Agriculture products: Open global trade - an utopy?

Agriculture products: Open global trade - an utopy?


World trade in agricultural products totals $674 billion in 2003[1], about 7 % of the whole. This trade is an important source of foreign exchange earnings for many countries. The dominant player is EU. It’s intra-regional trade is $233 billion[2]. Africa, with over 900 billion in habitants represents only a marginal portion of world trade, only $9 billion in exports and $11 billion in imports. The share of agricultural products of total trade is, however, biggest in Africa, 13.9 % in exports and 15.9 % in imports. No African countries can be found in the list of top exporters[3]. Because of big population, Africa’s own demand for various food products is large, more than $50 billion and is expected to double by 2015[4]. Only a part of this output is marketed and the rest is consumed in farms. The paradox in the Africa now imports about 25 % of its food grain[5] and succeeds to export only marginal portion of the world trade in food products. There is certainly potential to increase Africa’s production.

The most serious situation in Africa is in LDCs. Over the last two decades the share of LDCs in global exports has declined and their share in global food imports has increased. In the late 1970s, LDCs had net export surpluses $1-2 billion when they now have net deficits of over $4 billion[6]. The share of food imports of LDCs’ total exports has, however, grown to 70 %. This is an indicator of the economic disaster in many of LTCs that have even continuous difficulties to pay for their food imports. The two major consumers of agricultural products are the EU and the EU. In 2005, LDCs’ total exports to the EU were $3.5 billion. The EU has its historical position as the leading trader of Africa’s agricultural products. The EU imports over 90 % of the agricultural products from Africa’s LDCs and the EU’s relative share of exports to Africa’s LDCs is over 80 % [7]. The second biggest target market for LDCs is the growing economies in Asia. In 2005, LDCs’ total exports to Asia were $3.1 billion[8]. North America with a large scale production of agricultural products has only marginal position in the trade between LDCs.

Agricultural commodity-based exports from Africa’s LDCs are greatly dependent on the EU policy in agriculture. The EU has not favored the LDCs’ agriculture, not even Africa’s ones. The share of agricultural exports of total LDC exports to the EU has declined from about 25 % to about 10 % over the WTO-period from 1995. [9]

The growth in the agricultural exports is crucial in reducing poverty in Africa. The trend of the EU imports is going to the opposite direction. The EU is importing mainly industrial products, not agricultural ones. The EU is exporting itself €433 million more than importing, when imports from LDCs had €383 million deficit in 1995. The African LDCs have a comparative advantage in such commodities as fruits, sugar and tropicals in which import tariffs are low and the effects of further liberalization are likely to be marginal. Most of agricultural products from African LDCs meet the saturated demand in the EU, in particular coffee, cocoa and tea. Processed products that represent the biggest potential in global markets with 9.7 % average annual growth in 1995-2005 generate to the EU €760 million by LDC exports in 2005.[10] This fact is far from being in the line of the EU’s outspoken policies to decrease poverty in our globe. On the contrary, the EU continues to support its own agriculture and, thereby, makes LDCs’s position still more difficult. It is important to notice that the new EU member countries increase the EU’s production capacity substantially in agriculture when they have modernized their farming.

Processed forms of products of cereals, cocoa, coffee, fruit, vegetables, root crops, etc has been in growth in trade because of their functionality. Africa as the producer of has been pushed out of the increasing value added by the unfair trade policies of the US and the EU. Even cotton that could be article has stagnated to €87 million in 2005.

Growing economies in Asia seem to be the best partners to African producers. An example of that in West Africa is Burkina Faso that has increased its exports of agricultural products to Asia 49 % in 2004 and to $174 million. Agriculture represents 32 % of Burkina Faso’s GDP and occupies 80 % of the working population[11]. The economic problems of Burkina Faso are still serious and lack of work has caused emigration, about 3 million people from Burkina Faso live in Côte d'Ivoire. The International Fund for Agricultural Development (IFAD) estimates that seven out of ten of the world's poor still live in rural areas. They include smallholders, landless laborers, traditional pastoralists, artisanal fishers and marginalized groups such as refugees, indigenous peoples and female-headed households[12]. Agricultural growth spreads its benefits widely. Growth in farmers’ and farm laborers’ incomes create demand for basic non-farm products and services in rural areas. These include tools, blacksmithing, carpentry, etc that are difficult to trade over regions. They are produced locally, usually with labor-intensive methods, and have great potential to create local entrepreneurship that is the best broad recipe for poverty reduction[13]. Local entrepreneurship creates demand for the welfare services like basic education, health services, and safe water.

Asian countries seem understand better than the EU Africa’s logic of development. The liberalization of world trade in agriculture products could raise incomes greatly in Africa because Africa anyway has its own comparative advantages.

Developing countries liberalized their agricultural trade in the 1980s under structural adjustment reforms[14]. When agricultural trade was subjected to systematic multilateral controls during the Uruguay Round, developing countries had good reasons to expect a fair pact. The agreement negotiated by the WTO’s is called Agreement on Agriculture (AoA). Under the AoA non-tariff barriers such as quotas were replaced by tariffs. This is a measure used by the WTO to increase transparency in international trade. The key non-tariff barriers that African countries meet in the markets are, however, agricultural subsidies[15]. The AoA includes a promision to reduce subsidies. The progress in this area of non-tariff barriers has been minimal. The WTO members have made technical reforms by shifting towards less distorting support measures.

The total support to agriculture in the OECD countries is estimated to be over $300 billion[16] that is almost one half of the total value of world trade in the sector.

The EU, which is made up of 27 member states with a total of about 13 million farmers, made its Common Agricultural Policy, CAP reform in 2003. The total payments to farmers in the EU have increased since the reform decreased price supports but more than compensated that through payments to rural development, environmental protection and programs designed to improve the sustainability of rural economies. The EU’s trade policy in agricultural products is far from being transparent. The EU’s export subsidies are still about $6 billion that is difficult to justify. The EU subsidized sugar production by about $2 billion. The EU is a major sugar exporter, even though its production costs are double higher than in many developing countries[17]. The EU use actively even tariffs under the AoA. For frozen beefs tariffs can be even over 200 %. The moral question behind is that the EU’s worry about the hormones that are used in the U.S and some other countries to make cattle grow faster and produce more milk. Although this moral issue might be acceptable WTO ignores justification for banning hormone-laden beef because this kind of action is against non-discriminatory principles of the WTO.

CAP farm support expenses were $61 billion in 2004 and accounted for 45 % of the EU's total budget, even though agriculture only 1.7 % of the EU GDP, and only 4.3 % of the EU population was employed in agriculture[18].

Export subsidies mean that EU agricultural goods are sold in EU markets and in the third world markets at much lower prices than they should be, creating unfair competition for local producers as well as producers from third countries. The end result is that export subsidies help to maintain an oversized and not very efficient production here in the EU, while costing money not only to EU taxpayers, but to people in other countries as well. In 2002, President Bush signed into law a new farm bill worth $180 billion that will raise U.S. agricultural subsidies up to 80 percent a year for the next 10 years[19]. President Bush’s arguments to Congress for the farm bill included that it expands international trade and is based on free market principals. The argumentation is almost as honest as the ones in the case Iraq[20]. In the US, farm subsidies grew faster than any other major federal program and the new farm bill is the most expensive farm bill in the history of any nation. Through the farm bill the federal government will spend more on subsidies than on education and environmental protection combined[21]. The neoclassical argumentation of Bush administration of free market principals is a parodox if the real beneficiaries of the new farm bill are big actors[22].

According to the World Bank, West African cotton exporters already lose about $250 million a year as a direct result of U.S. subsidies and this figure will rise sharply[23]. In West Africa, cotton-based textile and clothing manufacturing could be the growth driver but the farmers cannot compete against subsidies[24].

The WTO Doha round of multilateral trade negotiations (MTNs) gives a substantial focus on development concerns[25] to secure LDCs meaningful integration into the global economy. The agricultural trade of LDCs’ primary products lags behind and only processed agricultural products that multinationals dominate are in the fast growth. The history of politically argumented protection[26] makes it difficult for OECD countries to liberalize agricultural trade. A possible solution to that could be trade negotiations where market access is exchanged to the mutual benefits of the trading partners[27]. Small and poor countries need multilateral bargaining[28] although also in that case the monopoly power of multinationals can be the decisive barrier. Many of them are vertically integrated, covering the whole chain from production to food processing and distribution. By controlling large parts of the supply chain, they can put pressure on farmers and retailers. In Africa multinationals have tied farmers into unfavorable buying and selling contacts, including violation of the proper environmental standards.

The concentration of NMCs has been rapid[29] because of the neo-liberalistic policies adapted by most of the states’ governments and IGOs, the UN as the only major exception. In practice, the industry concentration has run out of the control especially in the markets of commodities[30].

Complete liberalization of agricultural trade could produce valuable welfare gains. According to the FAO, impacts of complete agricultural trade liberalization are substantial[31], an estimation of the boost to global incomes is $165 billion a year. The biggest benefits would go to consumers and taxpayers in the EU and the US, where agriculture is most protected. Agricultural exporters in LDCs could get open entry to global markets in cereals, milk, meat and sugar, like the WTO and the UN have declared[32]. This would provide substantial gains for labor-intensive agriculture in Africa. Sub-Saharan Africa is the region with unfavorable agro-ecological conditions and inadequate transport/ communication infrastructure. For most agricultural goods, the AoA's impact on prices and levels of trade has been negligible. The reason for that are the unfair trade policies of the US and the EU that exert a negative influence on the development of agriculture in Africa. Preference erosion arising from reductions in most-favored-nation tariff rates is an important issue. The products most affected are the primary products, such as rice, sugar, milk, wheat, and maize that poor countries produce. Products, like coffee, tea, and fruits, face the problems of high, complex and seasonal tariffs, and tariff escalation. The real beneficiaries of subsidies and unfair trade agreements are multinationals.

A measure of the monopoly power is the widening gap between world consumer prices and farmers compensations. Multinationals press the pricess even in Africa where farmers have not subsidies when subsides in rich countries can be up to 80 % of farmers’ production costs.



[1] http://www.wto.org/english/res_e/statis_e/its2004_e/its04_bysector_e.htm
[2] The second is intra-Asia with $70 billion and the third North America to Asia with $38 billion. The next ones are ($ billion): Intra-North America 34, Latin America to the EU 22 and Latin America to North America 20.
http://www.wto.org/english/res_e/statis_e/its2004_e/its04_bysector_e.htm
[3] The world biggest exporters of agricultural products are ($ billion): The US 76, the EU-15 73, Canada 33, China 22, Australia 18, Thailand 15, Argentina 12, Malaysia 11, Mexico 10, Indonesia 10, New Zealand 9, Russia 9, Chile 7 and India 7. The world biggest importers of agricultural products are ($ billion): the US 77, the EU-15 98, Japan 55, China 44, Canada 18, Korea 15, Mexico 13, Russia 13, Switzerland 7, Saudi Arabia 6, Thailand 5, Indonesia 5 and Turkey 5.
http://www.wto.org/english/res_e/statis_e/its2004_e/its04_bysector_e.htm
[4] Diao, Xinshen & Dorosh, Paul A. & Rahman, Shaikh Mahfuzur (2003) Market opportunities for African agriculture," DSGD discussion papers 1.
ideas.repec.org/e/pdo121.html
[5] For wheat the share of imports is 64 %. Diao & etc.
[6] http://www.wto.org/english/res_e/statis_e/its2004_e/its04_bysector_e.htm
[7] http://trade.ec.europa.eu/doclib/html/120307.htm
[8] http://www.wto.org/english/res_e/statis_e/its2004_e/its04_bysector_e.htm
[9] There appears little evidence to suggest that the 'Everything But Arms' (EBA) initiative in 2001 has led to increased agricultural exports from the LDCs to the EU; exports of products that did not benefit from preferential access have increased significantly (vegetables and sugar are still under quota), while exports of some products traditionally exported without border protection have decreased (tropical products such as coffee and tea, cotton).
http://trade.ec.europa.eu/doclib/html/120307.htm
[10] http://trade.ec.europa.eu/doclib/html/120307.htm
[11] It consists mostly of livestock but also sorghum, pearl millet, maize (corn), peanuts, rice and cotton. http://en.wikipedia.org/wiki/Burkina_Faso#Economy
[12] http://www.fao.org/docrep/004/y3557e/y3557e07.htm
[13] http://www.fao.org/docrep/004/y3557e/y3557e07.htm
[14] Trade and Structural Adjustment: Embracing Globalisation (OECD, 2005)
http://www.oecd.org/department/0,3355,en_2649_33705_1_1_1_1_1,00.html
[15] Agricultural subsidy is the process whereby governments give large sums of money to agriculture traders and farmers to increase their overall profits; this allows these exporters to drastically reduce the prices of their goods.
[16] ftp://ftp.fao.org/unfao/bodies/ccp/ccp64/Y8318e.doc
[17] http://www.fao.org/docrep/006/j0083e/j0083e04.htm
[18]http://www.ers.usda.gov/Briefing/EuropeanUnion/basicinfo.htm
[19] How agricultural subsidies in rich countries hurt poor nations, Wole Akande, columnist (Nigeria)/YellowTimes.org 19Oct 02.
http://www.mindfully.org/WTO/Subsidies-Hurt-Poor-Akande19oct02.htm
[20] http://www.cnn.com/2003/WORLD/meast/03/19/sprj.irq.main/
[21]http://www.heritage.org/Research/Agriculture/BG1538.cfm
[22]"Sugar's First Family," Center for Responsive Politics, at
http://www.opensecrets.org/pubs/cashingin_sugar/sugar08.html
[23] How agricultural subsidies in rich countries hurt poor nations, Wole Akande, columnist (Nigeria)/YellowTimes.org 19Oct 02.
http://www.mindfully.org/WTO/Subsidies-Hurt-Poor-Akande19oct02.htm
[24] The US handed out $3.9 billion in subsidies to 25 000 cotton farmers in 2001–2002, more than the GDP of Burkina Faso, where 2 million people depend on cotton for their livelihood. http://www.fao.org/docrep/006/j0083e/j0083e04.htm
[25]Doha WTO Ministerial 2001: Ministerial Declaration, WT/MIN(01)/DEC/1, Geneva: World Trade Organization, 14 November.
[26]During three centuries of modern economics, there has been only one significant episode involving a major liberalization of agricultural protectionism, namely the mid-nineteenth century repeal of Britain's Corn Laws. OECD (2002), Agricultural Policies in OECD Countries: Monitoring and Evaluation, Paris: OECD.
[27]Grossman, Gene and Helpman, Elhanan (2003) Innovation and Growth in the Global, Technology and International Trade in Witt, Ulrich (2003) The Evolving Economy, Cheltenham, Edward Elgar, Aldershot.
[28] Multilateral Trade Negotiation: The Case of Small Developing Countries, First draft: April 27, 2006 (Preliminary) Kornkarun Kungpanidchakul
https://mywebspace.wisc.edu/kkungpanidch/web/paper/multilateral%20trade%20negotiation.pdf
[29] In 1996, five MNCs accounted for about 50 % of world trade in green coffee, and four coffee roasters accounted for 50 % of the roasted coffee market. In cocoa, the number of trading houses in London has been reduced from 30 in 1980 to around 10 in 1999. The six largest chocolate manufacturers account for 50 % of world chocolate sales. www.navdanya.org/pdf_files/roti.pdf
[30] Some examples of that are: 4 firms control 50 % of the US broiler market and 46 of the US pork market, and 4 firms control 80 % of the US beef packaging and 60 percent of the pork packing market. Monsanto and Syngenta account together for 35 % of the global market for crop protection and 19 % of the one for seeds. http://www.fao.org/docrep/004/y3557e/y3557e07.htm
[31] http://www.fao.org/docrep/004/y3557e/y3557e07.htm
[32] Paragraph 42 of Ministerial Declaration of the 4th WTO Ministerial Conference in Doha in November 2001 states: “We commit ourselves to the objective of duty-free, quota-free market access for products originating from LDCs”.
www.wto.org/English/thewto_e/minist_e/min01_e/mindecl_e.htm
The paragraph 68(h) of the program of action for LDCs, endorsed at the third UN Conference on LDCs, states: “Improving preferential market access for LDCs by working towards the objective of duty-free and quota-free market access for all LDCs’ products. This will apply to the markets of developed countries”.
www.un.org/events/ldc3/conference/plan_action.htm