INTRODUCTION

1. The Committee at its 62^nd Session reviewed the studies undertaken by the Secretariat on commodity and environment linkages, the present state of biotechnology developments and their potential impact on commodity markets and trade and the assessments made of the impact on trade of the Uruguay Round (UR) Agreements on Application of Sanitary and Phytosanitary Measures (SPS) and Technical Barriers to Trade (TBT). In this regard, the Committee noted the importance of these matters for member countries. This report contains a summary the activities undertaken by the Secretariat in the areas listed above since the last session of the Committee, as well as the new and emerging issues that may affect agricultural commodity markets in the future.

TRADE AND ENVIRONMENT LINKAGES

2. Although the Secretariat has not produced further studies on trade and environmental linkages since its last report to the 62^nd Session of the Committee, it continues to monitor developments in the area of environment and biological diversity, with a view to assessing their possible impact on international trade of agricultural commodities. Indeed, one area that has recently become important from such a perspective is the growing potential that organic agriculture offers for increased trade and beneficial environmental impact.

3. Production and exports of organically-grown foods have been rising rapidly world-wide over the last 10 years. The UNCTAD/WTO International Trade Centre (ITC) estimated retail sales of organic foods in the 11 largest markets at US$13 billion in 1998. Industry sources estimate that sales will be close to US$20 billion in 2000, an increase of 54 percent over 2 years. Although sales of organic products account for less than 2 percent of the food market in most countries, these products have attracted the attention of governments, producers, market operators, consumers and the media. This interest is partly due to a growing distrust of conventionally produced foodstuffs after a series of food scandals, environmental concerns and a public perception that organic foods may have better taste characteristics. Furthermore, while sales of conventional foods have stagnated for years, the organic food segment has experienced strong growth, with demand reportedly growing faster than supply in many developed countries. In these countries, certified organic foods generally sell at higher prices than conventional foods. Thus, in addition to its perceived environmentally friendly nature, organic agriculture offers promising market opportunities, not least for developing countries which could benefit from the growing demand in industrialised countries. For reasons such as low-input farming methods, climate and costs of labour, many developing countries potentially have a comparative advantage in producing and exporting certain categories of organic products.

4. International trade in organic agricultural products is expected to continue its rapid expansion in the short and medium terms. However, there are several constraints to trade development. Reliable market information (e.g. data on imported quantities and prices) is scarce due to the fact that national customs statistics do not distinguish organic from conventional products. Governments and producers need medium- to long-term projections on supply, demand and prices in order to make informed policy and investment decisions. In the relatively small market for organic produce, production expansion needs to be based on reliable market information in order to avoid surpluses and depressed prices. In addition, national organic standards and certification systems need to be harmonised, as some countries refuse to label as `organic' the products imported from countries where standards and regulations are different from theirs, hence increasing compliance costs of exporting countries.

5. In order to help governments and market operators make informed decisions, FAO has undertaken several economic and market studies on organic products. A study on the market for organic bananas was presented to the Intergovernmental Group on Bananas and Tropical Fruits in 1999 (document CCP: BA/TF 99/7). FAO is also carrying out a study on the world markets for organic horticultural products in collaboration with ITC, as well as an analysis of the economics of organic citrus production (both to be published in 2001). FAO is testing a questionnaire to collect annual information and statistics on organic agriculture production and trade from its Member Nations. Moreover, plans are underway to hold a conference on 'Supporting the Diversification of Exports in the Caribbean/Latin American Region through the Development of Organic Horticulture' in 2001 provided sufficient extra-budgetary resources are obtained. Similar conferences are planned for Africa and the Asia-Pacific regions in the next two years.

6. The FAO/WHO Codex Alimentarius Commission has endorsed in July 1999 Guidelines for Production, Processing, Labeling and Marketing of Organically Produced Foods. These Guidelines are intended to guide and promote the elaboration and establishment of definitions and requirements for organic food, to assist in their harmonization and, in doing so, to facilitate international trade. FAO's cross-sectoral activities on organic agriculture are coordinated by an Inter-Departmental Working Group (IDWG) on Organic Agriculture and have been incorporated into FAO's Medium-Term Plan (MTP). These activities have three main objectives: (i) establishing information services and networking arrangements on all aspects of organic agriculture (production, processing, labeling and marketing); (ii) providing analysis and decision-support tools for productive and efficient organic agriculture systems; (iii) undertaking topical studies and policy advice on production and trade of certified organic agriculture products.

7. Finally, FAO released a new web page on organic agriculture in July 2000, which includes information on its activities and a searchable database of documents, as well as links to external web sites that offer information on organic agriculture. (http://www.fao.org/organicag).

TRADE AND BIOTECHNOLOGY DEVELOPMENTS IN AGRICULTURE

8. The Secretariat has continued its work on assessing the commodity market implications of biotechnology developments. Currently this work is being undertaken within the framework of the IDWG on Biotechnology, established in response to the request of the Committee of Agriculture at its 15^th Session. The IDWG on Biotechnology has the objective of fostering the development of a co-ordinated programme for FAO on biotechnology and has so far completed a survey of actual and planned biotechnology activities in FAO; developed a position statement for FAO on biotechnology; and taken part in the preparations of FAO's MTP in which it will concentrate on providing a forum for FAO Members, developing an FAO web-site on biotechnology and coordinating the activities of technical divisions in priority areas for interdisciplinary action.

9. Within the framework of the IDWG, the future activities related to the monitoring of biotechnology developments with a commodity focus will include the development of databases providing information on patents as they apply to food and other agricultural commodities, classified in accordance with the conceptual framework reviewed by the Committee at its 61st Session, and on national regulatory action taken by developing countries in the field in order to complement the work undertaken by the OECD for developed countries. In addition, the Secretariat will continue to update its assessments of the potential impact of these developments on the competitiveness of agricultural commodities and international trade patterns.

10. Since the last meeting of the Committee, the Secretariat completed the assessment of the situation as it applied to the cereals sector, which was reviewed at the Joint Meeting of the Intergovernmental Groups (IGGs) on Grains and Rice held in September 1999¹. The analysis indicates that the most likely first effect of biotechnology developments on cereal trade would be to reinforce existing trade patterns, because the developments pursued so far have been directed at and adopted by commercial producers located in the more developed cereal producing and exporting nations, leading to reduced production costs. The impact on cereal trade, however, could be limited by consumer reluctance in some markets to purchase food containing genetically altered cereals. The trade implications of the adoption by producers and the acceptance by consumers of the next generation of technologies that could promote the development of new characteristics and uses of cereals are still unknown, as they are not yet commercially available. Moreover, if public sector biotechnology research picks up momentum and the results benefit the developing countries, this could lead to a shift in cereal trade patterns.
11. More recently, the Secretariat updated its earlier patent search that formed the basis of the documents that were reviewed by the IGGs at their earlier sessions. A more substantive document is currently under preparation, but a brief summary of the results is presented in Table 1 in the form of a relative frequency distribution highlighting the concentration of the new applications in terms of their potential impact on markets. Thus, for example, nearly 75 percent of the new patent applications in the oilseeds sector (with soybean, sunflower and rapeseed being the main items) are designed to maintain or increase the yields of the crops concerned. Applications related to pest and disease resistance constituted an important proportion of those classified under the category "maintain yields or reduce variability." This is also the category where the largest concentration occurs for cereals (30 percent), where maize and rice are the main crops receiving attention. Creating new uses for cereals is the category where the second largest concentration occurs, followed by those applications designed to improve yields (13.4 percent) and improve marketability (12.4 percent). As for the livestock sector, the recent efforts seem to be concentrated in the fields of medicinal uses of animal products and vaccines against pathogens for both animals and humans, with nearly two-thirds of the applications falling under the categories new uses and vaccines.

MONITORING DEVELOPMENTS RELATED TO SPS AND
TBT ISSUES IN AGRICULTURE

12. In view of the growing importance for trade of sanitary and phytosanitary measures and of technical barriers to trade, the Secretariat had prepared studies assessing the incidence of these measures on a number of agricultural commodities², which were subsequently reviewed by the respective IGGs. The Secretariat is in the process of developing a methodology to quantify the impact of these measures on trade. In the meantime, however, experience with the implementation of the measures is being gradually built up at WTO. This section provides a brief summary of the processes being instituted at WTO to increase transparency and facilitate harmonisation across member nations and summarises the Secretariat's approach to assessing the trade impact of these measures.

13. With the change in the policy environment of many countries, tariff and quantitative restrictions on food and agricultural trade are being progressively lowered. The focus is now on technical measures such as food safety regulations and labelling requirements, as the incidence of genuine health concerns related to food rise in an increasing number of countries. Such consumer worries are placing greater demands on regulators to ensure not only the safety and quality of the food they consume but also the environmental, social and ethical concerns related to food and agricultural production.

14. The Uruguay Round Agreements on Technical Barriers to Trade (TBT) and the Application of Sanitary and Phytosanitary Measures (SPS) were intended to clarify and discipline the use of technical requirements, including food safety and animal and plant health measures. To avoid the misuse of SPS measures as disguised trade restrictions, the SPS Agreement requires such measures to be based on science. They may be applied only to the extent necessary to protect human, animal or plant life or health, and they may not arbitrarily or unjustifiably discriminate between countries where identical or similar conditions prevail.

15. In order to prevent the multiplication of TBT and SPS requirements from seriously hindering trade, efforts are being made to foster their harmonisation across member countries, in particular through the development and adoption of international standards, the promotion of "acceptance of equivalency of requirements" and the forging of "mutual recognition agreements". Several such initiatives have been conducted successfully in recent years. However, the instances of accepting of equivalency of requirements or of mutual recognition agreements have mainly involved developed countries.

16. Since the inception of the two agreements, significant progress has been achieved with respect to the obligations on transparency concerning the establishment of inquiry points, for the provision of information on SPS or TBT measures to other members, and the notification of SPS and TBT actions. With regard to the inquiry points for SPS and TBT, a majority of WTO members had established these by 1999. However, the proportion of those developing countries that have not yet designated an enquiry point for TBT regulations continues to be relevant. As for the notification of actions, their number has risen substantially in the case of SPS measures, from almost 300 in 1998 to some 440 in 1999. Although the overall number of TBT measures notified to WTO has not followed a similar upward trend, it is noteworthy that the notifications made by the developing countries trebled between 1995 and 1999.

17. Nevertheless, many developing countries continue to express concern regarding their inability to comply with trading partners' SPS or TBT regulations. Notwithstanding the provisions on special and differential treatment included in the SPS and TBT agreements and the technical assistance given bilaterally or through international organizations, these countries still are not able to meet their obligations on use and application of international standards and, consequently, run the risk of being marginalised from international trade. In addition, an examination of the records of the WTO Dispute Settlement Body (DSB) reveals that developing countries are much less likely to file requests for consultations (46 complaints) than are developed countries (152 complaints), which may suggest that some developing countries may lack the technical capacity to make effective use of the procedure.³

ASSESSING THE IMPACT OF SPS AND TBT MEASURES ON TRADE

18. With the growing importance of the SPS and TBT measures, there is a clear need to develop a consistent and practical framework that would allow exporting countries to assess the costs of complying with those measures and their impact on trade flows. An initial analysis has been undertaken to determine the basic requirements for developing such a framework. Most of the measures are product-specific and, therefore, the investigation of their impact on trade flows can only to be undertaken at the commodity level. Moreover, since the costs of complying with those measures depend to a large extent on the conditions under which the commodities are produced in different locations, the assessments must be country/supplier specific. Put differently, to understand fully the impact of these measures requires detailed knowledge of the standards and conformity assessment procedures that are applied, the manner in which individual suppliers comply with these requirements and the associated costs. Once the compliance costs are estimated, the impact on trade flows can be assessed by employing supply and demand elasticities to determine the proportions accounted for by domestic supply and imports⁴.

19. The costs of compliance are defined as additional costs necessarily incurred by businesses in meeting the requirements laid upon them in complying with a given regulation. In order to facilitate measurement, costs of compliance can be categorised in two different ways:

• Direct and indirect costs: Direct costs are associated with the primary purpose of technical standards and/or conformity assessment procedures, whereas indirect costs result from effects not directly related to the purpose of these requirements. For example, the direct costs of compliance with a requirement to include particular information on a product label might include label redesign. The indirect costs might include product adaptation in response to the requirement to label the product in this manner.
• Non-recurring and recurring costs: Non-recurring costs refer to one-off items of expenditure that are required for initial compliance, for example investment in new equipment. Recurring costs are associated with more permanent increases in operating expenditures, for example product-testing requirements. The distinction between recurring and non-recurring costs suggests that account must be taken of the stage in the compliance process at which costs are measured.

20. Thus, the approach involves identification of the specific changes and procedures businesses are required to undertake to comply with the various measures. Therefore, a good understanding of the compliance process within individual firms is required. The costs of compliance with the specified technical requirements are then estimated on a case-by-case basis using cost data reported at the firm level, making the results generally more reliable and allowing the costs to be related to the characteristics of particular standards and conformity assessment procedures.

CONCLUSIONS

21. Effective monitoring of global developments in agricultural commodity markets requires the collection, collation, analysis and dissemination of information on all important factors that affect the competitiveness of agriculture-based products. Thus, in this context, the Committee may wish to reaffirm its support to the following activities for the Secretariat's work programme:

• Continue analysing the economics of organic production of agricultural commodities, as well as collecting annual information and statistics on organic agriculture production and trade from Member Nations, in collaboration with other institutions that are active in the area.
• Continue monitoring biotechnology developments with the aim of assessing their possible impact on agricultural commodity markets and contributing to the activities of the Inter-Departmental Working Group on Biotechnology.
• In view of the growing importance of SPS and TBT measures and given the amount of detailed information and analyses required at the commodity and country level in order to assess the trade impact of such measures, undertake a series of studies covering agricultural commodities that significantly contribute to the foreign exchange earning capacity of developing countries.

1 See document CCP:GR 99/3 - RI 99/3 Biotechnology developments and their potential impact on trade in cereals. Similar studies were presented to the IGG on Oilseeds, Oils and Fats (CCP:OF 97/4) and the IGG on Meat (CCP:ME 98/7).

2 Documents CCP:ME 96/3 and CCP:OF 97/3.

3 Overview of the State-of-Play of WTO Disputes, WTO Website, 28 September 2000.

4 It should be noted that it is also possible to measure the trade impact indirectly by estimating the tariff equivalent corresponding to the costs of compliance with the technical requirements to trade through variations in market prices. This generally involves measurement of the extent to which the domestic border prices of an imported good exceeds the price paid by domestic importers to foreign exporters, inclusive of transport costs and any tariffs applied by the country concerned. However, the accuracy of this approach is dependent on the ability to isolate the impact of these measures from other influences on market prices.