Agricultural prices, like most other commodity prices, have been in steady decline in inflation adjusted terms since the Second World War. At the same time, the cost of production of most farm commodities has steadily risen. The gap between costs and prices has been bridged in a number of ways including off-farm employment, debt, and direct government payments. Even with these measures, millions of farmers in both the developed and developing countries have failed to earn sufficient income and therefore been forced to leave production altogether.¹ Although many farmers have left the land, the land has not generally left farming. Instead, new technologies have substituted for labor and other inputs, too. Most fields have continued to be farmed in ever larger units, requiring purchases of larger farm equipment, artificial fertilizers, more pesticides, and so on – generating significant negative environmental impacts and economic decline in many rural communities.

Alongside the general downward trend in farm prices there has also been an increase in price instability. Current prices are at record low levels, while just three years ago many commodities reached record high prices. At that time farmers responded by planting more land than before.² Predictably, this turned a world shortage into a world surplus – driving world prices down again to today’s crisis levels.³ A very small increase in imports or exports, or extraordinarily good or bad weather, can cause dramatic changes in prices. Overall, if these changes result in prices below the cost of production of the average producer there will be hardship in the countryside, and if they are well above the cost of production they will cause hardship among landless consumers – both rural and urban.

Governments have attempted to insure against extreme price fluctuations related to unpredictable environmental factors, technological and policy innovations, and other causes of uneven supply. Land set-asides, import and export controls, supply management, and price floors are typical of the kinds of measures that governments take to keep prices within acceptable ranges. The storage of reserves is another effective means of smoothing supply, demand and price variations.⁴

The goal of trade liberalization is to bring domestic prices in line with world market prices and to allow world price signals to influence domestic production patterns.⁵ Trade liberalization aims to limit the type and magnitude of government interventions allowed in order to do so. The elimination of government grain reserves, in part due to the Uruguay Round, was one of the causes of the 1996 price spike,⁶ along with bad weather across much of the planet, severe blight in the U.S. wheat crop, and other problems.

Whether the so-called convergence of domestic and world market prices worldwide will cause world commodity prices to rise in the long run or whether they will continue their fall further is unknown. Few studies projecting prices into the future take into consideration the cartel power of ever fewer buyers in the monopsonistic global market, or the potential impact of competition policy in response.⁷

Most studies evaluate supply-demand shifts between and among countries induced by liberalization, assuming the reduction of price supports in the North will lead to the elimination of over-supply. For example, the FAO projected that the Uruguay Round would result in price rises ranging from 4% to11% for most commodities by 2000.⁸ The World Bank projected that some prices would rise modestly, up to 3.8% in the case of wheat, while others – especially tropical products – would fall more or less 1%.⁹

Although long-run projections cannot be compared with actual prices for years to come, especially because many of the provisions of the Uruguay Round are being phased-in over time, there is a record available for the NAFTA agriculture agreement implemented January 1, 1994. A recent study by the Commission on Environmental Cooperation recently found that in Mexico, where trade liberalization in farm products is quite advanced, maize prices fell 45% from 1990-1997 (in constant 1994 pesos). Perhaps more important than this level of decline is a comparison of prices to costs of production: while Mexican maize lost nearly half its value in the market, the prices of major agricultural inputs about doubled from 1994-1997.¹⁰ In 1997, the economy of the rural sector shrank by 6%, despite Mexico’s Gross Domestic Product growing by 7%.¹¹ Certainly there are many factors influencing these prices – from weather to currency exchange rates and national law – but agricultural liberalization was influential.

In Kenya, where liberalization has been implemented over the past decade as part of its structural adjustment program, prices of exported crops, especially tea, coffee and horticultural goods, have risen but the terms of trade (output prices relative to input prices) for the agriculture sector as a whole fell from 93.4:100 in1991 to 87.6 in 1995. As in Mexico, devaluation contributed to this trend, increasing the costs of imported inputs as well as increasing the value for exports. Nonetheless, Kenya’s rate of economic growth fell from 4.9% per year in 1995 to 2.9% in 1998, while that of the agricultural economy fell from 4.4% to 2.3%. For maize, the major staple food crop of Kenya, farmers earned, on average, just 57% of the cost of their production: the price of imported fertilizers relative to the price of maize rose from 1.95 to 3.00 through the 1990s. As a result, Kenya has become a net maize importer. With the privatization of Kenya’s National Cereals and Produce Board, government reserves have been greatly reduced, leaving Kenya’s imported food security a function of commercial interests.¹²

In projecting the impacts of agricultural trade liberalization on Indonesia’s rural sector, the Center for Agro Socioceconomic Research of Bogor found that, in the aggregate, rice production will not change greatly due to a strong comparative advantage in lowland farming in Java, but the impact on soybeans will be substantial. These researchers expect domestic soybean prices to decrease 40% over four years and, because world prices are relatively unstable, risks to producers will increase significantly. Liberalization of input markets will increase costs to farmers, with disproportionate impacts on smaller farms depending upon the agro-climatic and socio-economic circumstances. Technological improvements can compensate, to some degree, but at the farm level, the study concludes, "impacts of market and trade liberalization are strongly negative on agricultural income."¹³

The WTO Committee on Agriculture has spent well over a year coordinating a process of "Analysis and Information Exchange" concerning the implementation of the Uruguay Round Agreement on Agriculture in preparation for the next negotiations towards "continuation of the reform process." Findings indicate that tariff levels remain high for many products of export interest to the South, and that tariff escalation – by which tariffs on processed products are higher than those on the corresponding primary commodity – continues to be an obstacle for developing country exporters.¹⁴ Quotas and safeguards appear to be insufficient remedies, nor are the required reductions in domestic support in the North sufficient to open markets significantly. The transmission of price instability in the world market to domestic markets has increased the burden of developing country governments, while food aid is shrinking relative to commercial imports – adding to their costs.¹⁵

As the next WTO talks gather momentum, this type of analysis at the country level will grow in importance. "The argument is not that trade is responsible for the discouraging development situation," commented Cuba, the Dominican Republic, Honduras, Indonesia and Pakistan in a joint statement in March 1999, at symposia sponsored by the WTO regarding trade, environment and development, "Rather, the contention is that this situation exists in the context of increasing liberalization of trade. And, hence, there is an obvious need to critically examine the role of the global trade regime in development."¹⁶

Nonetheless, there is a shortage of data with which to evaluate the actual impacts of trade liberalization on farm income and rural welfare, particularly in the developing world. The South Centre, an intergovernmental agency in Geneva that serves as a think-tank for its developing country members, has prepared a 27-point "Checklist to Assist the Preparation of Country Experiences on the Impacts of the WTO Agreement on Agriculture."¹⁷ (See appendix.)

One of the goals of the Uruguay Round was to bring U.S. and European agricultural policies more fully under the disciplines of the General Agreement on Tariffs and Trade (GATT). Although the original GATT agreement struck in 1947 had excellent agricultural trade rules, both the U.S. and European approaches to agriculture policy were largely exempted from the GATT rules by the mid-1960s.¹⁸

For example, Article VI of the original GATT agreement defines and condemns dumping (see appendix). Article XI in the original GATT test permits governments to adopt domestic supply management, even allowing restrictions on imports that might favour domestic producers, in order to control production levels and avoid the temptation to export surpluses and to relieve "critical shortages of foodstuffs."¹⁹

For the United States, both the Uruguay Round and the NAFTA negotiations were designed to make changes in the external and internal agricultural policies of other countries and of the United States itself. The U.S. negotiating position was largely determined by the purchasing departments of major corporations and the chief negotiators were drawn from their ranks. For example, the Reagan Administration appointed a long-time executive of the Cargill company to head the U.S. delegation in the AoA talks.²⁰ The European Union, in the middle of the negotiations, abandoned farm price support policies that had been in effect since the beginning of the European Community in favor of U.S.-style government subsidies.

Thus, it should not be surprising that the Uruguay Round results meet the needs of agribusiness corporations to a great extent, and do not support sustainable agriculture or rural development in either the North or the South. Extensive bilateral negotiations between the EU and the U.S. culminated in a deal often called the "Blair House Agreement" that was then effectively imposed on the rest of the GATT parties.

The Blair House Agreement tied reductions in both domestic support and export subsidies to baseline levels of 1986, when stocks and subsidies were at their peak, thus giving both the EU and the US ample flexibility in meeting their obligations²¹ and defined a "peace clause" (Article 13) forbidding for nine years – that is, until 2003 – any country's taking action against another country's support programs that fit into the blue or green boxes and demanding "due restraint" regarding actions against export subsidies.

One perverse result of these provisions is that the U.S. and Europe are able to "legally" increase their export dumping through both export subsidies and other mechanisms. While the AoA formally allows 25 out of 132 WTO members to subsidize exports, just 3 of them are responsible for 93% of all subsidized wheat exports and just 2 of them are responsible for subsidizing 94% of butter and 80% of beef exports.²² Many agree these export subsidies should be disallowed.²³

However, a lack of agreement over what is and is not an export subsidy persists. Governments have endless ways to re-package and re-name subsidies and manipulate currencies in ways that dramatically alter domestic prices relative to the world price. And in the United States, the lack of anti-trust enforcement has enabled a few monopolistic companies to control the market, forcing farmers to sell their production at prices far below their cost of production. Some critics argue that these forms of export dumping ought also to be disallowed.²⁴

Least-developed countries and net-food importing countries sought market access and better prices for their exports²⁵ and achieved several concessions, although these appear to be insufficient to overcome immediately negative impacts resulting from the AoA.²⁶ The WTO Secretariat found that developing countries' share of world agriculture exports had not changed from 1990 to 1996.²⁷ Few developing countries can afford to increase their support for farmers, whether through investment or input subsidies or any other government payments. There are numerous other loopholes disabling the special and differential treatment (S&D) provisions as drafted in the AoA, which provides inadequate provisions for technical assistance and no financing to help build their production and export capacity.²⁸

Furthermore, the "Marrakesh Decision on Measures Concerning the Possible Negative Effects of the Reform Programme on Least-Developed and Net Food-Importing Developing Countries" has not been implemented. This decision committed developed countries to provide compensation to low income food deficit countries if they are adversely affected by higher food prices as a result of implementation of the AoA. Analysis by the FAO since 1995 suggested that for all low-income food deficit countries, their food import bill will indeed be $9.8 billion higher in the year 2000 than at the start of the Uruguay Round negotiations, of which $3.6 billion – a 14% increase – would be directly attributable to the Uruguay Round results.²⁹ The International Monetary Fund (IMF) disputed the FAO findings, however, on grounds it overstated the degree of liberalization likely to occur from 1995-2000 and subsequently overstated the likely price changes. The IMF claimed the 1996 "food price spikes" were "unrelated to the Round" and that "declining stocks [predicted as an outcome of the Round] do not necessarily imply proportional declines in food aid."³⁰ With this disagreement over price projections and their direct causes in hand, the WTO Committee on Agriculture decided in 1996 not to trigger the Marrakesh Decision's compensation provisions for low income food deficit countries. Meanwhile, evidence is accumulating that rural welfare in these countries is in serious decline.³¹

Given the failure of the WTO to launch a new comprehensive round after the Seattle Ministerial Meeting, the "built-in" agenda represents the core of the negotiating process to be undertaken in 2000 – and the Agreement on Agriculture is at the core of the built-in agenda. In order to progress beyond the current stalemate, a balance will need to be found on three key disagreements: non-trade concerns including ecological considerations and food security; a solution to export subsidies and, more importantly, export dumping; and operationalizing special and differential treatment for developing countries. In the long run, however, there is a need to negotiate a multilateral agreement on food security and the sustainable production and distribution of agricultural goods and services within the United Nations system, so that non-trade concerns will not always be trumped by the concerns of traders.

Article 20 of the AoA commits WTO members, as part of the original Uruguay Round deal, to "substantial reductions in support and protection" while "taking into account" the experience to date, special and differentiated treatment to developing countries and "non-trade concerns," especially (according to the preamble of the AoA) "food security and the need to protect the environment." These Article 20 considerations have generated a good deal of discussion, given the ambiguous and, for the most part, poorly-documented results experienced by different countries under different conditions and at different stages of development.

The European Union, having just completed an extensive process to reform its Common Agriculture Policy consistent with the Uruguay Round, and many of its member countries are focusing on "non-trade concerns," especially what has come to be known as "multifunctional agriculture."³² As Norway summarized in a paper submitted to the WTO,³³ key non-trade concerns are food security, environmental protection and the viability of rural areas: "Agriculture may be defined as multifunctional when it has one or several roles or functions in addition to its primary role of producing food and fibre. [They] may also be characterized as positive externalities or public goods related to agricultural production." There is a huge constituency favoring recognition of the multifunctional purposes of agriculture in Europe.³⁴

Japan³⁵ and the Republic of Korea³⁶ have noted their support for multifunctional agriculture in papers submitted to the WTO Committee on Trade and Environment, emphasizing the ecological functions of terraced rice production and food security respectively. Critics of this approach to implementing Article 20, such as Australia, express reservations that "the terms multifunctionality and non-trade concerns are being used as post-facto justification for continuing high levels of trade distorting protection of agriculture."³⁷ Many developing countries share this concern, while supporting the need for food security to be recognized as a valid objective of domestic policy.

Meanwhile, both the Cairns Group (Australia, Argentina, Brazil, Canada, Chile, Colombia, Fiji, Indonesia, Malaysia, New Zealand, Paraguay the Philippines, South Africa and Thailand) and the United States are calling for the elimination of the "blue box" exempting the European Union’s domestic support programs, and export subsidies, which would primarily affect the EU – given the nature of the U.S. market. The EU in turn has shown an interest in cracking down on the US’ relatively extensive use of the "green box" (see appendix) and its export credit programs.³⁸ Neither the Cairns Group nor the EU, however, has broached U.S. dumping of agricultural commodities as an anti-competitive practice.

Instead of continued arguments over what is or is not an export subsidy, negotiators could simply agree to phase-out and then eliminate export dumping. One of the many benefits of directly reducing dumping is that it could bring immediate improvements for many producers in the Third World who have been devastated by export dumping from the United States, Europe, Canada, and others. At some agreed upon date in the future all food exports could be priced at or above the cost of production. This would narrow the debate into two areas. First, how to determine the full cost of production by which dumping would be judged. Second, what timeline to use for phasing out dumping. A five-year phase out would be a reasonable approach, but the precise timing hardly matters. Some countries and some crops might take longer. Some poor countries might get additional flexibility. Whatever the timeline, by the end all countries will stop dumping.

The formula for calculating the full cost of production would consist of two major components – the expenses paid by the producers themselves and those paid by the taxpayers. The average cost of production paid by producers is determined each year in all major exporting countries by the national government. In the United States, this is done by the U.S. Department of Agriculture. The other part of the cost of production, the cash value of the expenses paid by taxpayers, has been calculated for most crops for each of the major food exporting countries by the Organization for Economic Cooperation and Development (OECD). OECD uses a formula, often called the Producer Subsidy Equivalent, to determine the cash value of various government programs. This Producer Subsidy Equivalent (PSE) formula is surprisingly comprehensive and accurate, given the elusive nature of most government farm programs.

This full cost of production for each crop would be determined by adding up all of the expenses paid by farmers together with those paid by the taxpayers and then divided by the total production in order to determine the average cost of production on a per pound, bushel, or tonnage basis. If this cost of production was higher than the average export price, this would be considered dumping and subject to reduction over the agreed period of time.

If a country refuses to commit to reducing dumping or, more likely, there is backsliding on commitments, the response should be swift, simple and strictly WTO-legal: importing countries would simply impose countervailing duties, as the U.S. government now does on industrial imports dumped into North America. This anti-dumping tariff would be large enough to bring import prices of dumped goods up to proper levels. Producers worldwide could expect to cover their costs in the global market.

Net food importing countries would of course require significant transitional assistance to redevelop their capacity to produce. The Marrakesh Decision should be triggered immediately and retroactively, while all other provisions for special and differential treatment are operationalized.

Finally, multilateral collaboration on the development of a viable global food security should proceed under auspices of the United Nations system, in collaboration with civil society. Nations can agree to develop a framework for negotiating a "Sustainable Food Security Convention" or some such instrument with the purpose of elevating food security to the highest level of priority within international law. Such a convention could establish a global network of local, national and regional reserves for staple foods, subject to independent audits, and national food security plans to enhance farmers’ capacity to produce nutritious and safe foods – exempting these plans from WTO rules and disciplines when said rules undermine them. The convention could mandate international commodity agreements among importing and exporting countries both for concessional food transfers and to supplement domestic production to meet national demand for staple foods, without resort to dumping. Financial and technical mechanisms could be negotiated as part of the convention to implement its provisions and to aid governments in disputes with other entities such as the WTO that might arise over food and agriculture policy. Financing could be achieved through member contributions, a tax on agricultural commodity trade, or the proposed "Tobin tax" on international financial transactions.³⁹

In short, there is a need for an internationally coordinated approach to food security, aimed at increasing stability in the food supply by reducing volatility in agricultural markets while making both production and distribution systems sustainable over time. Such an approach requires that food security be planned and implemented primarily at the local and national levels with support for diversified peasant and family farm systems. These non-trade concerns can be complemented by trade and trade policy, but they must not be displaced by trade liberalization.

1. The contracting parties recognize that dumping by which products of one country are introduced into the commerce of another country at less than the normal value of the products, is to be condemned if it causes or threatens material injury to an established industry in the territory of a contracting party or materially retards the establishment of a domestic industry. For purposes of this Article, a product is to be considered as being introduced into the commerce of an importing country at less than its normal value if the piece of the product exported from one country to another
1. is less than the comparable price, in the ordinary course of trade, for the like product when destined for consumption in the exporting country; or,
2. in the absence of such domestic price, is less than either
1. the highest comparable price for the like product for export of any third country in the ordinary course of trade, or
2. the cost of production of the product in the country of origin plus a reasonable addiction for selling cost and profit.

Due difference shall be made in each case for differences in conditions and terms of sale, for differences in taxation, and for other differences affecting price comparability.

2. In order to offset or prevent dumping, a contracting party may levy on any dumped product an anti-dumping duty not greater in amount than the margin of dumping in respect of such product. For the purposes of this Article, the margin of dumping is the price difference determined in accordance with the provisions of paragraph 1.

- General Agreement on Tariffs and Trade, 1969.

Endnotes