT provisions is shown in Table 8.2. It is noted in particular that the least developed countries, of which there are 41 in total, are exempt from reduction commitments even though they are supposed to change their border measures to tariffs and may not increase price-distorting support to agriculture beyond the 1986-88 level.

Of particular importance may prove to be the above-mentioned option offered to the developing countries in the SDT clause for the products for which the tariffs they applied in the base period were "unbound". In such cases, the developing countries can declare future "bound" tariffs ("offer ceiling bindings") at levels they consider appropriate for their policy objectives. Where other countries have not objected to such offers, the developing countries have been able to set high enough tariff ceilings to allow themselves the flexibility of applying in the future any tariff below the ceiling they consider necessary, e.g. in cases of temporarily abnormally low prices, as discussed in Chapter 7, or abnormally high ones. Another aspect of the AOA worth noting is that it does not address the issue of policy measures implying negative protection for producers and exporters, a phenomenon not uncommon in a number of developing countries, particularly as regards taxation of export crops. Such policies are being changed as part of the wider domestic policy reforms. In the first place, the widespread introduction of structural adjustment programmes has already, in many cases, reversed previous trends towards taxing agriculture. Thus, the current emphasis on promoting primary sector activity, particularly where it has export potential, may involve a tendency to introduce measures to support production. In addition, even where agricultural production in aggregate has been taxed in the past, such measures which involve the transfer of resources out of agriculture have often been accompanied by interventions to subsidize specific groups of producers, often for social rather than economic reasons. In these circumstances, an understanding of the extent to which individual policy interventions are likely to be acceptable in the new international environment is a standard requirement for policy makers.

In conclusion, therefore, the implications of the AOA for the developing countries are significant mainly in the way in which agricultural policies will be formulated in the future. Whether the pressure for change comes from the new disciplines of the Final Act or from those deriving from structural adjustment policies, both point in a rather similar direction, one where influencing prices is no longer the main instrument of agricultural policy. Whether, however, it will always be feasible for developing countries to adopt suitable non-price distorting policies is a matter that requires case-by-case examination. A review of selected policy alternatives to developing countries in the post-Uruguay Round policy environment is given in Box 8.1.

Developing countries and world market changes

In addition to the changed policy environment, the implications for the developing countries of the Uruguay Round agreements derive from changes in world markets-the size, stability and prices fetched.

As regards the effects on world agricultural markets, it was already noted earlier that although the Agreement on Agriculture is comprehensive it only represents a partial liberalization agreement. Overall, a large degree of distortion in the world market of agricultural commodities will still remain even after the complete implementation of the reduction commitments.

Box 8.1. Review of policy alternatives to developing countries*

*Reproduced from FAO (1994c).

In general, according to most studies and compared with the situation without the effect of the Uruguay Round, moderate increases can be expected in the prices of temperate zone products (5 to 10 percent on average) but smaller increases or even slight declines in the prices of the principal tropical products. The price changes of both temperate and tropical products are of concern to the developing countries. Moreover, the expansion in world trade in these commodities, which has been projected to be slower in the future than during the 1970s and 1980s, will only be stimulated to a limited extent by the Uruguay Round agreements. Thus in general it may be expected that there would be no major changes in the global volumes of trade although there will certainly be some changes in the patterns of trade and scope for the more competitive exporters. Beyond agriculture per se, important changes are expected from the expansion in trade under the liberalized Multifibre Agreement. A large rise in exports of textiles to the developed countries is expected while the upward pressure on price could curtail demand somewhat in the developing countries, where the bulk of textiles consumption takes place. On balance the demand for textile fibres could be stimulated, which could be of considerable interest to a number of fibre-exporting developing countries. At the same time a beneficial effect on the expansion of world agricultural markets could come from the boost to world income from the Uruguay Round. This boost to income, mainly in the developed countries, would presumably increase the demand for higher valued products as well as for niche market products like exotic fruit and vegetables, cut-flowers and horticultural products.

Food import costs

The increases that are likely in the prices of the main temperate zone food products together with the reduction in export subsidies could imply rather significant increases in the import prices paid by the net food importing developing countries, which are the large majority of developing countries. In this context, the Decision on Measures Concerning the Possible Negative Effects of the Reform Programme on feast Developed and Net Food Importing Developing Countries could, in principle, help this group of countries in the event of higher world food prices and import bills. This is an important text even though it is still rather weak on concrete action. The idea behind the Decision is that agricultural trade liberalization is likely to lead to higher world prices for food while a reduction in export subsidies will also raise the effective price paid by importers.

Food aid

There is also some concern that the volume of food aid, which historically has been closely linked to the level of surplus stocks, could be more limited in future as the surplus stocks are run down. The Decision recognizes these issues and provides for some redress. First it promises action to improve food aid via: (a) reviewing the level of food aid; and (b) providing an increasing share on grant terms. The Decision also promises that full consideration will be given to requests for technical and financial assistance to improve agricultural productivity and infrastructure. It goes on to promise that any agreement on export credits would make "appropriate provision" for differential treatment in favour of these countries. Finally, the Decision makes some provision for short-term assistance in financing normal commercial imports from international financial institutions under "existing facilities, or such facilities as may be established, in the context of adjustment programmes". This concession appears to be rather weak. The loans (probably not grants) would be from existing facilities at the World Bank or IMF and would be subject to conditionalities of such loans, including "in the context of adjustment programmes". Finally, there is no commitment to new facilities set up specifically to compensate food importers for the higher import bills arising from a reform process, only a reference to "or such facilities as may be established".

Food stocks

While it is likely that world agricultural prices may be slightly more stable as a result of the Uruguay Round, there is a question mark over food stocks. The general move towards liberalization and a reduced role of the government in price support activities could lead to a fall in government stockholding of agricultural commodities. The reduction may not be large but there is a question as to whether the private sector would step in to fill the gap. If not, as seems likely, then global food stocks are likely to be reduced. Fortunately, however, support to food security stocks undertaken in a prescribed fashion has been excluded in the Final Act from reduction targets. As called for by FAO's Intergovernmental Group on Grains at its 25th Session in 1993, it is to be hoped that countries would take advantage of this exemption and build up adequate food security reserves, but developing countries may not be able to make major efforts on this score as holding stocks is an expensive undertaking. The costs and benefits of building and utilizing food reserves or relying on the world market for food supplies need to be carefully weighed.

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