When trade ministers meet in the United States (Seattle) late this year, they may launch a new round of global trade talks under the auspices of the World Trade Organization (WTO). If the ministers indeed initiate this "millennium round," agriculture will be part of it. Otherwise, agricultural negotiations will proceed on their own, since Article 20 of the Uruguay Round (UR) Agreement on Agriculture states that agricultural negotiations should be resumed during 1999.
Agriculture was key to the conclusion of the Uruguay Round. Along with textiles and apparel, intellectual property, and services, it was a critical component of the complex reform package needed to garner support from the many countries involved.
The world environment has changed substantially since the completion of the UR negotiations. The European Union (EU) is expanding its membership. Regional and subregional trade agreements in Africa, the Americas, and Asia are increasing their prominence. In agriculture, the EU, Japan, and U.S. have undertaken some market-oriented reforms, while many developing countries have initiated or continued the process of policy reform aimed at more market competition and macroeconomic stability.
Yet the horizon is not cloudless. The U.S. trade deficit is headed toward historic highs and the president has yet to secure "fast-track" negotiating authority, which is considered necessary for serious trade negotiations. Although the U.S. has implemented new domestic agricultural policies consistent with UR agreements, there are strong pressures to go back to more distorting programs. The EU appears set to implement further reforms to its Common Agricultural Policy, but the changes proposed will still impose important budgetary and trade burdens on those countries and the rest of the world. Asia, the largest source of net demand for world agricultural products, has been hit by a crippling financial crisis that has spread to other countries. The crisis highlights the complexity of international finances and could pose a threat to greater market openness. The world economy is decelerating and, after years of fighting inflation, deflation has emerged as a key concern. All these developments will shape the nature and pace of the new round of negotiations on agriculture and other trade issues as well.
Agricultural export subsidies have disrupted markets for developing countries and agricultural producers in nonsubsidizing countries. Eliminating export subsidies would put agriculture on the same footing as other sectors under WTO discipline. State trading enterprises’ practices, which can function as subsidies or dumping on the export side and hidden trade barriers on the import side, need transparency and stricter discipline. Ultimately the trade rules related to agricultural products that cover the relationship between export subsidies and food aid and export credits should be integrated in a unified framework.
Expanded market access will depend on increasing the volume of imports allowed under the current regime of tariff-rate quotas (TRQs) and making their administration more transparent and equitable; further reducing tariffs, particularly those still high for some key products; completing the process of tariffication in the cases where exemptions were granted; and eliminating, or at least reducing, tariff escalation (a practice that hurts developing countries by limiting the generation of local employment in products with higher value added).
Many developing countries have dismantled or significantly reduced their domestic support for agriculture, mainly because of concerns about inefficient policies and fiscal constraints. The possible benefits these countries and the world can enjoy, however, are thwarted by the subsidies of developed countries. Further discipline in this regard should include tightening the criteria for "green box" policies (containing non- or minimally distorting subsidies), defining the measure of domestic support by product, and eliminating the exemptions under the "blue box" (which allows nondecoupled, trade-distorting payments to farmers under some conditions). Least-developed and developing countries, however, will still be allowed "special and differential" treatment.
The Sanitary and Phytosanitary (SPS) Agreement remains controversial. Rather then reopening the agreement, the best approach is probably to ensure that the existing process of dispute settlement clarifies the issues involved.
The special situation of least-developed countries and net-food-importing countries was recognized in ministerial declarations at the conclusion of the UR. Concerns include the preservation of adequate levels of food aid, the provision of technical assistance and financial support to develop the agricultural sector in those countries, and the continuation and expansion of financial facilities to help with structural adjustment and short-term difficulties in financing food imports.
The imposition of export taxes or export prohibitions may also hamper the access of these poorer countries to food supply at adequate and stable prices. Volatility in agricultural prices must be monitored carefully. While expansion of world agricultural trade should limit overall fluctuations by spreading supply and demand shocks over larger areas, the decline in world public stocks as a percentage of consumption works in the opposite direction. Strengthening early-warning systems of food shortages, lowering costs for food transportation and storage, and providing better targeted food aid programs and financial facilities for emergencies are issues that need to be addressed.
The impact of changes in trade and agricultural policy on poorer consumers and producers is a matter of debate. The UR has begun to discipline unfair competition from subsidized agricultural exports from developed countries that hurt producers in importing countries. At the same time, the agreement allows developing countries to continue most agricultural and social policies linked to poverty alleviation and agricultural development. To achieve those objectives the adequate design of domestic policies and investment programs in human capital, infrastructure, technology, land ownership by small producers and landless workers, and the adequate functioning of product and factor markets are crucial. Certainly the objectives of development and poverty alleviation will not be served by trade-distorting interventions that operate as taxes on food consumers (with the greater burden falling on the poor) or by subsidies that allocate scarce fiscal revenues to wasteful programs.
Genetically modified products present a special challenge. They have implications for the WTO framework on intellectual property rights and the proper administration of the agreement on technical barriers to trade. The development of important new technologies that are necessary to feed the world in coming decades may be blocked if the politically sensitive issues surrounding genetically altered food are not handled with scientifically rigorous analysis of the risks to human health and biodiversity.
Debates over the links between trade, labor, and the environment will continue to require analysis of the different claims regarding the effects of low wages and lack of environmental standards on trade. Legitimate concerns need to be separated from the increasing use of these issues for protectionist purposes in developed countries.
China, the world’s largest agricultural producer (representing about 20 percent of world production), Taiwan, and Viet Nam, along with Russia, Ukraine, and other countries emerging from the former Soviet Union, are not yet members of the WTO. Their eventual membership will involve important domestic changes that may improve the productivity of their agro-food sectors and create more transparency in their trade policies. These transformations will produce far-reaching consequences for world agricultural markets. The issue of WTO accession, however, is not part of the upcoming agricultural negotiations.
Historically, changes in the trade balance and current-account balance were the main focus of economic policy analysis. But in a world where many countries have opened their capital markets and international financial markets are increasingly important, the dynamics of trade flows appear to be dominated by capital flows. Adequate macroeconomic policies, therefore, may be at least as important for the operation of commodity markets, including trade in agricultural products, as WTO negotiations on reducing trade barriers.
The two main actors during the UR, the U.S. and the EU, face different incentives now than they did during the previous negotiations. Then the U.S. and EU were under pressure to reduce the fiscal cost of agricultural support and the U.S.-EU subsidy war was disrupting world markets. Now the fiscal position has improved significantly in the U.S. and EU—although the cost of European support for agriculture remains high. Some of the distortions in world agricultural markets have been diminished thanks to the UR, although they may come back in the current environment of low world prices. The UR focused more on cereals and oilseeds while the coming negotiations may require a closer look in developed countries at sensitive products such as sugar, dairy, and peanuts. Furthermore, agriculture in the UR was part of a wider negotiation, which allowed tradeoffs between agricultural and nonagricultural interest groups. Now, unless the millennium round takes off, the negotiations on agriculture will be conducted apart from other issues. This separation reduces the leverage of countries and groups interested in further reforms.
The combination of all these circumstance may weaken the resolve of the U.S. and the EU to complete the still badly needed reform of agricultural policies. In that case, as in the past, the new WTO agricultural negotiations may well be defined by the pace and shape of the reform of the EU’s Common Agricultural Policy.
A final point is that developing countries, as small players in the global arena, should be interested and active participants in the design and implementation of international rules that limit the ability of larger countries to resort to unilateral action. Also, domestic legal and institutional frameworks in developing countries may be strengthened by the implementation of internationally negotiated rules that limit the scope for rent-seeking and arbitrary protectionist measures. The developing countries as a group have much to gain from continued progress toward a transparent, rule-based trading system in agriculture.
Eugenio Diaz-Bonilla is a visiting research fellow and Sherman Robinson is director of the Trade and Macroeconomics Division at IFPRI.