The outbreak of the COVID-19 pandemic in early 2020 and the measures taken to contain it across countries put global food and agricultural markets to a test. National agrifood systems stretched but continued to provide adequate, nutritious and safe food worldwide. Despite the significant restrictions on people’s movements and the uncertainty that settled upon the world, international trade continued to link food surplus areas with those in deficit, which safeguarded food security and nutrition globally. Unlike what happened during the 2008 global food price crisis, global cooperation was sustained, and this allowed agricultural trade policies to support well-functioning global markets.
Today, conflict in one of the breadbaskets of the world threatens global food security in multiple ways, including through the disruption of global food and agricultural markets. The war in Ukraine has not only resulted in a severe humanitarian crisis and a looming increase in global food insecurity, but also in the potential break-up of global cooperation in trade.
Global cooperation in agricultural trade policies can address global challenges, such as economic crises, pandemics, conflicts and climate change, and it can contribute towards food security and healthy diets for all. Since 1995, the establishment of the World Trade Organization (WTO) and its multilateral trade rules have provided a freer, fairer and more predictable trade environment and, together with a plethora of regional trade agreements, have promoted food and agricultural trade and economic growth.
At the same time, the increasing globalization of food and agricultural markets has raised concerns about the potential impacts of trade on the environment and on societies. International trade in food and agriculture is viewed as contributing towards the depletion of natural resources, driving deforestation and biodiversity loss, accelerating changes in lifestyles and diets, and widening inequality.
Currently, the trade policy environment is characterized by a deadlock in multilateral trade negotiations under the WTO and a proliferation of deeper regional trade agreements (RTAs) that, in addition to market access, aim to promote convergence in domestic policies and regulations among their signatories. Multilateral trade liberalization and regional trade agreements have been evolving in parallel since the end of the twentieth century, generating gains from trade and promoting economic integration.
The 2022 edition of The State of Agricultural Commodity Markets (SOCO 2022) considers the ways in which trade policies based on both multilateral and regional efforts can address today’s challenges for sustainable development while strengthening the resilience of the global agrifood system to shocks, such as conflicts, pandemics and extreme weather.
The geography of trade
This report looks at different cooperation approaches in trade integration for sustainable growth by providing a systematic framework to assess the geography of food and agricultural trade. The analysis focuses on the patterns of food and agricultural trade across geographic space, their drivers and their role in shaping today’s trade policy environment.
Looking at the geography of trade offers numerous valuable insights for analysing sustainable development. First, mapping food and agricultural trade makes it easier to understand the evolution of trends such as globalization and regional integration and their relationship with economic growth. These trends can also help assess the resilience of global food and agricultural markets to shocks, such as the current war in Ukraine, and its implications for food security and nutrition.
Second, the geography of trade highlights the significant gaps that exist across countries. Global wealth has grown, but the share of this wealth claimed by low-income countries is not much changed. The agricultural productivity gap is also enormous. Relative differences in agricultural productivity across countries can determine the influence of comparative advantage in food and agricultural markets and can shape trade patterns. Trade costs, which are also shaped by geography, are significant and can partly insulate low-income countries, limiting opportunities for growth and development.
Third, looking at trade through a geographical lens reveals the uneven distribution of natural resources. Land and water are key factors of production that also contribute to shaping comparative advantage. Although trade helps regions with low resource endowments, such as water-stressed countries, to ensure food security, it can also affect the environment. With food being increasingly consumed far from where it has been produced, trade can generate environmental externalities across the world. Production for exports can add pressure to already depleted natural resources and affect forests and biodiversity.
This analysis of the geography of food and agricultural trade sheds light on the trade-offs between different sustainable development objectives and helps discuss a complex policy environment. Multilateralism, as reflected by the WTO Doha Round of negotiations, has stalled and deeper regional trade blocs are on the rise. Both approaches aim to promote trade integration and economic growth, while addressing the impacts of trade on the environment. Within these approaches, SOCO 2022 examines the effectiveness of trade policies for addressing today’s global challenges.
Globalization and regionalization
Food and agricultural trade expanded rapidly in the new millennium, catalysed by trade liberalization at multilateral and regional levels. Today, more countries trade with each other. Emerging economies have become important players and low-income countries are better integrated into global markets. Although this process of globalization has brought about important changes in the structure of the global food and agricultural market, it has lost steam since the financial crisis of 2008.
Globalization stalled in 2008 but today more countries trade with each other, and the global food and agricultural market is less concentrated and more balanced than in 1995
The global food and agricultural market has become less concentrated and more decentralized. In 1995, a few large players dominated the global market. Over time, the number of large traders increased, while their dominance weakened. These structural changes reflect a relatively even playing field and a global food market that can be conducive to economic growth. For example, low- and middle-income countries are more likely to trade with high-income economies today than they were two decades ago. This is important as trade facilitates the diffusion of technology and knowledge and promotes productivity and overall growth.
Trade intensity is higher within rather than across regions, and the regionalization of food and agricultural trade is relatively more pronounced
However, within this global context, regional markets continue to play an important role. The regionalization of food and agricultural trade – the tendency of countries to trade more within a region than with countries outside the region – has become more pronounced. Countries form trade clusters, which may be regional or expand to include countries across regions and within which they tend to trade more. Such clusters are often shaped by geographic proximity and economic integration forged by trade agreements. Many of these clusters are relatively stable, such as a cluster including countries in Northern and Latin America and the Caribbean. Others tend to be less stable; for instance, African countries appear to trade more with partners off the continent.
The global food and agricultural market has become more resilient, but many countries remain vulnerable to trade shocks and should diversify their import sources to safeguard their food security
As countries have increased the number of their trading partners, the global food and agricultural market has become denser. This has strengthened the market’s buffer capacity and resilience to shocks relative to the beginning of the twenty-first century. However, only a few countries still account for most of the value traded and only some countries source a large variety of food and agricultural products from many different exporters. The imports of most countries are concentrated on a few products from a limited number of trade partners, making them vulnerable to shocks occurring in the exporter markets. To strengthen their resilience and ensure food security and healthy diets, countries should aim to diversify the products they import and to increase the number of their trading partners.
The fundamental drivers of trade in food and agriculture
Trade in food and agriculture has been an essential part of our history and is important to societies. Countries engage in trade to export what they can produce at a lower cost relative to other countries, while importing what is relatively more expensive to produce domestically. For a country, many factors can influence trade in food and agricultural products, but the most influential factor is comparative advantage – a country’s ability to produce a particular good at a lower opportunity cost than its trading partners.
Differences in agricultural productivity between developed and developing countries can be very large, with low-income economies facing significant constraints in adopting better technologies
The productivity gap in agriculture is huge. On average, the top 10 percent of the richest countries produce about 70 times as much agricultural value added per worker as countries in the bottom 10 percent of the income distribution. Many lower middle- and low-income countries face significant constraints in technology adoption and access to modern inputs. Many other factors, including the small average farm size and limited access to insurance, credit and education, especially for women, contribute to lower agricultural productivity in the developing world.
In the global market, the higher the heterogeneity in relative productivities across countries, the stronger the influence of comparative advantage
Relative differences in productivity but also the uneven distribution of natural resources lead to food price differences across countries and determine the influence of comparative advantage in the global market. On average, the higher the heterogeneity in relative productivities across countries, the stronger the influence of comparative advantage, and the higher the trade. The principle of comparative advantage implies that all countries become better off as a result of trade.
The role of comparative advantage in shaping global food and agricultural trade can be weakened by trade policies and the costs of trade
However, this is not always the case. Trade policies affect the relationship between comparative advantage and trade. For example, export subsidies, which have been eliminated for agricultural products by the 2015 WTO Ministerial Conference in Nairobi, could potentially reverse the relationship between comparative advantage and trade, causing goods that would have otherwise been imported to be exported, and vice versa. Trade costs also inhibit the influence of comparative advantage.
Trade costs can be significant – for low-income countries high trade costs can hinder trade integration and affect the structural transformation of the economy
Trade can be costly, and distance generally increases transport costs. There are also other costs related to insurance, export and import procedures and time delays at the borders. On average, a food product faces eight different non-tariff measures and standards, and compliance significantly increases the cost of trade. In low-income countries, trade costs are estimated to be up to 400 percent in ad valorem equivalent. Such high costs inhibit trade integration.
For example, in sub-Saharan Africa, the weak influence of comparative advantage and high trade costs result in a low intensity of intra-regional trade. Countries in the region trade more with countries outside the region than among themselves. High trade costs could also result in a country not trading as much as it would if trade costs were lower. Especially for low-income countries, which are characterized by relatively low agricultural productivity, high trade costs and less trade could result in an expanded agricultural sector relative to other sectors of the economy, necessary to meet the population’s food subsistence needs. This could hinder the structural transformation of the economy.
Increasing productivity, lowering tariff barriers and reducing trade costs can increase the gains from trade but complementary policies are necessary to reduce inequalities that may arise
Policies should aim not only to improve agricultural productivity but also to reduce trade costs to reap the benefits of trade. Measures taken to increase trade integration in the context of the African Continental Free Trade Area (AfCFTA) will be important for economic growth and development in the region. Lower trade costs will make a country more open to trade and let comparative advantage play out, resulting in gains from trade. However, in countries with low agricultural productivity, trade openness could also entail losses especially by those smallholder farmers who are not able to increase their efficiency and compete in more open markets. Complementary policies will be needed to improve access to technology and modern inputs, as well as to facilitate the reallocation of labour to other sectors through labour markets.
The environmental impacts of food and agricultural trade
Natural resource endowments, such as land and water, contribute to the comparative advantage in food and agriculture. For countries with low natural resource endowments and where climate conditions are unfavourable to agricultural production, trade contributes to food security and nutrition in terms of food quantity and diversity at levels above what domestic production could sustain. Globally, trade and comparative advantage strengthen the efficiency of natural resources use. Trade helps allocate agricultural production to regions where the amount of water and land used per unit of food is relatively lower. For example, a study estimates that food and agricultural trade could generate between 40–60 m3 of annual water savings per capita.
Globally, food and agricultural trade can enhance the efficiency of land and water use but can also result in negative environmental impacts
Although open global food and agricultural markets can help alleviate the pressure on natural resources, production for exports can generate negative environmental externalities, such as unsustainable freshwater withdrawals, pollution, biodiversity loss, deforestation and greenhouse gas emissions (GHG). For example, agricultural production of cattle, soybeans and palm oil – all products with sustained global demand – accounted for 40 percent of tropical deforestation between 2000 and 2010.
Most of trade’s environmental externalities arise due to local conditions, and trade policies will have to be complemented by specific environmental measures to address them
Often, these negative environmental impacts arise due to local conditions and a poorly regulated environment. This means that trade policies, on their own, cannot easily tackle environmental externalities. Multilateral trade rules, such as the WTO framework, together with national regulation, can address the trade-offs between economic and environmental objectives. The scope of trade agreements is also evolving to include environmental provisions. Between 1957 and 2019, out of 318 agreements that were concluded, 131 included at least one environmental-related provision and 71 of the agreements incorporated provisions that displayed the interaction between the environment and agriculture. Such agreements provide incentives to producers to adopt sustainable practices to gain and maintain access to markets.
Multilateral trade rules and increasingly regional trade agreements allow for environment-related provisions, which, when legally binding, can help tackle the environmental impacts of trade
In general, several studies suggest that environmental provisions in RTAs have a positive effect in addressing environmental externalities generated by trade when these are due to local conditions. Deeper trade agreements foster policy convergence in signatory countries on many issues, including the environment. These often establish specific mechanisms to discuss and oversee the implementation of environment-related commitments.
Trade agreements can encourage trade partners to adopt sustainable practices when environmental provisions is legally binding and trade between signatories are equipped by well-developed institutions, such as dispute settlement procedures and environmental impact assessments.
Multilateral and regional trade policies for sustainable growth
Since the beginning of the new millennium, globalization and regionalization have evolved in parallel, with each process complementing the other. Today’s trade policy environment in food and agriculture, as shaped by the WTO, has discouraged unfair practices, reduced uncertainty and facilitated coordination between countries. This multilateral framework is also complemented by a multitude of RTAs. Both multilateral and regional trade liberalization have contributed to expanding global trade.
Multilateral trade negotiations are in a deadlock, while extensive regional trade agreements, which increasingly include food and agriculture, are on the rise
Although WTO members agreed on eliminating agricultural export subsidies following the Tenth Ministerial Conference held in Nairobi in 2015 and established the Trade Facilitation Agreement, which entered into force in February 2017, among others, several areas related to agriculture, such as the treatment of public food stockholding and domestic agricultural support, contributed to stalling the negotiations. At the same time, the number of RTAs in force have multiplied from fewer than 25 in 1990 to more than 350 in 2022. This has raised concerns about whether discrimination in the global market has increased and is leading toward the fragmentation of global trade in competing blocs.
Regional trade agreements promote participation in regional value chains and growth, but may exclude low-income countries
RTAs create trade between the signatories but can also divert trade from non-members. For their signatories, deeper trade agreements improve market access through preferential tariffs and reduce trade costs through domestic regulation convergence and harmonization of standards. This can promote regional value chain development and spur growth. Although RTAs, on average, can generate gains globally, some countries may lose. Particularly, low-income countries with a limited capacity to negotiate and implement complex trade provisions may be left out of the regional trade integration process. Multilateral trade liberalization can result in larger gains globally and can be the most efficient way to promote market access and economic growth for all.
Multilateral trade liberalization and multilateral cooperation in addressing global environmental externalities can bring growth, ensure food security and better nutrition for all, and make trade work for sustainable development
Although comparative advantage appears to be more conducive multilaterally, it would be difficult to address the trade-offs between economic and environmental objectives in the same way. Environmental externalities generated by trade, when localized, can be addressed by trade policies complemented by regulation at the national or regional level.
Unilateral or even regional actions will not be effective when these externalities are global, such as with climate change. A multilateral agreement will be necessary, but it may be challenging to achieve consensus mainly due to the diverging views held by countries on the impact of GHG emissions and their cost to society. Nevertheless, global environmental externalities can only be addressed effectively through multilateralism with trade rules helping to expand the reach of policies that take into account the social costs of such externalities.
