World Agricultural Trade

Andrew Schmitz

• Publisher: Routledge
• Year: 2019
• ISBN:
  9781000011142
• Edition: 1
• Topic: Politics & International Relations
• Subtopic: Politics
• Index: Politics & International Relations

Between 1961 and 1983, Turkish agriculture was subject to negative protection as a result of indirect measures, such as macroeconomic policies and industrial protection. Until the early 1980s, Turkey maintained an overvalued exchange rate, which served as an implicit tax on Turkish farmers. This policy was changed in 1982 when Turkey allowed its

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Agricultural Trade: Future Issues

D. Gale Johnson

Abstract International trade policies for agriculture remain as adjuncts of domestic farm policies. The farm policies that attempt to increase or stabilize farm prices require that trade be regulated through import quotas, tariffs, variable levies and export subsidies. For much of the period since World War II, most developing countries have discriminated against agriculture with disastrous results for agriculture and the rest of the economy. Farmers in the industrial countries would not suffer significant reductions in the returns to labor and capital if the protection of agriculture were eliminated. Land values would fall. The Uruguay Round trade agreement represented a modest beginning. Much more needs to be done if agricultural trade is to be liberalized.

Introduction

The agricultural trade issues of the future have the same origin as those of the past half-century—governmental interventions in the markets for farm products. The domestic market interventions require the manipulation of or make it expedient to manipulate international trade, either by restricting imports or by subsidizing exports. Without control of international trade, domestic market price interventions—whether they lead to prices above or below international prices—cannot be implemented. Highly disruptive trade interventions—quantitative import quotas including absolute prohibition of imports, variable levies and export subsidies—have been and are the means by which domestic prices are divorced from international prices. International trade policies for farm products are adjuncts of domestic farm policies in nearly all countries.

I shall argue, and I hope convincingly, that the governmental market interventions either do little good for farm people or actually harm them. Strikingly and without public discussion, nearly all of the interventions result in transfers from the poor to those who are better off. This is true in both developed and developing countries. While politicians in most countries extol their efforts, attempting to eliminate poverty or to reduce inequalities in the distribution of incomes, these considerations never seem to be applied to the market interventions in farm products. In developing countries, the policy of maintaining low prices for urban consumers and the taxation of exports of farm products have clearly transferred income from low-income farm families to much more prosperous consumers—the urban population. Fortunately, such transfers in the developing countries are now less important than before, but much remains to be done before farmers can look forward to "a level playing field." Not much has changed in developed countries—higher food prices rest most heavily on low-income families while most of the presumed beneficiaries have incomes well above the national average.

Special Treatment of Agricultural Trade

Prior to the Great Depression of the 1930s, trade policies for agricultural products differed little from those for all other products. Some products won political favors and were protected by tariffs much as manufactured products were. The primary instrument of protection was the tariff and, to my knowledge, export subsidies were not used. But, with the introduction of widespread governmental interventions in the markets for agricultural products that occurred in the industrial countries in the 1930s and continued into the very different post-World War II world, agricultural trade has been treated differently than most other trade. Various exceptions for interventions in agricultural trade, such as quantitative restrictions and export subsidies, were included in the Havana Charter for the International Trade Organization (an early version of the World Trade Organization (WTO)) and were continued in the General Agreement on Tariffs and Trade (GATT). In 1955, the United States was granted a waiver for the use of import quotas for dairy products without having to abide by the modest provisions on import quotas in the GATT charter; internationally imposed restraints on import quotas, state trading and export subsidization were not possible and were nonexistent until the conclusion of the Uruguay Round. The variable levies of the European Community, for example, would not have met the conditions of Article XXV of the GATT had those conditions not been negated by the action of the United States.

Developing Countires' Discrimination Against Agriculture

In most developing countries, primarily during the 1950s, governmental policies were adopted that seriously discriminated against agriculture and farm people. These policies resulted from the acceptance of the view that the development of industry, including heavy industry was the only road to rapid economic growth. Agriculture was subordinated and discriminated against and was viewed primarily as a source of resources for the development of the urban and industrial sector. Not only was agriculture expected to contribute labor to industrial development; it was also frequently required to sell its products at prices well below international market prices and to provide cheap food to urban workers. Thus, agriculture reduced the apparent cost of misguided industrial policies, especially by encouraging capital-intensive enterprises in labor-abundant and capital-poor economies.¹ In all too many cases, export taxes on agricultural products were an important source of government revenue that was made available for financing industrial development. Countries followed a mixture of policies adverse to agriculture in addition to direct exploitation through low market prices—high rates of protection for industrial products and overvaluation of exchange rates and macroeconomic policies intended to benefit the urban sector, such as heavily subsidized interest rates and inflationary credit extensions.

The Uruguay Round—Modest Achievement

The GATT took some halting steps to bring trade in agricultural products under the same rules that govern trade in nonagricultural products. Some time in the next century—perhaps its midpoint—agricultural trade will be indistinguishable from general trade. The Uruguay Round trade agreement generally abolished import quotas, brought export subsidies to the table as a negotiable item, imposed a requirement for a minimum level of imports of commodities whose import had previously been prohibited or held to minimal levels and required signatories to reduce the overall level of protection that they provided agriculture. State trading remained largely untouched and the abolition of import quotas became a farce as a result of the very high level of duties levied on imports above the quota level by several of the major traders, especially the United States and the European Community. A tariff rate that is prohibitive for all imports above a given level cannot be distinguished from an import quota.² Variable levies are also permitted if the maximum levy does not exceed a bound tariff rate.

The Uruguay Round set the stage for bringing domestic agricultural policies under some international discipline. But there will need to be willing actors on that stage for the next several decades—the agreement is a beginning, not an end.

Trade Liberalization Requires Domestic Market Liberalization

Let me be clear. Significant liberalization of world trade in agricultural products requires the elimination of domestic market price interventions by governments. A nation's international agricultural trade policies are largely determined by its domestic agricultural policies. Only as these policies are modified to eliminate market price interventions will a nation adopt trade policies that follow the accepted rules of liberal trade—the elimination of state trading and quantitative restrictions on imports and export subsidies. But if agriculture is to be treated fairly trade in manufactured products must be liberalized. The exchange rate must not be controlled in a way that results in a significant degree of overvaluation since an overvalued currency operates exactly like a tax on exports and a subsidy on imports—either of which could be adverse to agriculture, depending on whether the country is an exporter or an importer. As a result of a deal between the European Community and the United States, a wide range of subsidies to agriculture now have international blessing. These are the "green box" subsidies, which need not be counted in measuring the level of support and which cannot be subject to dispute or contest in the WTO. Some of the measures included in the "green box" are clearly appropriate—such as support of agricultural research (consumers and not farmers benefit in the long run) and measures to increase domestic consumption, for example, food stamp plans or school lunch programs.

The primary objective of the "green box" was to sanction very large decoupled payments, such as those made by the United States and the European Union. These are payments that are presumed not to affect current production and that may be based, for example, on past levels of production or the area of land devoted to one or more crops. The amounts of such payments can be exorbitant—in the United States, for 1997, they were nearly US $6 billion and several times that in the European Union. What this means is that high-income countries now have international acceptance for any level of income transfers to agriculture so long as a plausible case can be made that effects on current production are minimal. (So far as I can determine, no criteria have been established for deciding when the criterion is met.) Admittedly, the subsidies exempted under the "green box" are far less distorting than higher commodity prices, for example, but this does not prove that they have no output effects.

Two Important Questions

I shall address two primary, related questions. The first question is whether farmers in the industrial countries will suffer significant losses if domestic policies of market price intervention are largely eliminated and subsidies are substantially reduced. The second question is whether the farmers in developing countries will gain from trade liberalization. As will be noted later, in most developing countries, farmers are taxed by market price interventions, import substitution and macroeconomic and exchange rate policies. The liberalization of agricultural trade in developing countries, which has occurred in recent years, appears to be occurring in conjunction with general programs of liberalization (Valdes, 1996).

Domestic Political Considerations

There are two puzzles related to the determination of governmental market interventions in agriculture. In most developed countries, a very small minority of the population has been able to maintain high levels of positive protection at significant cost to taxpayers and consumers. In developing countries, a majority of the population has not been able to prevent market interventions; this results in the negative protection of agriculture that was intended to transfer significant benefits to the urban population.³

I teach art undergraduate class in economic analysis and public policy. The students are often puzzled when I present the evidence that, if you are a poor farmer in a low-income country, you are taxed, and when you are a rich farmer in a high-income country, you are subsidized. They have difficulty understanding how this could be true. And I must admit that, at times, I share their bewilderment, but the facts are indisputable.

It is useful to review what we know about the political economy of intervention in agriculture and the distribution of gains and losses, either directly through market interventions or through subsidies. Research has greatly expanded our knowledge of the regularities that exist in governmental interventions in the markets for agricultural outputs and inputs. While there was general knowledge of the rough pattern of price interventions in developing countries and the differences among the interventions in developed countries prior to 1980 (Schultz, 1978), the first systematic empirical study of the patterns of agricultural protection was undertaken by Binswanger and Scandizzo (1983). Subsequent work—especially Gardner (1987), Anderson and Hayarni (1986), Miller (1991) and Swinnen (1994)—introduced explicit analytical frameworks and extended the earlier empirical analyses.

Several empirical regularities were found (Miller, 1991). These regularities are related to governmental interventions in markets—measured by nominal protection coefficients—and to important characteristics of agriculture and the economy. The nominal protection coefficients, which measure the difference between domestic and border prices, can be negative as well as positive; unfortunately, they often are. The most important regularities are that there are significant negative relationships between the level of nominal protection and:

• the percentage of the labor force engaged in agriculture;
• the amount of arable land per capita;
• the percentage of a farm product that is exported (with imports counted as negative exports);
• the percentage of a product produced by small farmers; and
• the product's identification as a tropical beverage.

The negative relationship between the level of nominal protection and the percentage of the nation's labor force engaged in agriculture could be stated differently with equal accuracy; that is, a significant positive relationship exists between the level of nominal protection and real per capita national incomes. It is common knowledge that a close negative relationship exists between the percentage of a nation's labor force engaged in agriculture and real national per capita incomes. This is why we find that poor farmers are taxed and that rich farmers are subsidized.

The crossover from negative to positive protection occurred in East Asia when per capita incomes (1980 U.S. dollars) were approximately US $2,000. For any given country, the per capita income at which protection becomes positive depends on other factors affecting protection, such as the amount of arable land per capita or the degree of self-sufficiency.⁴

A commodity that is produced primarily by a large number of small farmers receives significantly less protection than one produced by a small number of relatively large and specialized farmers. The reason for this departure from what one might expect is the "free-rider" problem. When there are many producers, it is difficult and expensive to organize them to promote their interests in the political arena. In this situation, the expected gain for a producer is small relative to any cost that might be incurred. But if there are relatively few specialized producers, each one can see that the benefits derived from collective action exceed the costs. It is no accident that in the United States the two farm products that have received the most protection are sugar and rice: Each is produced by less than 10,000 relatively large and specialized farms.

Market Interventions and Subsidies

The World Bank's comparative study of governmental policies affecting agriculture—ably directed and summarized by Krueger (1992), and by Schiff and Valdes (1993)—significantly extended our knowledge of the effects of governmental policies on agriculture in developing countries. In 16 of the 18 developing countries, farmers were taxed, and exports were taxed more than imports. The two exceptions were South Korea and Portugal, both of which had crossed from developing-country status to middle-income status. The study showed that, overall, more than one-half of the negative protection of agriculture resulted from the protection of industrial products—the result of the import substitution policies rather than the result from direct market interventions. In the case of Turkey, for 1961 through 1983, all of the negative protection of agriculture was due to indirect measures, including industrial protection; the direct interventions on agricultural prices were slightly positive. However, farmers received no benefit from the modest direct positive protection; overall, for 1960 through 1984, the rate of negative protection—the taxation—averaged almost 32 percent (Schiff and Valdes, 1992).

Of the many important results of the study, two are directly relevant to us. The first is that high rates of negative protection of agriculture had adverse effects on the rate of growth of agricultural output. The assumption of the import substitution and heavy industry policies—that farmers did not respond to economic incentives—was not supported. The second was that the countries that heavily taxed agriculture did not achieve higher growth rates—the basic assumption underlying the policies was rejected as invalid. In fact, as measured by the growth of per capita gross domestic product (GDP), the high taxers had much lower growth ra...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• Contents
• Acknowledgments
• About the Contributors
• Introduction
• 1 Agricultural Trade: Future Issues
• 2 Medium-term FAPRI Outlook for World Agricultural Prices: Comparisons and Implications
• 3 A Social Science Fiction: Future Directions of European Agricultural Policy
• 4 Wheat in China: Supply Trends in the Reform Era
• 5 Iranian Wheat Policy: Implications for Trade
• 6 A Theoretical and Empirical Analysis of Wheat Policy in Turkey
• 7 International Trade Agreements: Some Prospects for Turkish Agriculture
• 8 The "Restaurant-table" Effect: Europe and the Common Agricultural Policy
• 9 Agricultural Trade Prospects for Turkey with Central and Eastern European Countries and the Russian Federation
• 10 World Durum Wheat Trade: Competitiveness and Outlook
• 11 The Uruguay Round: Implications for Turkish Agriculture
• 12 Food Security Issues in Turkey
• 13 State Trading, Trade Distortions and GATT
• 14 Export Subsidies and State Trading: Theory and Application to Canadian Wheat
• 15 Plans and Adjustment: A Structuralist Approach to Modeling Grain Importer Behavior
• 16 State Trading Exporters and the World Trade Organization: What Are the Rules?
• Index