Agriculture and the Global Trade Agenda
By Timothy Josling, June 3, 2014
International trade in agricultural commodities is a relatively small component of total trade in goods and services, but it accounts for a disproportionate share of time and effort in trade negotiations and is the topic of many of the most contentious trade disputes.
The reasons for this imbalance are many, but they fall into three broad categories: the sensitivity of governments to issues that impinge on their ability to secure food supplies for their populations; the significance of agricultural exports for rural development and economic progress more generally; and the growing trade in food products associated with the rapid globalization of the food and beverage industry. In each of these aspects of the politics and economics of trade in agricultural and food products, powerful and conflicting interests arise. Trade regimes reflect the resolution of these forces, and any attempt to change rules meets with formidable resistance.
The intention of this article is to survey briefly the current issues surrounding the place of agriculture in the global trade agenda. That agenda itself is being discussed in a number of venues, from the World Trade Organization Doha Round, to the numerous bilateral trade agreements between countries at all stages of development, to the mega-regional arrangements such as the Trans-Pacific Partnership (TPP), the Trans-Atlantic Trade and Investment Partnership (TTIP) and the Regional Comprehensive Economic Partnership (RCEP). The outcome of these talks will determine the regime for agricultural and food trade in the decades to come.
One starting point for such a survey is to reflect on the different perspectives that groups of countries bring to the negotiating table when agricultural trade rules are under discussion. All countries assume an obligation to ensure adequate food supplies for their citizens; the affordability and safety of such food is also of public concern, and governments react to these pressures. For relatively large economies in temperate climates, this challenge has been met by encouraging domestic agriculture. In several developed countries, the adoption of modern farming techniques in the post-World War II period led to reduced demand for imports of basic agricultural commodities. In others, technological progress provided surpluses for export and led to the search for markets overseas.
Thus, over much of the past 60 years, the primary tensions over agricultural trade have been among developed countries such as the U.S., Canada, the European Union countries, the European Free Trade Association (EFTA) countries, Japan, Australia and New Zealand. Japan and the EFTA countries, more recently joined by South Korea, have high-cost agricultures but strong domestic political support for limiting the importation of grains, sugar, dairy products and meat. The exporting developed countries—joined in the past two decades by Argentina, Brazil and Chile—have argued strenuously, but with limited success, that they are reliable and low-cost suppliers of those products. The Uruguay Round of trade talks, which lasted from 1986 to 1994 and led to the creation of the WTO, was the final act of this drama, putting significant restraints on domestic policies and lowering agricultural tariffs.
Less conspicuous on the agricultural trade scene until recently were the developing countries that exported specific products—mainly tropical fruits and beverages together with sugar—to developed markets, typified by countries in Africa, the Caribbean, Central America and the Pacific Islands. These products either enjoyed privileged access under post-colonial trade agreements or were marketed by large companies with adequate infrastructure. For these developing countries, the trade rules negotiated in the Uruguay Round were largely irrelevant, and tariffs on their exports were often low. However, as small economies, many of them had an overwhelming interest in trade, and they came rather late to the realization that the development of the multilateral trade system was an important aspect of their economic development. Moreover, the unwillingness of the EU to continue to grant unilateral preferences to its former colonies, among other factors, has obliged these countries to diversify their trade strategies.
Another group of developing countries, those with large populations and extensive agricultural sectors, felt pressure from their urban areas to keep prices low and to neglect their agricultural infrastructure. India and other countries in South Asia maintained policies that essentially taxed agriculture in favor of urban consumers through low fixed prices. These countries were saved first by the import of massive amounts of grain under food aid programs, distributed to consumers through state-run stores, and later by dramatic yield increases in basic foodstuffs as a result of improved crop breeding, known as the green revolution. However, these countries also believed that their policies would not be constrained by the rules being negotiated by the developed countries in the Uruguay Round and took little interest in the debate. Countries in Southeast Asia—such as Malaysia, Indonesia, Thailand and the Philippines—had a more direct interest in agricultural trade but maintained a defensive stance when it came to the opening up of agricultural markets.
All this began to change around the turn of the century, as a new round of trade negotiations began, and the current debates reflect this transformation. The developed countries had by then largely achieved an accommodation among themselves reflecting significant domestic policy changes that removed many of the conflicts with the trade rules. Negotiations since that time have involved steady reductions in tariff levels through bilateral and other deals, particularly when the multilateral trade negotiations have been on hold. In place of agricultural conflicts, disagreements emerged over health and safety issues, like beef hormones or poultry slaughtering; the introduction of new technology for crop production, such as transgenic seeds; and the marketing of goods with place names to indicate quality, that is, geographical indications.
Developing countries with preferential access to tropical commodities have sought to maintain their traditional markets while expanding their sales to emerging economic powers. Here again this has been as a result of bilateral and other trade agreements rather than progress at the multilateral level. Developing countries have become increasingly concerned with the regulations and standards that govern imports into affluent markets, whether imposed by governments for health reasons or by private firms looking to sell desirable attributes—organic and fair trade, for instance—to quality-conscious consumers. To many, the costs of meeting such standards constitute a restriction on trade.
A change in approach to agriculture can also be observed in those countries with large populations and low yields. They had in the past decade begun to invest in rural infrastructure, both to increase productivity at the farm level and to curb the continued flow of people to overcrowded cities. But attitudes toward agricultural trade have been slow to change. India has followed a meandering path toward open markets and has shown some ambivalence when it comes to negotiating changes in the trade rules for agriculture. China entered the WTO in 2001 and has had a substantial impact on agricultural trade, both as a major market for such products as oilseeds and cotton and as a formidable competitor in third-country markets. But China’s domestic policies also waver when it comes to such matters as self-sufficiency targets for basic commodities and the role of state trading institutions. It is not clear in which direction China will use its growing influence in agricultural markets. The ongoing negotiations in the WTO Doha Round reflect these new realities: China and India now hold the keys to progress in agricultural trade rules, just as the EU and the U.S. did for so many years.
Agriculture in Trade Rules
The rules of the trade system for agricultural goods, as for manufactured products, have their roots in the immediate post-World War II environment, in which the main focus was to develop constraints on government behavior in the area of trade policies that would avoid the disastrous collapse of trade seen in the 1930s. The trade rules, developed in the General Agreement on Tariffs and Trade (GATT), extended to agricultural trade. But in three areas there were special provisions inserted that in effect relaxed the restrictions on agricultural trade policies. Article XI of the GATT limited border measures to tariffs, but an exception was granted to countries where domestic supply of a product was constrained. For these products quotas and similar nontariff trade measures were allowed. This apparently logical and harmless exception proved to be an open door through which passed numerous trade quotas that were only loosely connected to domestic supply restrictions. (For instance, the U.S. requested a waiver from these conditions in 1955 when Congress passed a bill that required the president to impose quotas in support of farm programs even when no supply control was in place.)
The second exception was in the matter of export subsidies. The original GATT advised countries against using such subsidies (Article XVI) but did not prohibit them. A later addition to the rules did prohibit export subsidies on manufactured products but not on primary products. Among the consequences were the “subsidy wars” of the 1980s, when the U.S. and the EU clashed over export subsidies to wheat and flour. Once again, the trade-disruptive policies of developed countries competing for markets were not effectively constrained by the GATT.
A third exception, allowing the violation of other rules of the GATT, was contained in Article XX, which dealt among other things with import restrictions for health and safety reasons. This provision was inserted to allow governments to discriminate against countries to keep out produce that might otherwise pose a threat to human, animal and plant health. However, exporting countries continually complained that the measures taken to protect health were actually designed to protect domestic producers. So another potential loophole for agricultural protectionism appeared in the fabric of the GATT in the guise of health and safety standards.
The Agreement on Agriculture
The early rounds of trade negotiations did little to close these loopholes or make more explicit the rules that were to constrain government behavior. The Uruguay Round finally tackled the issue of agricultural trade, taking a major step by agreeing to consider constraints on domestic farm policies and on health and safety regulations as they impacted trade flows. The Uruguay Round Agreement on Agriculture (AoA) provided a formula for the resolution of the problems inherent in the GATT exceptions. Nontariff barriers were converted to tariffs, and those tariffs were bound and reduced. With respect to export subsidies, the agreement incorporated a ban on new subsidies and a reduction by formula for those that had been entered into a country schedule. Domestic support for agriculture, including all support given “within the border” by subsidies and administered prices, was divided into three categories: “trade-distorting subsidies” that involved payments based on price support, or direct payments that were made on the basis of output—often called “amber box payments”—were to be entered into schedules and reduced; payments that were tied to supply control—“blue box payments”—were not to increase, though there was no obligation to reduce them; payments deemed to be not trade-distorting, or only minimally so, were categorized as “green box” and were not subject to reduction.
With respect to health and safety regulations, countries agreed, in the Sanitary and Phytosanitary Agreement, to employ risk assessment techniques and to base such regulations either on multilateral standards or on scientific evidence.
An important provision in the AoA (Article 20) mandated the start of further negotiations within six years of the conclusion of the Uruguay Round. This provision, along with some mandated negotiations on services, constituted a “built-in agenda” for a new round of trade talks. The launch of such talks would have been an appropriate focus for the agenda at the WTO Ministerial Conference in Seattle in November 1999. But the conference attempted the more ambitious task of setting the agenda for a full trade negotiation, including some new subjects, the so-called Singapore Issues, that had been discussed at the 1996 conference in Singapore. The task proved too much for the Seattle meeting, which ended with recriminations among WTO members and shattered hopes for a continued strengthening of the multilateral trade rules. It was not until the Doha Ministerial Conference in December 2001 that a new round of WTO negotiations was launched, including agriculture as one of the key topics.
The Doha Round
The change in the balance of interests mentioned above began to show itself early in the Doha Round. In the lead-up to the Cancun Ministerial Conference in 2003, the U.S. and the EU presented a joint paper that would have sheltered their agricultural policies from significant cuts. The reaction was swift, with Brazil, India and China leading a group of some 20 countries to oppose the U.S.-EU plan. The G-20—not to be confused with the later group of 20 large economies convened to discuss global financial matters—in effect took over the agricultural agenda after Cancun, calling for sharp tariff cuts, an end to export subsidies and a major reduction in domestic support payments. The U.S. and the EU found themselves together defending their own farm policies and asking for major access to emerging markets in exchange for any tightening of restrictions. This dynamic continued throughout the period of active negotiation in the Doha Round, from 2004 to 2008. A meeting in July 2008 came close to yielding agreement but was ultimately deadlocked when the emerging countries failed to offer enough in the way of market access for the U.S. to agree to the agricultural aspects of the package.
The Doha Round was given a modest boost at the WTO Ministerial Conference in Bali in December 2013. The ministers decided to reactivate the Doha Round and agreed to prepare a road map by the end of 2014 for its conclusion. The agricultural component is still central to an eventual agreement. However, conditions on world markets have changed somewhat since the Doha Round was launched, and the agenda looks somewhat dated. Commodity prices boomed in 2008 and again two years later, leading to export restrictions by some countries and widespread concerns about food security. Thus the issue of export restrictions became a candidate for inclusion in the Doha agenda. Moreover, India had found that its policy of buying domestic production to build up food security stocks was in danger of breaching its allowable limit of trade-distorting support. As a result, much of the discussion in the next year in the Doha Round will revolve around these food security issues rather than focus on the domestic support policies of the developed countries.
Preferential Trade Agreements
Though the WTO has served as a locus for discussing domestic and export subsidies for farm products, the access to markets has been transformed by the negotiation of bilateral and regional trade agreements, often grouped as preferential trade agreements. The treatment of agriculture in such agreements has been changing over time. In the 1960s the choice seemed to be to include agriculture as any other traded product, as the European Economic Community did, or to exclude it altogether, as the EFTA did. Now the typical free trade agreement (FTA) allows for the exclusion of one or two of the most politically sensitive commodities—rice and sugar are two common candidates—and the liberalization of other products on a range of timetables. But even with these accommodations to domestic sensitivities, the result has been to reduce the overall level of protection for agricultural products at the border.
The negotiation of the mega-regionals offers to open up trade in agricultural products in a dramatic way. The TPP involves 12 countries—including the U.S., Canada, Australia and Japan—that have either strong export interests or significant barriers that obstruct agricultural trade. Any agreement that removed these trade barriers, even on an extended timetable, would transform trade patterns in the Asia-Pacific region. Insofar as the TPP would be a magnet for other countries, perhaps even China, the significance of the agreement would grow. And the corresponding initiative across the Atlantic, the TTIP, would have an impact on agricultural trade well beyond the modest increase in trade flows themselves. The focus of the TTIP will be on regulatory coherence. Any harmonization or mutual recognition of health and safety standards and quality regulations between the U.S. and the EU would likely spread rapidly to other markets. By contrast, the impact on agricultural markets of the RCEP, sponsored by the Association of Southeast Asian Nations and China, is not expected to be great. The agreement in effect would consolidate all the ASEAN free trade agreements, but most of these avoid opening up trade in sensitive agricultural products. Perhaps as important is the recent FTA between China and Australia, in which some concessions on agricultural goods were made.
Of course not all, or even any, of these bilateral and mega-regional negotiations may result in an agreement. This would leave any improvements in the regime for agricultural trade squarely in the hands of the WTO. And if the Doha Round remains in limbo, the rules included in the Agreement on Agriculture will remain as the main framework for domestic agricultural policies. The prospect under these circumstances would be for increased reliance on the dispute settlement procedures of the WTO to adjudicate challenges arising from new tensions. Such tensions could arise from several directions, including different responses to climate change, divergent attitudes to new technologies and the expanded use of food crops for biofuels. It is doubtful whether the recourse to litigation will resolve such issues. The need for agreements among the major trading partners will remain.
At stake is the adequacy and affordability of food for a growing world population. Trade policy influences where such food is produced and the cost of that food to consumers. Resources are wasted when food is produced in the “wrong” places. Food security demands the ability to move produce to where it is most needed: Self-sufficiency comes at a high cost, borne by the poorest sections of the population. Growth in incomes leads to diversification in diets, again facilitated by trade. The benefits of an open trade system in food products will increase as climatic conditions change the economics of production. But the trade system works on trust and confidence. Trade rules help to build that confidence. In the case of agriculture, this process has been slow and is still incomplete.
Timothy Josling is a Senior Fellow at the Freeman Spogli Institute for International Studies, Stanford University.