There has been much interest in the effect of OECD country agricultural policies on developing countries. Are these countries damaged by the agricultural policies pursued in rich countries? In this lecture, we highlight the various channels through which developing countries are affected. A key issue is to recognise that developing countries are not a homogeneous group and will be affected differently by agricultural trade liberalisation depending on their net trade status (whether they are net exporters or importers), the commodity composition of their trade, their dependence on preferences, etc.
OECD agricultural trade and support policies are widely seen as damaging to developing countries. By limiting market access to the food markets of developed countries, while subsidising the export of surpluses to developing countries, it is argued these agricultural trade and support policies undermine markets for rural producers in developing countries and make it more difficult for these countries to trade their way out of poverty. For developing countries and NGOs, achieving a high level of ambition in the agricultural negotiations has become the lynchpin by which progress in the overall talks is judged.
Nonetheless, in more recent years there has been a growing sense that agricultural trade liberalisation by developed countries may not make as substantial a contribution to developing countries as was first thought. The reasons for this are varied.
Partly, it has been fed by an awareness that not all developing countries, and perhaps not even all farmers in these countries, necessarily stand to benefit from multilateral trade liberalisation. At the country level, the problem of net food importers, which could face an adverse terms of trade shock if world food prices increase as a result of liberalisation, had already been recognised in the Uruguay Round Agreement. The Marrakesh Decision was an attempt to put in place policies which could help to alleviate any adverse impacts. The problem of net food importers arises because the consumer interest in importing countries is larger than the producer interest; producers still gain from higher world food prices but these gains are outweighed by the losses to consumers.
Recently, more attention has been paid to the potential losses to those developing countries which benefit from preferential access to developed country markets, where it is the producers who are the losers.
Even where simulation results appear to show positive gains for farmers in developing countries as well as overall gains, scepticism is evident. Some question whether the postulated increases in trade flows would in fact take place given the potential for various non-tariff barriers, both formal and informal, not captured in the model specifications to hinder this. The trade-restraining role of sanitary and phytosanitary standards is often mentioned in this context. The growing concentration in retail markets particularly in developed countries, and the related emergence of global supply chains with their potential to exclude particularly smaller producers from the benefits of formal market access, is another cause for concern.
Yet another reason for scepticism concerns the ability of the poorest developing countries to take advantage of improved market access. One of the consequences of the renewed interest in preferences has been to highlight that many developing countries have failed to maintain their market share in developed country markets despite significant preferential advantages. The limitations of preferences as a way to encourage trade are well known: they are arbitrary and uncertain, their value is undermined by restrictive rules of origin, and the preferences themselves are often limited in precisely those commodities which developing countries could export. Nonetheless, the apparent lack of response to preferences suggests that increased market opportunities do not necessarily translate into increased market access.
Much greater attention has focused on the potential problems facing preference recipients in the Doha Round negotiations as compared to the Uruguay Round. All OECD countries implement preference schemes which provide developing countries with preferential access at lower than most-favoured-nation (MFN) tariffs to OECD markets. Lowering MFN tariffs will erode the value of this preferential access for beneficiary countries. Because tariffs are generally higher on agricultural and food products with more tariff peaks, preferences for these products tend to be more valuable. Not surprisingly, the consequences of preference erosion are likely to be more significant for beneficiaries with preferences in agri-food products.
Two widely quoted IMF studies assuming a 40 per cent reduction in the preference margin enjoyed by LDCs and middle-income countries found an insignificant impact overall for these groups (e.g., less than two per cent of exports for all LDCs). But eight middle-income countries (where sugar and banana preferences account for the vast majority of benefits) and seven LDCs could lose 4–12 per cent of total export revenues.
A variety of responses have been suggested to this problem. Some authors point to the continued significance of tariff barriers even for preferred exporters, and argue that market access gains from MFN tariff reductions (either in the preference-giving country or other countries' markets) could offset the loss of preferences. Another suggested response is to maintain nominal margins of preference to the maximum extent possible. This is clearly impossible when preferred countries already face zero tariffs. Some WTO members have proposed that tariff reductions in OECD countries for products where preferences are significant might be smaller or phased in over a longer period than might otherwise be the case under any general tariff-cutting formula that might be agreed. Yet others sought ways in which the erosion of existing preferences might be offset by the extension of new preferences. For LDCs this was achieved at the WTO Hong Kong Ministerial Meeting in December 2005, where it was agreed that all developed country members (and developing countries in a position to do so) would extend duty-free and quota-free access to LDCs by 2008, although up to 3 per cent of tariff lines can still be excluded. In any event, middle-income developing countries are not affected by this offer. Led by Mauritius, which faced significant losses due to preference erosion on both sugar and clothing, there were calls for a compensation mechanism for countries adversely affected by preference erosion.
However, assistance for trade adjustment where this is due to preference erosion is contentious. There are many sources of negative shocks that create the need for adjustment, both trade and non-trade related. Focusing on just one of these while ignoring others is difficult to justify. Trade reforms by countries which do not currently grant preferences can help to attenuate the negative impact effects of erosion. Gains from trade reforms in non-related sectors (for example, in manufacturing trade) may also balance potential losses in agriculture. This raises the difficult question, if compensation were to be made, whether this should be related to the gross value of specific preferential access arrangements, or whether it should depend on the net adverse effects of MFN liberalisation overall.
A related issue is whether compensation for preference erosion is a bilateral or multilateral responsibility. Because the most important preferences originate in unilateral trade policy decisions by OECD countries, it is argued that it is those countries whose preferences are being undermined who should bear the responsibility to put in place alternative mechanisms to assist the recipient countries. On the other hand, proposals for a multilateral preference erosion compensation fund have been justified on the grounds that trade liberalisation can be seen as a global public good. The limited number and small size of most of the economies concerned imply that measures to help mitigate the impact of preference erosion need to be closely focused on the countries at risk.
One of the reasons that many developing countries feel they will not benefit from further liberalisation of access to OECD agri-food markets is ubiquity of supply-side constraints. Low-income countries, in particular, face many constraints in taking advantage of improved market access. They may be land-locked countries facing high transport and transit costs across neighbouring countries. They may have difficulty in complying with increasing stringent sanitary and phytosanitary standards. They may simply lack the trading infrastructure and market contacts in developed countries to exploit new market opportunities. Thus, many academics as well as WTO members have called for increased financial assistance to developing countries to accompany any market liberalisation package. The scope of such aid for trade is potentially broad, covering implementation of new standards, social safety nets, support for negotiating capacity, overcoming supply side capacity constraints such as poor infrastructure, and trade facilitation and services, as well as adjustment and implementation costs for any Doha Round agreement, compensation for fiscal revenue losses, compensation for food price increases for net food importers, and compensation for preference erosion.
Aid for trade has become part of a final Doha agreement since the Hong Kong Ministerial Council. The Task Force on Aid for Trade set up at that meeting reported in July 2006. It proposed a narrower focus for aid for trade activities, including technical assistance for trade policy formulation and negotiation, trade development, trade-related infrastructure, building productive capacity, trade-related adjustment and other trade-related needs. The idea of providing compensation, whether for higher food prices, preference erosion or loss of fiscal revenues, remains contentious. But even with this narrower scope, questions remain. Does it make sense to differentiate aid for trade from development aid in general? Given that it is often difficult to distinguish the two, is it sensible to complicate the aid system by creating separate frameworks and structures for trade-related assistance? There are already a variety of new channels to deliver this assistance, including the IMF's Trade Integration Mechanism, various bilateral donor programmes as well as multi-agency programmes such as the Integrated Framework for Trade-related Technical Assistance to Least Developed Countries. At a minimum, trade-related assistance should be disbursed in the context of the “new aid framework” which emphasises the need for coordination between donors and coherence with national policies and priorities. The relationship between aid for trade and policy conditionalities which may be associated with other forms of assistance also needs clarification.
Should aid commitments be brought under the WTO umbrella and formalised as part of a Doha Round Agreement, thus making them subject to the dispute resolution mechanism? The Food Aid Convention which seeks to guarantee a minimum level of food aid deliveries is a previous example of such an agreement, which also serves to underline its possible limitations. The big potential for disillusionment lies in the fact that aid is fungible, and that new 'commitments' for trade-related assistance may simply repackage aid flows that would otherwise go to other sectors. A proposal that all countries agreeing to increased aid for trade should subscribe to a Maintenance of Effort Commitment that current aid levels would not be reduced has been made to deal with this concern.
Tangermann, S. 2005. OECD Area Agricultural Policies and the Interests of Developing Countries, Waugh Lecture to the American Agricultural Economics Association, mimeo.
Matthews, A., 2007, Improving policy coherence between agricultural and development policies, Research Findings Volume 1, Advisory Board for Irish Aid.
(unfortunately, you cannot download just the individual article from this volume (chapter 6), so you have a large download because of the glossy layout, 4 MB)
Supplementary reading
Anderson, K., Martin, W. and van der Mensbrugghe, D., 2005, Would multilateral trade reform benefit Sub-Saharan Africans?, World Bank Policy Research Working Paper No. 3615, World Bank.
FAO, 2005. Agricutural Trade and Poverty: Can trade work for the poor? Special Report on Trade, State of Food and Agriculture Report 2005, FAO, Rome. [download] (Concentrate on Chapters 3, 4 and 5 in this report) [alternative download]
IMF, 2002. 'How do industrial country agricultural polices affect developing countries', IMF World Economic Outlook,
October 2002, p.81-91. (note that the relevant essay is just one of three in this download)
Panagariya, A., 2005. Agricultural Liberalisation and
the Least Developed Countries:
Six Fallacies. World Economy.
Green, D. and Griffen, M. 2002. Dumping on the Poor: The Common Agricultural Policy, the WTO and International
Development, London, CAFOD (download)
(CAFOD is an NGO, the official aid agency of the Catholic Church in England
and Wales and the report criticises the external effects of the CAP on developing countries).