UN Chronicle | Global Agricultural Trade in the New Century

Agricultural trade is economically vital for farmers in exporting countries who look for international markets to sell their produce in order to make a reliable livelihood. Many developing countries belong to that category of agricultural export nations. Less obvious, agricultural trade is also economically vital for countries that could, in principle, produce most of the food and raw material they need, but do better by concentrating on other sectors where they have a comparative advantage, while importing products at prices below the costs if they were to produce them domestically.

While almost everyone agrees that agricultural trade is vital, the world at the dawn of the new century is still full of barriers to this trade. Indeed, contrary to enormous progress in recent decades in liberalizing manufactures trade, agricultural trade is still significantly distorted through government policies. Many countries maintain high-tariff walls in their agricultural markets, often effectively blocking imports. Some developed countries have particularly high tariffs, but a number of developing countries also make it difficult for such imports to penetrate their markets. In other cases, Governments pay large sums of taxpayer money to push their agricultural exports onto world markets through export subsidies or domestic support. This is a phenomenon prevalent in developed countries. In these cases, agricultural production in the countries concerned is maintained at an artificially high level, above what can be produced competitively.

As a result, more competitive farmers in other parts of the world are denied the opportunity to use their productive potential in full. At the other end of the spectrum, some Governments of developing countries still make it difficult, through a variety of measures, for their farmers to sell on the international market, thereby depressing domestic prices for agricultural products and reducing incentives to produce. Where this happens, the countries concerned under-utilize their resources and employment opportunities. While Governments feel they have good reason for interfering with agricultural trade in these ways, an overwhelming amount of economic analysis has clearly demonstrated that countries individually, and the world on aggregate, lose economic welfare as a result of such trade barriers. Most of the policies distorting agricultural trade are motivated by social objectives, in particular concerns about income distribution.

Market protection, through tariffs and export subsidies, aims at maintaining farmers’ incomes and employment in agriculture. Where government policies keep domestic prices below the international level, the objective usually is to provide cheap food to poor domestic consumers, or to raise government revenue through export taxes. Other aims are also pursued by trade policies, but in most cases they come second to such income distribution objectives, and often they are justifications, rather than the true objectives of the policy. Social objectives in food and agriculture are worthy of policy efforts. However, interference with trade is a far cry from optimal policy approach and involves a large amount of extra costs for both the domestic economy and other countries. There are other much more direct and efficient measures to deal with social objectives. For example, direct income payments can help farmers more effectively than price support and without the negative implications for trade and domestic economic welfare. Equally, targeted assistance to poor food consumers is much more efficient than keeping food prices low and thereby reducing incentives for domestic farmers.

It is for these reasons that an increasing number of countries have come round to the view that it is high time to reform agricultural policies at the global level. While some countries had already embarked unilaterally on the process of policy reform, a big step forward at the international level was made in the Uruguay Round of the General Agreement on Tariff and Trade negotiations (1986-1994). A new agreement on agriculture was concluded, whereby all countries accepted quantitative limits for their agricultural policies, committing them to reduce tariffs, export subsidies and domestic support. The Agreement was a watershed in global agricultural trade as it created completely new, and fully operational, rules for agricultural trade worldwide. It brought agriculture back on the main track of trade liberalization, creating the conditions under which market forces one day can play a more important role than government policies in global agriculture. However, the starting point for reduction commitments was the high level of protection and support that had prevailed on the eve of the Uruguay Round.

Hence, the years immediately following the Uruguay Round have not yet seen a fundamental change in actual policies and trade flows. Its negotiators were aware of that and wise enough to build into the Agreement a commitment for a follow-up round of agricultural negotiations. These negotiations have, indeed, started early in the new century. It is not yet clear what the end result will be, but it is reassuring to note that no country questions the need for this new agricultural round or resists further reduction commitments.

The new century has, therefore, started well for global agricultural trade. With a bit of optimism, one can foresee a continuing movement towards making market forces work better in world agriculture. At the same time, however, other problems in global agriculture remain and are increasingly exposed. The world is far from alleviating the problem of food insecurity in many developing countries. In rich societies, on the other hand, concerns about food quality, animal welfare and the environmental effects of modern agricultural production technologies are growing. In response to these issues, the agenda for agricultural trade negotiations will continue to change in the new century. In the coming decades, the quantitative issues of agricultural protection and support may become less and less relevant, and qualitative issues, such as food security and consumer concerns, will dominate the debate. In other words, global agricultural trade will remain high on the agenda.

Stefan Tangermann is Professor of Agricultural Economics at the Institute of Agricultural Economics, University of Göttingen, Germany, and a member of the Academy of Sciences, Göttingen. He also served as Chairman of the Scientific Committee of the Science Council, and as a member of the Science Council of the Federal Republic of Germany.