Bridges Weekly Trade News Digest • Volume 12 • Number 32 • 2nd October 2008

Trade Rules and the Global Food Crisis

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For nearly seven years, trade officials at the WTO have been trying to hammer out an agreement on how to cut subsidies and open markets in the agriculture sector. When the Doha Round of trade talks was launched in 2001, many WTO Members worried that a continued decline in the prices agricultural goods would harm their domestic producers. But in the past year, an unprecedented increase in prices for internationally traded agricultural commodities has spurred a crisis among the millions of poor people worldwide who buy more food than they grow. Many delegates at the WTO hold the opinion that reformed trade policies will be an important component of any long-term solution to the crisis in global agricultural production.

The Crisis

Experts largely agree that droughts, historically low levels of food reserves, volatility in food output and rising fuel costs have all helped make food more costly to produce. Increased biofuels production and changing consumption patterns in large developing countries are also considered contributing factors, along with - more controversially - increased liquidity in financial markets. Even the weak dollar, the currency in which commodity prices are most frequently quoted, has received some blame.

The debate on the role of biofuels in food prices has been particularly vociferous. A World Bank study estimated that biofuels have caused 65 percent of the rise in prices. Similar studies by the US Department of Agriculture and the International Monetary Fund have pinned the number at 3 percent and 30 percent, respectively. The studies establish, to varying degrees, that farm goods are being diverted to energy use, away from the food supply. This normally healthy competition has been exacerbated by historically high oil prices, a necessary element in making biofuels cost effective.

Clearly, the rise in prices is a complex phenomenon that cannot be explained through a single cause. Although stop-gap measures to lower domestic prices abound, many of them, such as export taxes, only serve to worsen the situation globally.

Prices for key commodities such as rice, wheat, soybeans, maize and sugar have generally declined from the peaks they reached earlier this year, although the prices remain well above historical averages. But despite the end of record-breaking prices — at least for now — many experts agree that we have reached the end of “cheap” food, that the sustained decline in the prices of agricultural commodities over the past two decades has ended.

Shortcomings of the Uruguay Round

Some argue that ineffective trade policies have also contributed to the current crisis, and blame the shortcomings of the most recent world trade deal, the Uruguay Round Agreement of 1995, for having set the stage for the recent spike in food prices.

Subsidies and protectionist tariffs, among other measures, alter the prices that consumers pay and the amount that producers receive. Agricultural production in many countries therefore reflects government policy objectives rather than what farmers would produce under the most efficient market conditions. According to some analysts, the food crisis is in many ways a breakdown in the chain that informs farmers, public food stocks and consumers.

While the Uruguay Round has led to some real restrictions on subsidies and actual cuts in tariffs, the implementation of those commitments has not produced the dramatic improvements in agricultural trade that many had hoped for. Through the process of tariffication, or converting non-tariff-based trade restrictions to tariffs, the agreement helped end quotas, or unit-based restrictions on the imports of goods. However, it replaced those restrictions with tariff rate quotas, or tariffs that varied with import volume over a given period. This introduced an extra degree of complexity in agricultural trade that has helped mask continued high levels of protection.

Uruguay Round flexibilities such as the Special Agricultural Safeguard, or SSG, allowed import-sensitive developed countries to keep products of export interest to developing countries out of their markets. Perhaps most significantly, persistently high subsidy levels in rich countries meant that farmers in the developing world could not compete with lower priced imports. Thus, the developing country producers had virtually no market-based incentives to farm key food staples.

Doha Round

The agenda of the ongoing Doha Round of trade talks at the WTO was meant to address the shortcomings of the Uruguay Round agreement, but thus far the negotiations have failed to produce a concrete result. Agriculture in particular, a key component of trade for many developing countries, has repeatedly caused the talks to stumble.

Several sets of competing interests within groups of developed and developing countries are at play. Efficient agricultural exporters, developed and developing, want the broadest cuts in tariffs and subsidies. Import sensitive developed countries have been clamouring for sensitive products, exceptions that would protect the interests of domestic farm lobbies in specific sectors such as dairy, poultry and some cereals. Meanwhile, import-sensitive developing countries have sought exceptions for special products, measures that would allow them to ease into the process of trade liberalisation by protecting goods that impact rural development, livelihoods and food security. Complex exchanges among these competing interests may ultimately result in the compromises necessary to reach a Doha agreement. Whether a deal sufficiently addresses the food security concerns is up to the WTO’s Members.

The monetisation of food aid is another contentious subject in the WTO farm talks that could impact food prices. Often countries on the receiving end choose to convert the aid that they are given into cash by selling the food. Whether such monetisation should be allowed has been a controversial issue. Food aid, especially that received in kind, is surplus production from developed countries. But due to the rise in prices and shortage in stocks food aid has been at historically low levels. If food aid recipients monetise aid in kind they risk depressing domestic prices and providing longer term disincentives for local farmers.

Indeed, the importance of food security was evident in the most recent collapse of Doha Round talks, which was triggered by a deadlock over the Special Safeguard Mechanism, or SSM, a provision that would allow developing countries to temporarily raise tariffs to shield famers from a surge in imports or decreases in prices (See BRIDGES Weekly, 7 August 2008, http://ictsd.net/i/news/bridgesweekly/18034/).

Elements of the Doha Round could have a lasting positive impact on aligning domestic agricultural production with international markets. However, much like the Uruguay Round, the exceptions, flexibilities and diminishing ambition are threatening the potential benefits of the Round while allowing some trade-distorting practices in global agriculture to continue unchecked.

Subsidies in the Lamy Package

In a last-ditch effort to salvage the most recent high-level Doha negotiations, WTO Director-General Pascal Lamy presented trade ministers a set of compromises on a number of contentious issues. The so-called “Lamy Package” would have required the US to lower its maximum permitted overall trade-distorting support (OTDS) by 70 percent; the EU would have had to make an 80-percent cut. For the US, the proposed deal would have meant a reduction from US$48.2 billion a year to US$14.5 billion at the end of the Doha Round implementation period. Although the new ceiling would have represented nearly twice the level of projected (and current) outlays, the US stressed that its OTDS level had exceeded US$15 billion in seven out of the last ten years. The EU would have had to cut bound OTDS from €110 billion to €22 billion.

While these reductions would not have resulted in ‘effective cuts’ to actual spending, they would have provided a significant guarantee against future increases in domestic farm payments.

Though they provide important limits, the disciplines on subsidies leave much to be desired. For example, caps on product-specific spending would limit it only to historical levels, leaving developing country farmers to compete with developed country producers who receive concentrated support on staples such as rice and maize. The lack of clarity on the treatment of biofuels will lead to great diversity in their treatment and support by WTO members. Moreover, efforts to decouple agricultural production from domestic support by providing direct payments to farmers, which is permissible under WTO rules, will allow them to continue to overproduce and will thus serve as a disincentive for developing country production in key crops.

Yet the high food prices create an opportunity for subsidy reform. Indeed, other areas of the Doha negotiations - such as in the talks to reduce fisheries subsidies - have noted that rising food prices create an added urgency to eliminate trade-distorting price signals. High prices can potentially provide incentives for subsidy cuts since support levels are often tied to market prices. If developed country farmers can generate sufficient income without government support it may be feasible in some countries for subsidies to be cut. However, analysts say that heavy subsidisers like the US are unlikely to significantly change farm policy in the immediate term, despite the record high prices.

Global agricultural production depends heavily on the signals it receives through prices and their transmission across international, regional, and local markets. For a systematic downward revision of prices, producers, suppliers, and food stocks need to be able to accurately anticipate and accommodate changes in demand, usually demonstrated through what consumers are willing to pay for a given good.

Tariffs in the Lamy Package

Sustained high prices may be a double-edged sword. For the poorest subsistence farmers, who are often net food buyers, increased prices can translate into a net loss of income. Doha Round provisions on market access - especially if prices fall, as in the case of the special products and the SSM - do make important accommodations for the needs of the most vulnerable farmers. However, products of export interest to developing countries may not obtain the gains they had hoped for due to sensitive products, thereby diminishing prospects for growth in their agricultural capacity.

ICTSD research shows that although developed country tariffs would have decreased under the Lamy proposal, key products of export interest to developing countries would have continued to face significant import duties. For the US, the average applied trade-weighted import tariff would have fallen from 7.9 to 3.5 percent. Tariffs on products likely to be designated as sensitive would have dropped from 50.4 to 29.3 percent. These products include important developing country export commodities, such as processed dairy, beef, sugar, chocolate, tobacco goods and frozen orange juice.

The overall EU outcomes are largely similar, although the specific figures and products differ. While average trade-weighted agricultural tariffs would have decreased from 23.4 to 9.5 percent, sugar, cereals, meat and dairy would still have faced high import barriers, especially since they are likely to be designated as sensitive.

Looking beyond trade rules

Rich country farm subsidies have made many developing countries addicted to cheap food. In some cases, staple crops are cheaper to import than they are to grow locally — a situation that creates a perverse set of incentives that work against domestic agricultural investment and production. Coupled with widespread poor investment in agricultural productivity in developing countries, their capacity to respond to changes in food prices is greatly limited.

But the spike in food prices can also be seen as an opportunity for producers in developing countries. Some analysts have predicted that private sector investment for developing country farmers will increase thanks to higher prices. This is particularly significant since Official Development Assistance (ODA) in agriculture declined from US$8 billion in 1984 to US$3.4 billion in 2004. However, development organisations such as the World Bank and the FAO are now focusing on poverty alleviation through agriculture. When combined with the renewed efforts of other international organisations directly supporting agriculture, such as the FAO, CGIAR, IFAD, it is possible that domestic production capabilities can be strengthened, if not restored. With the right incentives, and without the confusing signals that subsidies and protectionist measures provide, farmers, public and private sector actors can work towards building an improved agricultural production system.

While speculators in agricultural commodities may have played an unclear role in driving up prices, they are likely to profit the most from volatility in prices. In trading over the past week, commodity markets have seen daily price declines in goods such as soybeans and wheat, among others. Although it is difficult to identify a relationship between the US credit crisis and commodity markets, a positive relationship has been identified by some experts between oil, which have also declined, and commodity prices.

A systemic solution to high food prices is unlikely to come through a single international body. The global agricultural system is likely to face future crises if the weaknesses demonstrated by the current emergency are not fully understood and addressed. The WTO offers developing countries a unique forum to voice their concerns about food security and a positive conclusion to the Doha Round is likely to make trade more predictable, and better able to respond to the world’s agricultural needs.

ICTSD reporting.

For more information on this subject, please see:

http://www.ifpri.org/PUBS/newsletters/IFPRIForum/if200807.asp

http://go.worldbank.org/ZJIAOSUFU0