Why agricultural trade liberalisation matters
Farmers’ incomes still rely too heavily on subsidies, which distort markets, put exporters from developing countries at a disadvantage and cost taxpayers hundreds of billions of dollars a year. Agricultural reform and reductions in trade barriers could help farmers both in the industrial and developing worlds get a better deal in a more cost-effective way.
Agricultural policies in OECD countries cost consumers and taxpayers more than US$330 billion a year. On average, more than a third of farm receipts come from government programmes, although this share varies widely among OECD members, from almost zero to nearly three-quarters of farm receipts.
To put this spending in perspective, total agricultural support accounts for 1.3% of GDP across the OECD area, yet agriculture accounts for less than 5% of national income in most member countries. The value of support is more than five times higher than official spending on overseas development assistance and twice the value of agricultural exports from all developing countries.
Given this scale of intervention, it is important to ask whether the money is being well spent. In general, the answer is no. Current policies typically reduce economic efficiency and disrupt international markets – often at the expense of developing countries. The current policies also fail to target low-income farmers and in many cases do more harm than good to the environment. OECD ministers have recognised the need for fundamental reform. Substantial reductions in support and protection would ease the burden on consumers and taxpayers. The resources released would also allow for more targeted assistance to farmers and a clearer focus on environmental and other domestic objectives. Such changes would be consistent with Article 20 of the Uruguay Round Agreement on Agriculture (URAA), which calls for a continuation of the reform process to build a fair and market-oriented agricultural trading system, while taking account of non-trade concerns, such as food security and the environment.
As a new round of trade negotiations approaches, it is important to note that the starting point is very different from 1986 when the Uruguay Round was launched. The URAA was a watershed, in that agriculture was finally subjected to multilateral rules and disciplines. Specific reform requirements were mandated in three areas: market access, export subsidies and domestic support. WTO members will be approaching the forthcoming WTO ministerial with proposals in mind for how the rulings agreed in 1994 should be revised and extended.
The main achievement of the market access discipline was “tariffication” – a process whereby import bans, quotas and other restrictive import measures were converted into tariffs. But the price of this reform was that some of the new tariffs were set at extremely high levels. Six years on, with Uruguay Round implementation in agriculture completed for the developed countries, tariffs remain very high. Average agricultural tariffs are in the region of 60% of the price of imports, whereas industrial tariffs are rarely above 10%.
Market opening measures in the form of tariff-rate-quotas (a quantity of imports allowed at a lower tariff) have not been fully successful, with a large number remaining unfilled. Not surprisingly, the growth in world agricultural trade has remained much slower than in other sectors, and developing countries have been unable to increase their share of world markets. Significant improvements in market access will require much deeper cuts in tariffs, or big increases in the volumes admitted at lower tariffs, and preferably both.
The disciplines on export subsidies were the most effective part of the URAA, with countries less able to resort to export subsidies when world markets weakened.
Export subsidies disrupt world markets and prevent efficient producers from competing. The lower prices they imply may benefit some developing country importers, but in many more cases they undermine local markets and hinder agricultural development. Further reforms could have significant impacts in some markets, notably for dairy products, and would prevent countries returning to export subsidisation in the event of weaker world markets.
An innovative feature of the URAA was the domestic support disciplines, which recognised that domestic policies can have strong effects on trade and trade policies. Countries agreed to reduce the value of support for the most trade-distorting policy measures (such as output-related price supports), but not for the less-distorting ones (such as direct income payments). But more has to be done. For a start, these commitments did not significantly constrain WTO members, since countries agreed to make reductions from a base period of unusually high support, rather than from the actual levels at the time of the agreement in 1994. Moreover, while several countries have since shifted to less-distorting support measures, these still keep additional resources in farming and continue to distort trade as a result. The fact is that, despite the reforms to date, overall support remains very high. Exempting policies on the basis that they do not affect farmers’ production decisions at the margin, may fail to address the cumulative impact that the whole range of support policies has on production and trade.
In order to consolidate the reform process there is a need for stronger disciplines and simpler legal requirements. Less complicated provisions would undoubtedly ease developing countries’ concerns about the need for a “fair” and “balanced” agreement. A number of other difficult issues may also have to be addressed. These include the tendency for tariffs to escalate according to the degree of processing undertaken, the potential for state trading enterprises to distort trade, the growing use of anti-dumping duties, and the possible misuse of food aid and export credits.
Some countries would also like to see “non-trade” concerns specifically acknowledged and integrated into a new agreement. A number of countries with high animal welfare standards argue that they should not have to accept competition from countries with lower standards. A wide range of issues related to production processes and methods – in particular concerning food quality and safety – has also been raised. The Agreement on Sanitary and Phytosanitary Measures and the Agreement on Technical Barriers to Trade cover many of these issues. Yet while the framework created by the Uruguay Round should facilitate further reform, it is unlikely to be sufficient to address all countries’ concerns.
A consolidation of the URAA promises efficiency gains that should translate into stronger economic growth. But it is important to recognise that while trade reform promises aggregate gains, it does not guarantee that everyone will be better off. Within and among countries, there will be both winners and losers, although the losers may benefit in the long term from stronger growth and higher returns in other activities. In particular, the burden imposed on net food importing countries, and on specialised exporters that depend on one or two key commodities, may need to be addressed.
While such problems do not alter the case for further trade reform, they nevertheless imply that trade cannot be viewed in isolation. In those OECD countries where the agricultural sector benefits from high support and protection, adjustment assistance, compensation and income safety nets may be required. In developing countries, there may also be a need for export capacity building and renewed efforts to reduce dependence on one or two key commodities or export markets. Development assistance clearly has a role to play here.
A new agreement with deeper reforms would reduce the burden on consumers and taxpayers in OECD countries. It would also be of overall benefit to developing countries, many of which have lost out from limited market access opportunities and the difficulties of competing with subsidised exports from more developed countries.
Why agricultural trade liberalisation matters
Jonathan Brooks and Carmel Cahill, OECD Agriculture, Food and Fisheries Directorate
The Uruguay Round Agreement on Agriculture: An Evaluation of its Implementation in OECD Countries, OECD, 2001.
The Uruguay Round Agreement on Agriculture: The Policy Concerns of Emerging and Transition Economies, OECD, 2000.
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