Trade and Food Reserves: What role does the WTO play?

By Sophia Murphy   
Published September 20, 2010

Food and HealthAgricultureFood ReservesFood securityWorld Trade Organization (WTO)

I. Introduction

Grain reserves are an important part of a food security strategy. Reserves are an obvious and practical tool that has been in use for thousands of years. They are proven to be effective. They are not on their own sufficient to ensure food security, and, like any tool, they can be counter-productive if not properly established—but they are worth the effort.

Agricultural trade, too, is important, including trade in regional and global markets. Trade, too, has also been important for thousands of years, and it remains central to food security. Globally, the total volume of food that crosses international borders is relatively small (very roughly estimated at around 10 percent), but it is nonetheless critically important, especially for particular countries and regions, among them some of the poorest regions in the world. When it comes to protecting food security, even relatively tiny volumes of food (whether in a reserve or in trade) can have disproportionately large importance.

For decades, many governments in developing countries either ignored or taxed agriculture so as to pay for industrial development projects (Anderson, 2009). In some regions, particularly in Africa, high tariffs prevented the movement of food across borders where historically trade had been common. Cheap food for urban populations was a high priority, for policy and political reasons. Then, over the last two to three decades, the world has witnessed a global experiment with trade, pushing trade to the fore of development agendas. By the mid-1990s, government leaders and policymakers from dozens of countries and institutions were insisting that global trade and private investment dispense with the need for economies built on local food production and exchange. There have always been skeptics, IATP and the participants in the EcoFair Trade Dialogue among them. From the skeptics’ perspective, the experiment further damaged already fragile food systems around the world, in developed and developing countries alike, and exacerbated food insecurity.

The number of skeptics has grown significantly in the past three years. For the mainstream global policy community, wider acceptance of the critiques was first signalled by the World Bank’s acknowledgment of mistakes in its 2008 World Development Report (published in October 2007), a report that was devoted to agriculture. That same month, an internal evaluation of the World Bank’s agriculture projects in Africa came to some scathing conclusions about World Bank staff’s misplaced hopes for the private sector to replace a number of functions that had previously been provided by governments (World Bank, 2007). Then came the deaths from hunger and civic violence that ensued from the 2007-08 food crisis, attracting strong media interest and widening the circle of policymakers who accepted publicly that global markets had inherent weaknesses. Since 2008, a large number of governments have shown markedly more interest in the question of how to manage volatility in global commodity markets, and how to protect people from escalating food costs.

Reserves offer an obvious way for governments to reduce price and supply volatility. There is considerable tension among economists on the relative merits of trade and reserves, in a debate that often assumes that the policies are somehow in competition with each other. The idea of food reserves tends to find favor among those who do not believe trade liberalization serves food security well. Those that are persuaded by free trade arguments tend to see reserves as market distorting and an unnecessary public expense. In fact, trade and reserves policies should be complementary strategies.

Perhaps because the food security policy field has been colored by the debate between proponents of state-led versus market-led development, there is an assumption that the trade rules put in place by the WTO curtail countries’ ability to establish and operate a grain reserve. The truth is more complicated. In fact, WTO rules do not preclude the operation of a food reserve system. On the other hand, the rules do not make it easy either, and they do prohibit (though not especially effectively) some of the policies that a reserve is likely to depend upon if it is to work well. In other words, the multilateral system could do much better. These issues are explored in the paper.

This paper complements an earlier paper published by IATP in October 2009 entitled “Strategic Grain Reserves In an Era of Volatility.” The October 2009 paper provided a brief review of grain reserves—why governments created reserves, to a large extent dismantled them and are now again interested in re-establishing them in some form. This paper does not revisit that discussion, but readers who wish to know more about the history of grain reserves are encouraged to read the earlier paper (Murphy, 2009).

This paper is in part prompted by the clear revival in political interest in establishing grain reserves. At the G8 meeting held in Italy in April 2009, some 30 governments and a wide range of inter-governmental organizations signed the L’Aquila Joint Statement on Food Security, which includes the following recommendation:

The feasibility, effectiveness and administrative modalities of a system of stockholding in dealing with humanitarian food emergencies or as a means to limit price volatility need to be further explored.1

At the World Summit on Food Security, at the FAO in Rome in November, 2009, India said:

We need to give serious thought to some practical mechanisms such as establishment of regional and global physical reserves as suggested in the background papers.

Other countries joined the chorus, including the Philippines, which is actively pursuing a more effective rice reserve mechanism in the context of ASEAN (Association of Southeast Asian Nations). In March 2010, the four BRIC countries (Brazil, Russia, India and China) met in Moscow and agreed to support the establishment of a system of national grain reserves (Reuters, March 26 2010). Together, BRIC account for 25 percent of the world’s land and 40 percent of the world’s people. They are global giants in the food economy.

In June 2010, Canada played host to a G20 summit. Disappointingly, the Canadian government chose not to pursue a discussion on global food security or to move ahead with the commitment to at least explore the possible contribution of global grain reserves. France, however, which will host the 2011 G20 summit, has already committed to holding a special session on agriculture in March 2011, with a preparatory meeting with civil society planned for November 2010. In October 2010, the newly revamped FAO Committee on Food Security will discuss food price volatility as one of three core issues at its first session. The Comprehensive Framework for Agriculture, a joint UN-system (including the WTO, World Bank and IMF) response to the global food crisis, also includes reserves as a policy tool in its recommendations. The governments have an agenda, have made some commitments to exploring the idea and they have venues to move this agenda forward. The challenge now is to see that they actually do it.

Food stocks—neglected for several decades in the push for open markets and to reduce the role of governments in the regulation of the economy—are back in vogue.

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