Trade barriers of many kinds are making agriculture less efficient than it could be
The Economist | March 25, 2000
IN AALSMEER, in the Netherlands, the full flower of global agriculture is on display, quite literally. Most mornings 18m blooms go on parade in an auction that attracts 1,600 buyers, either on the spot or via the Internet. Most afternoons, 4m flowers and potted plants arrive by air from Israel, Kenya, Ecuador, South Africa and other foreign horticultural hotspots. Inside the world's largest covered building, they are graded for quality, catalogued by computer and prepared for their moment of judgment. Once purchased, the flowers are whisked off to markets throughout the European Union, Japan and America, all on the same day.
This floral United Nations is an impressive sight, but as a rule global agricultural trade is far less fragrant. Farming is one of the most distorted sectors of the world economy. Despite promises to liberalise, domestic support policies, import barriers and export subsidies in many industrialised countries remain formidable hurdles to the free flow of goods. This hurts farmers in the developing world as well as consumers in protected markets. It also makes farmers less responsive to changes in demand. Conflicts over new methods of agricultural production, from genetic modification to hormone treatment, add a further layer of complication.
Charity begins at home
Farming is full of curiosities, but none is more striking than the disproportion between the size of the farming population and its political influence in rich countries. In North America and the EU, farmers make up less than 5% of the labour force and contribute less than 2% of GDP, yet they are able to wring remarkably generous levels of financial support out of their governments. This may be precisely because there are so few of them: in absolute terms, the cost of dissuading French farmers from blockading Paris will be relatively small. Only a few industrial countries, forming a loose organisation known as the Cairns Group, have stripped their farmers of most of their subsidies.
In 1998, OECD countries paid out $360 billion in agricultural support. The highest rates of support were paid to rice, milk and sugar producers, with the biggest generally getting the most. Some countries are far more generous than others (see 4). For much of the 1990s, domestic farm support in the industrialised world was on the wane, but since 1998 it has ballooned in response to a collapse in commodity prices. For the past two years in America, Congress has approved a total of $15 billion-worth of emergency farm aid. Cynics note that this largesse happens to coincide with the run-up to presidential and congressional elections.
Most of the money to cushion the farmers is stumped up by consumers, via government manipulation of domestic prices to boost farmers' earnings. According to OECD calculations, consumers in the industrial world pay about a third more for their food than they would without government support for farmers.
There is no doubt that agriculture is different from other industries, not only because its product, food, is so essential and so emotive, but also because it has the capacity to create, or destroy, a number of public goods, from ecological diversity to animal welfare to rural landscapes. The question is how to pay for these benefits. Some governments, notably in the EU and Japan, have argued that it is worth spending quite a lot of money to encourage farmers to maintain their "multifunctionality". But indirect measures such as price supports are a crude and inefficient way of achieving that. Better to acknowledge these aims openly and pay direct from government budgets.
Trading insults
In 1998, $456 billion-worth of agricultural goods was traded across borders, three times more than 20 years earlier. That seems an impressive growth rate, but trade in manufactured goods has grown three times as fast since the 1980s. Developing countries that have become trading successes, such as Thailand and Brazil, now account for over a third of all agricultural exports. Clearly, developing countries have reason to worry if rich countries embrace domestic farm policies that bring down the price of their goods in export markets, and clearly they are keen to see barriers to their own exports removed. Pledges to reform were made in 1993, at the end of the most recent set of world trade talks, the Uruguay round, but much remains to be done. Tariffs on agricultural goods still run at an average of 40%, compared with well under 10% for manufactures, and import quotas remain tight.
But it is not just a matter of tariffs. Another sore point is the subsidisation of exports -- the support rich countries provide to make their agricultural surpluses competitive in export markets, thereby undercutting the price of home-grown goods in poor countries. Under the Uruguay round agreement, developed countries committed themselves to reducing their export subsidies by 36% of their 1986-88 value for most commodities by 2000. They have kept this promise, but have fallen down on others, and show little sign of making further concessions.
The banana trade perfectly illustrates the need for more transparency and liberalisation. Bananas are the world's most traded fruit. The EU imposes strict quotas and high tariffs on bananas from efficient producers in Latin America, while allowing free access to those from a handful of small African, Caribbean and Pacific countries. It claims it is providing aid by giving growers from poor countries preferential access and good prices, but the WTO disagrees, and has given its blessing to the imposition by America of $191m-worth of retaliatory measures. According to Brent Borrell of the Centre for International Economics in Canberra, Australia, the policy has driven down demand in the EU and reduced prices in the rest of the world.
Research by Kym Anderson, of the University of Adelaide, suggests that stripping such distortions from the OECD's agricultural policies would boost global agricultural trade by more than half, making the OECD and the developing world $160 billion better off between them. On the other hand, international food prices would rise by up to 5% over a decade. That is an alarming prospect for countries concerned about the security of their food supplies, especially for the many countries in sub-Saharan Africa that import more food than they export. What if the price or supply of food were to see-saw wildly, causing mass hunger and riots in the streets? Do not worry, say many economists: freer trade will provide steadier food supplies, and may bring gains in other industries to help pay the bill. Besides, none of this will happen overnight. Under a mandate from the Uruguay round, agricultural talks have to start this year, but the latest WTO meeting in Seattle last December, the successor to the Uruguay round, failed to launch a comprehensive new round.
For any country determined to keep food imports out, science can be another handy tool. Under a section of the WTO rules known as the Sanitary and Phytosanitary (SPS) Agreement, a country is entitled to restrict imports if they compromise human, animal or plant health. This covers things like insects, viruses or chemicals that may be imported along with foodstuffs.
International standards in this area are set by bodies which the SPS Agreement acknowledges as authorities, such as Codex Alimentarius, a joint body of the World Health Organisation and the Food and Agriculture Organisation. But there is a fine line between protection and protectionism, and it is tempting for local producers to keep out foreign competition by invoking food safety or environmental concerns. The exporting country can dispute the claim, and if a WTO panel rules that the restrictions are not scientifically justified the importing country may face trade sanctions.
Precautionary tales
But what if the science is in dispute? This is what has happened in the long-running feud between America and the EU over hormone-treated beef. The EU has imposed a ban on imports from America and Canada of beef from cows treated with hormones. The EU's scientific advisory body on the issue claims that some of the hormones could cause cancer in consumers, whereas scientists at Codex Alimentarius say the levels found in American beef are safe. America has the WTO's approval to raise its tariffs on certain imports until the EU relents or proves its case.
And what if the science is not conclusive, as in the argument over genetically modified foods? The EU has prohibited imports of many varieties of GM cereals and has put on hold the expansion of commercial plantings of genetically modified crops in some member states. It argues that there is insufficient scientific evidence to conclude there is no risk to consumers from genetically modified foodstuffs, or to the environment from such crops. It has invoked the "precautionary principle", which is a fancy term for a simple idea: better safe than sorry.
But America, Canada and Argentina, which have a vested interest in the free flow of genetically modified foods, argue that, after four years of widespread cultivation, there are plenty of data to show that the technology poses no more risks to consumers or their countryside than conventionally bred crops. They have long opposed labelling, favoured by consumer groups, since it would single out GM products on the basis of how they were produced, which WTO rules frown upon. The two sides have now come a little closer to each other with the creation in January of a "biosafety protocol", laying down strict rules for exporters of GM products, including elaborate notification procedures.
As yet, the WTO has no special body to advise on whether new provisions are needed for genetically modified food or old ones can be adapted, but creating such a body would be a worthwhile investment. For the moment, genetically modified crops make up only a small fraction of global commodity production, but their derivatives find their way into countless processed foods, so the share of goods affected by trade barriers is much larger than the share of the total crop. And as more traits are introduced and more countries choose to plant the stuff, the International Service for the Acquisition of Agri-biotech Applications reckons that the market will increase fourfold to $8 billion by 2005. The controversy is set to grow too, but robust trade regulations should help mitigate some of the risks.Trade barriers of many kinds are making agriculture less efficient than it could beThe Economist:
