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Regional trade blocs
One of the main developments that characterize the world agricultural trading system is the formation or expansion of existing regional trade blocs. A number of regional trade agreements are under active discussion or have been agreed upon. Examples are the completion of the Single European Market in January 1993, the Protocol between the EC and the European Free Trade Agreement (EFTA) to form a European Economic Area, and the launching in January 1994 of the North American Free Trade Agreement (NAFTA), which extends the Canada-USA Free Trade Agreement to include Mexico. A number of other countries in Latin America are at present negotiating free trade arrangements with the NAFTA countries, or are strengthening and amplifying existing arrangements between themselves. The United States in addition has proposed an Enterprise of the Americas Initiative which would liberalize trade and investment flows between the countries of North, Central and South America. Discussions have also been held on trade cooperation in the Asian and Pacific Rim area, though it is less clear at present what form such arrangements might take. There are many regional agreements among developing countries but not many of them, so far, cover agricultural products.
Large trade blocs do not necessarily imply a movement away from trade liberalization since they could in principle maintain or enhance open trading arrangements with non-members (and other blocs). But the temptation to write rules for the blocs which have the effect of discriminating against outside competitors might be hard to resist. A strong GATT will be needed to make sure that regional trade blocs create trade rather than merely divert trade to their own membership at the expense of outsiders. Under the GATT discipline, regional arrangements are subject to certain conditions one of which is that such arrangements on the whole should not raise trade barriers against other GATT members. Developing countries could probably align themselves with developed country's trade blocs if they so wished, but they would presumably have only limited influence in shaping the rules for such regional trading arrangements. The role of developing countries that might not wish to join such blocs is problematic in the absence of a strong GATT, as they would be dependent upon the blocs providing them with preferential status so as not to be excluded from the major developed markets. The prospect of developing countries forming their own strong trading blocs is limited both by their own economic structures and by the lack of countervailing power that such blocs would possess. Finally, trading blocs seem unlikely to solve agricultural trade problems of a global nature. Existing trade blocs have not found the answer to such issues.
World market prices
The problem of low and highly volatile prices for some major agricultural export commodities of the developing countries will continue to loom large. As noted before, efforts to cope with this problem through international commodity agreements (ICAs) have proven to be of limited value and will probably continue to be so. For the longer term, the main hope for improvements or avoidance of further deterioration in real prices lies in the potential growth of consumption and imports in countries with still relatively low consumption levels of some of these products, namely the ex-CPEs and the developing countries themselves, and of course, in a change in the fundamentals of the producing and exporting countries, i.e. the low opportunity costs for labour due to the low level of productivity in other sectors, both agricultural and non-agricultural (see Chapter 3). But as noted in Chapter 3, these developments are not for the immediate future, not even for the medium-term one.
In order to cope with these problems, developing exporting countries could attempt to stop the decline in agricultural prices and to reduce fluctuations, or alternatively they could take steps to offset, or compensate for, their consequences. The main way that countries sought to stem the decline and stabilize international agricultural prices has been through the Uruguay Round of Multilateral Trade Negotiations. These have had the objective of boosting agricultural trade and prices via substantial reductions in protectionism, mainly in the developed countries. The other main approach to arresting price decreases and to stabilize them, given the failure of international commodity agreements, is to develop market demand via export promotion, commodity development policies and diversification. The Second Account of the Common Fund for Commodities represents an attempt at the international level to assist in this process although it has only recently started to be operational.
The alternative approach to international action on commodity markets is to take steps to offset the effects of price declines and price instability. The effects of world market price declines can be offset at the national level by measures to boost productivity and to cut export taxation or provide protection to agricultural producers. Many countries have followed these paths with the aggregate result of exacerbating the international problem. Similarly, domestic price stabilization measures adopted by many countries, both developed and developing, aggravate the international problem by reducing the extent to which these countries absorb fluctuations in world markets. In adopting a national policy response to declining and unstable world prices, the developing countries are at a distinct disadvantage. They cannot afford to provide extensive protection to their agriculture or engage in massive research and development expenditures to boost productivity. Other ways of offsetting the effects of declining and unstable prices have therefore been developed in the form of compensatory financial transfers and the use of other financial instruments. These include the compensatory financing facilities of the IMF and the EC's Stabex scheme, both meant to deal with fluctuations in export earnings. Finally, there has been the development in trading techniques that offer exporting countries new ways to counter the fluctuations in their commodity prices. These include long-term contracts with fixed prices, forward contracts, the use of options or hedge prices through commodity exchanges, over-the-counter markets and the use of swaps and commodity-linked bonds. As noted before, however, despite the usefulness of these various instruments to lessen the risk deriving from price fluctuations, they are unlikely to address the more fundamental factors underlying the long-term decline of prices of some agricultural commodities.
Trade in relation to environment and sustainability
The other main issue that is expected to characterize the world agricultural trading system in the near future is the growing concern with environmental and sustainability questions and how these relate to a more liberalized trading system. In practice for most agricultural commodities trade only represents a small proportion of agricultural output. For a few, however, such as tropical beverages, trade is much more important and it is always important for some countries. Trade, the environment and sustainable agricultural development are related, mainly because trade permits the location of production to be separated from the point of consumption. Trade may therefore affect the environment if it causes agricultural production to shift from places where it is less sustainable to places where it is more sustainable or vice versa. The two are also related indirectly because trade can help economic development and through it the perceptions of people about the value to be attached to environmental conservation.
Reference is made to Chapters 2 and 3 where it was indicated that the future is one of growing population and higher per caput consumption. Pressures on environmental resources will continue to grow with attendant threats to sustainability, as discussed in Chapter 11. It remains to note here that agricultural trade flows and policies affecting them determine in part not only the location of production but also the extent to which sustainable or otherwise technologies and practices are used to obtain any given amount of agricultural produce. For example, the high support and protection policies in some developed countries have encouraged excessive use of agrochemicals or intensive livestock units with consequent adverse environmental impacts. With more liberal trade and expanded market access, part of the produce thus obtained could have been produced in, and exported from, other countries with more environmentally benign technologies, e.g. meat, wheat and other cereals in South America rather than in Europe.
It follows that more trade can reduce overall pressures on the environment as measured at the global level, if it shifts production to locations where resource endowments are more appropriate to produce any given amount of output in more sustainable, or less unsustainable, ways. At the same time, there is no guarantee that this will be always so, if countries ignore or do not account in an appropriate manner for the environmental externalities generated by production for export or import substitution. In the end, any given amount of output will be produced with the least demands on the environment if both importing and exporting countries have policies that embody the environmental externalities into the costs of production and the prices of the traded goods. For the world as a whole, when all countries have such policies, production would occur in the areas where the sum of production costs and environmental costs is smallest (Anderson and Blackhurst, 1992; FAO, 1993). Naturally, any given environmental cost defined "objectively" in physical units (e.g. tonnes of soil lost to production caused erosion in the same type of land, i.e. other physical facts being equal) will be valued at different prices by different societies, just as any other factor of production is valued. It follows, therefore, that determination of production location patterns through trade (with all countries having environmental policies reflecting their own valuations) will minimize total costs including environmental costs as perceived by the different countries, but not necessarily as measured by some "objective" physical yardstick. This is as it should be because, as discussed in Chapter 3, sustainability and the value of the environment are anthropocentric concepts.
Thus, provided that this way of viewing the value of environmental resources is accepted and that appropriate environmental policies can be introduced, agricultural trade and environment can be made compatible but this may need multilateral support to make it effective. This will be one of the main challenges of international agricultural policy making in the years ahead, in particular for the Sub-Committee on Trade and Environment which has been established pending the negotiation on the successor to the GATT, namely the new World Trade Organization.
If national environmental policies are adopted by only a few countries, this does not represent a satisfactory approach to the pursuit of sustainable agricultural development. The imposition of taxes which make producers in one country face the environmental costs of particular production systems may simply lead to production being concentrated in countries where such costs are ignored or only partly taken into account. To avoid this, some countries could be tempted to adopt a unilateral approach, with policies which tend to equalize the treatment of domestic and foreign producers via the imposition of domestic charges on both local and imported goods or via import measures. Such approaches can, in many cases, be fully compatible with GATT rules but not all environmental policies would qualify. Thus a strong case can be made for a multilateral approach to reinforce the feasibility of adopting national agricultural environmental policies, through for instance international commodity-related environmental agreements. Multilateral approaches are also needed to avoid the misuse of environmental policies as a new form of disguised protectionism. For example, developed countries should not go so far as to deny poorer countries the advantages of profitable trade by demanding that they meet strict environmental standards reflecting values of much wealthier societies. At the same time, low-income developing countries will continue to face constraints in adopting "high" environmental standards. Assistance to enhance their development prospects as well as specific assistance in the area of sustainable development and the environment would contribute to relax these constraints.
In addition to national environmental issues, there are a number of transboundary environmental issues, which may or may not directly involve trade. In cases where appropriate national policies are not introduced and where damage is caused to other countries, resort may be made to multilateral action to encourage "good practice" via, for example, international environmental agreements (IEAs). The growth in the number and scope of these IEAs has been rapid and may be expected to continue in the future. An important issue for international policy will be to ensure that such action is based on objective, scientific criteria and to recognize the authenticity of differences among countries in the valuation of environmental goods. Action should be non-discriminatory, proportionate to the damage caused and result in minimal economic damage. Increasingly what is at stake is where the environmental problem does not derive from the production of the commodity itself but where it is the production and processing methods that are damaging and where trade measures are used to attempt to influence the choice of technologies used in other countries. These subjects are likely to be an important feature of the agricultural trade policy agenda for a long time to come and it will be important that agreements are reached which discipline the use of trade measures under the IEAs to make sure that these measures are not used as a new form of protectionism.
In conclusion, the widespread existence of environmental externalities means that markets alone cannot ensure sustainable agricultural development, since private market values normally do not take account of social costs and benefits. As a result if sustainable agricultural development is to be attained, governments should have appropriate policies which modify the behaviour of markets, otherwise resource allocation is likely to be sub-optimal from the point of view of the society as a whole. The range of policy options is very wide. Some imply the use of corresponding trade policies and others affect trade indirectly via their effects on production or consumption. However, it must be noted that inappropriate policies, what is called intervention failure, can also cause sub-optimal allocation of resources and need reform just as much as market failure requires action. It seems likely that countries will increasingly adopt environmental policies and that this will be a major aspect of agricultural policies by 2010.
NOTE
1. The PSE measures the value of the monetary transfers to producers from consumers of agricultural products and from taxpayers resulting from a given set of agricultural policies in a given year. The CSE measures the value of monetary transfers from domestic consumers to producers and from taxpayers to consumers of agricultural products resulting from a given set of agricultural policies in a given year. In other words, the CSE measures the implicit tax imposed on consumers by agricultural policies. For this reason the estimates have a negative sign (OECD, 1994: 251-3). The PSE and CSE measures were initially developed in FAO (FAO, 1973).