That was then, this is now: WTO and agriculture

The rules of global trade must accept new food system realities
December 15, 2017
by Eugenio Diaz-Bonilla

The Eleventh World Trade Organization (WTO) Ministerial Conference in Buenos Aires has ended. Advances were made toward an agreement on fisheries, and groups of countries made plans to focus on e-commerce, investment facilitation, and on micro, small, and medium-sized enterprises. But WTO members could not agree on a joint Ministerial Declaration. And in agriculture, there were no advances on domestic subsidies (which at one point seemed to be a “deliverable” at the Ministerial). There were also setbacks on the issue of separate negotiating tracks for a “permanent solution” on public food stocks (I have written on this here and here) and for a special safeguard mechanism. It remains to be seen how and when these crucial agricultural negotiations will restart.

There are many reasons for disagreements at the WTO. Here I focus on agriculture, and why, from the very start of global trade negotiations, it has been a sticking point.

Some history

When the General Agreement on Trade and Tariffs (a precursor to the World Trade Organization) first took effect in 1948, agriculture was treated separately from industry, with governments allowed to use a variety of measures such as tariffs and quantitative restrictions on imports to subsidize domestic production and shield it from external competition. The sector, particularly food production, was considered politically too sensitive and governments intervened heavily in its operation. Moreover, Europe and other regions were emerging from the total devastation of WWII, and reliable supplies of food were needed to avoid social unrest .

During the long period of postwar growth and buoyant demand, and then particularly after the price shocks of the second part of the 1970s, as concerns grew about the potential return of famines, measures to expand supply seemed justified (even if trade distorting). But when the global world cycle turned negative in the first half of the 1980s, contracting demand met that expanding supply—and commodity prices collapsed. Trade conflicts ensued, mainly between the United States and the European Union (which together at the time accounted for about 60 percent of global agricultural exports), with other producers and exporters as affected by-standers.

In the early 1990s, the U.S. and Europe finally settled on a framework of rules for agriculture trade that led to the drafting of the Agreement on Agriculture (AoA). This in turn became part of the agreements in the creation of the World Trade Organization in 1994. Developing countries were of two minds on the AoA: Although it granted them special status and protections for agriculture, including consolidating import tariffs at high levels, applying input subsidies, and higher de minimis, it still allowed developed nations significant flexibly to protect and subsidize their own agriculture sectors. Meanwhile, WTO agreements included new topics such as intellectual property rights and trade-related investment measures with debatable links to trade—but clear limits on developing countries’ policy space. .

Some additional context from the 1980s and early 1990s also deserves attention. Developing countries (with a smaller share in production and trade) were not important players in those early WTO negotiations; there were concerns about the high rates of poverty and hunger across many developing countries, where food systems were often fragmentary, and in many cases showed strong intervention of the public sector; and finally, climate change and sustainability were then marginal concerns in trade talks.

Current conditions

Fast forward a quarter of a century to today. The world has gone through another of the periodical long economic cycles of acceleration and retraction (I discuss the current cycle in historical context here). In the upswing, markets for commodities have been buoyant, and softened significantly after the 2009 global financial crisis (as occurred in previous cycles). Also, during the recent period of high economic growth and rapid development, many developing countries gained larger percentages of global agricultural production and trade; higher GDP per capita also meant that many of these countries could now devote more resources to supporting agriculture. In fact, estimates of support (from consumers and taxpayers) to agriculture suggest that China’s now exceeds that of the EU and that India’s expenditures are above the equivalent measures for the U.S.

Brazil and Argentina are ranked first and second as net exporters (i.e. exports minus imports) by value in the 2010s, according to FAO data. China, India, and other developing countries have become strong presences in world food and agricultural markets. For instance, China now represents close to a quarter of all world agricultural production (by value in dollars of equivalent purchasing power), and is the fourth largest exporter (with a value of total exports close to Brazil) and the third largest importer of agricultural goods (while still a net importer), according to the latest WTO data. India has actually become a net food exporter in the 2010s, ranking among the top 10 net food exporters worldwide (and with gross exports close to Australia).  

This changing landscape means it is time to rethink how agriculture and food systems are treated under the WTO framework. Developing countries are now important players in the current negotiations, there are important differences among them, and the food system issues they must confront are also very different from a generation ago.

Poverty and hunger have declined significantly in the developing world, and although there are still about 800 million people suffering from hunger (and about the same number living in extreme poverty), the number of people affected by the other forms of malnutrition—lack of key nutrients and overweight and obesity—have equaled or exceeded the number of hungry people. These latter problems have moved the policy focus to healthy and diverse diets (which calls into question the narrow approach of some trade negotiations on a small number of food products, called “food security” or “special” products). Food systems in developing countries have also become more integrated and modern due to domestic and international private investments in food processing, supermarkets, food chains, and related activities, while governments have been reducing their direct participation in many of those sectors. Finally, climate change and sustainability have moved to the center of current debates about food systems.  However, one important factor has not changed—and has been accentuated by the increased integration of the world economy: The large differences in farm size across countries.

For instance, the U.S. has about 2.1 million farms, averaging about 175 hectares. The EU reports some 11 million farms, averaging of 16 hectares in 2016 (but many of the large European producing countries have averages of between 20-50 hectares). India, by contrast, has an estimated 140 million holdings, which  average less than 1.5 hectares, and China’s numbers may be around 395 million farms, also with an average per farm of less than 1.5 hectares.

The difference in land size mentioned above, which  also happen between other large exporters from English-speaking and South American countries with averages largely above 100 hectares per farm) and most of the countries in Africa and Asia (where averages are usually below 2 hectares per farm) is a structural fact of life that has always complicated agricultural and trade policies and trade negotiations. This variety in landholding structures is important to consider not only because of the disadvantages for small-scale suppliers and the difficulties in adjusting to shocks and changes in market conditions, but also on the demand side: It makes the large majority of small farmers at the world level net buyers of food.

This means that greater restrictions of food imports (“protection”) will hit those small farmers (not to mention poor net buyers in general) harder as consumers than it would help them as producers. On the other hand, import surges may force small farmers to sell assets, go into debt, and make other painful economic adjustments from which they may never recover. Balancing these two issues has been the core of the food policy dilemma: Governments always seem to want both high prices for producers and low prices for consumers to help support food security and poverty reduction. This dilemma has led to many contradictory policies in a large number of countries.

Future prospects

Given these issues, global actors must engage in trade negotiations with a dose of realism. Developed countries have the greatest potential to contribute to a better and fairer system. But they also protect their own. The EU is still the largest protected market in the world (overall, intra-trade represents close to 30 percent of world agricultural trade) and recently has again become a net exporter. Opening the EU’s internal market to external competition will benefit EU consumers, while governments can shift from trade protection to providing truly decoupled income support to their farmers linked to environmental and other services, and even poverty levels, if that would be necessary. The same applies to high-income countries in Asia and elsewhere that keep significant levels of protection, when they could help farmers more efficiently and equitably with less distorting instruments. . It would be very useful for global welfare as well if the EU, which correctly insists on the important role of science to guide policies on climate change, applies the same approach to food and agriculture and resists bending to unsubstantiated claims from vociferous groups against the tools of modern science that are needed to improve efficient use of resources, ensure environmental sustainability, and produce healthy diets. 

U.S. domestic subsidies are not currently the main source of overall distortion in global agricultural markets, but they are still important in some crops such as cotton, and its trade still remains restricted for several products such as peanuts, dairy, and sugar. U.S. officials should take a hard look at those trade practices in light of the country’s considerable advantages: Good climate and a great endowment of natural resources, modern infrastructure, deep capital markets, and adequate supporting public and private institutions. And crucially, the typical size of U.S. land holdings offers important scale advantages. Other countries have reasons to question why on top of all these advantages, U.S. farmers need additional crop-linked subsidies and protection, while successive Administration in that country pressure the rest of the world to liberalize its markets.  

Both India and China still face serious rural development challenges, with millions of small farmers in each country, many of them poor. But they too have systemic impacts on global markets and on other countries, which cannot be wished away by arguing they are developing countries. India is by many measures still a food insecure country (we at IFPRI have some work trying to classify countries on food security dimensions), but it is also a net food exporter, with significant global presence in some key staple foods. The policy of buying domestic products for food security reasons through public stocks, and then exporting a portion of those products, directly or indirectly, is out of line with the goal of feeding the poor population. Also, keeping high bound import tariffs and then suddenly moving applied tariffs according to internal needs generates damaging volatility in global markets. Finally, extensive subsidies for agricultural inputs are depleting water resources and increasing chemical pollution, posing threats to poverty alleviation and food security..

China is not a food insecure country according to many measures, but still has a rural poverty problem. Its former development strategy of moving rural residents to urban centers to produce industrial goods for exports has reached its limits (while achieving a significant reduction in poverty). The current strategy of expanding credit and infrastructural investment also has its limits, leading to dangerous accumulation of overall debt in the economy. China needs a new rural development policy that helps to further reduce poverty while recognizing the systemic impact of its trade policies on other countries. Both China and India would benefit from shifting the focus towards investments in infrastructure and agricultural R&D, plus poverty-based safety nets for poor producers or consumers alike,instead of interfering with the markets of specific crops.

Other developing countries that are large exporters should not claim developing country status on agriculture issues in WTO negotiations. At the very least, these large food exporters need to consider the sizable impact their policies have on food security in the rest of the world, and refrain from export bans and sudden changes in policies that disrupt world markets.

UN-designated least developed countries (LDCs) certainly deserves substantial special and differential treatment, as many of them are poor, agrarian, and food insecure. But LDCs are not the only countries that fit that profile. Different classification exercises (see this one here using cluster analysis) show that other developing countries also suffer significant food insecurity. The global trading system needs better categories for special and differential treatment that take these factors into account.  Developing countries should accept a more detailed categorization of countries for WTO disciplines, in exchange of developed countries moving themselves to a more market-based agricultural and trade policies.   

Finally, any trade framework must account for evolving food systems. On a global level and in many developing countries, food systems have been dramatically restructured by the expansion of food processing, supermarkets, and the lengthening of supply chains. This requires policies that go way beyond primary agricultural and food production.

Here is the main question that should guide governments: How to structure and operate a food system that creates good private sector jobs and employment, uses resources efficiently (minimal food waste), is environmentally sustainable and resilient, and generates healthy diets. But this is certainly not the case now. Fostering such a food system will require many policy changes in trade and other areas. Some, perhaps most, of the needed interventions can be pursued domestically without concerns about regional or global spillover impacts. But some may generate externalities and/or be significantly affected by global factors. That will require some form of collective action among countries and peoples to reach the desired goals. That may include the Agreement on Agriculture and other pacts such as Sanitary and Phytosanitary, Technical Barriers to Trade, Intellectual Property Rights, Trade-related Investment Measures, Services, and the like.

The multilateral system is a crucial public good to coordinate such actions. In the context of a fragile global economic situation and volatile geopolitical conditions, preserving the progress made on development and ensuring a prosperous future will require reaching agreements to establish the “universal, rules-based, open, non-discriminatory, and equitable multilateral trading system under the World Trade Organization,” that all countries committed in the Sustainable Development Goals of the 2030 Agenda.

Henry Kissinger, in his book A World Restored: Metternich, Castlereagh, and the Problems of Peace, 1812–1822 (which analyzed the breakdown of the European diplomatic system at that time and the ensuing wars), noted that a key problem was the desire of countries for absolute security. “Thus,” Kissinger wrote, “the desire of one power for absolute security means absolute insecurity for all the others.” In trade negotiations, countries usually want to maintain all possible policy space for themselves. But that too often means that they will start infringing upon the policy space of others.

Hopefully, countries understand that an international trade system based on rules that are respected is good for all humankind, and act accordingly.  

Eugenio Diaz-Bonilla is Head of IFPRI's Latin American and Caribbean Program.