- ➔ 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. The multilateral framework also provides a basis for regional trade agreements. Both multilateral and regional liberalization have contributed to expanding global trade.
- ➔ Deeper and more extensive regional trade agreements, which address both market access and regulatory convergence, are being developed and include food and agriculture. This has raised concerns about whether multilateral cooperation is weakening.
- ➔ Regional trade agreements create gains, including through promoting value chains. However, low-income countries, which have limited capacity to negotiate and implement complex trade provisions, may be left out of the trade integration process. Multilateral trade reform results in higher gains globally and is the most efficient way to promote market access and economic growth for all.
- ➔ Localized environmental externalities generated by trade can be addressed by trade policies complemented by national regulation. When these externalities are global, such as greenhouse gas emissions, unilateral or even regional actions will not be effective. Although difficult to negotiate and implement, only multilateral agreements can effectively address global environmental externalities. Trade rules can help expand the reach of policies that take into account the social costs of such externalities.
The landscape of trade policy in food and agriculture
The world started to become more globalized in the second half of the twentieth century, with an increasing number of low- and middle-income countries participating in global markets. Since the 1950s, members of the GATT and the WTO have formed more trade links and have become more closely interconnected than non-members.av, 250, 251 Similar patterns have been found for food and agricultural trade (see Part 1).
At the same time, the structure of the global food and agricultural trade network has become more decentralized, and trade within regional clusters has increased more than across these clusters. This geography of trade is shaped by comparative advantage, trade policies and trade costs (see Part 2). In general, globalization and regionalization have evolved in parallel with each process complementing the other. While countries come together in the GATT/WTO to negotiate the global rules of trade, these rules are often complemented and deepened within RTAs.
Multilateral negotiations under the General Agreement on Tariffs and Trade and the World Trade Organization
Established in 1947, the GATT aimed to promote trade by rolling back trade barriers, removing discriminatory trade policies that had prevailed since World War I and establishing an orderly and transparent international framework to benefit global growth and development.252 This post-war trading system promoted trade and fast economic growth mainly in industrialized countries. The GATT rules applied to agriculture, but they contained significant loopholes that resulted in the implementation of import quotas and export subsidies, measures that were not normally allowed for manufactures.253 As richer countries protected and subsidized their agricultural sectors, global agricultural markets became highly distorted, hindering the trade prospects of low-cost producers in the developing world. It was not until the negotiations of the Uruguay Round (1986–1994), the incarnation of GATT to the WTO and the WTO Agreement on Agriculture (AoA) that became effective in January 1995 that agricultural trade was explicitly included in the trade liberalization process.
The GATT/WTO established a forum for countries to regularly convene, resolve disputes and monitor changes in policies that affect trade.254 One of the most fundamental rules of the WTO, the principle of non-discrimination, resulted in less distorted global markets.aw Evidence on the impact of GATT/WTO membership on merchandise trade is mixed and, on food and agricultural trade it is scarce.ax A study suggests that the GATT/WTO may have doubled the agricultural trade of its members in the period 1980 to 2004. Although import tariffs in food and agriculture were not reduced as much as those in other sectors (see Part 2, Figure 2.4), limits on agricultural subsidies and the coordination provided by the WTO framework reduced uncertainty and may have contributed to the expansion of trade.255
The WTO framework also promotes competition by discouraging unfair practices, such as export subsidies and dumping products at below normal value to gain market share. It encourages predictability through binding and transparency mechanisms, supports less developed countries by granting more flexible provisions and transition periods to adjust to these, and, in the case of the Trade Facilitation Agreement, provides for practical support for implementation and contributes to reducing trade costs.256
While the GATT was mainly concerned with improving market access by lowering trade barriers, the WTO extended and deepened its reach to include domestic (“behind-the-border”) policies, such as regulation and intellectual property rights, in the reform process.257 The AoA, in particular, includes provisions on market access, domestic support, export competition and other rules, such as on export prohibitions and restrictions, and explicitly considers the special and differential treatment of developing countries. The WTO agreements permit members to take measures to protect not only public, animal and plant health but also the environment (see Part 3).
Regulatory policies must not only be non-discriminatory, but they must also be transparent and must not restrict trade unnecessarily. Regulations on non-tariff measures under the Agreement on Technical Barriers to Trade and the Agreement on the Application of Sanitary and Phytosanitary Measures, many of which apply to food and agricultural products, have to be supported by scientific evidence (in the case of SPS measures) and should follow good regulatory practices. To ensure that regulations do not create unnecessary barriers to trade, they should ideally be based on international standards.258, 259
Although the WTO agreements, including the AoA, have succeeded in promoting trade by making it freer, fairer and more predictable, further progress in improving these rules has been limited. The latest round of multilateral negotiations, the Doha Round, which was launched in 2001, stalled at the end of the first decade of the twenty-first century for many reasons, including divergent views on issues related to agriculture among negotiating members (see Box 4.1).260, 261
BOX 4.1The political economy of protection of food and agriculture
Governments protect agriculture for various reasons but ensuring food security and maintaining a level of farm income that keeps pace with the income trends in other economic sectors, makes agricultural trade policy and domestic support extremely sensitive. Agriculture’s position in a country’s structural transformation – that is, the reallocation of economic activities away from agriculture to industry and services that promotes economic growth – also shapes the demand for and the provision of protection at different stages of the development process.
Along the path of structural transformation, agriculture’s relative importance declines as the economy grows. Increases in agricultural productivity per capita mean that fewer people can produce more food. Workers move from agriculture to fast-growing non-farm sectors of the economy, such as manufacturing and services, in search of better economic opportunities and agriculture’s share in total employment declines. The society becomes more urbanized and as people become progressively richer, they consume more manufactured goods and services, while the demand for food rises at a lower rate. This makes the share of agriculture in gross domestic product fall. At the end of the transformation process, agriculture’s share in the economy is small and its productivity per capita resembles that of other sectors.
For today’s high-income countries, structural transformation lasted for more than 100 years. For countries such as the Republic of Korea, the transformation from an agriculture-based to an industry- and service-based economy took much less time.343 Economists suggest that protecting agriculture is not efficient and that it can hinder structural transformation in fast-growing economies with non-farm sectors characterized by comparative advantage. Indeed, the evidence suggests that in the nineteenth century, free trade contributed to the structural transformation of the United Kingdom of Great Britain and Ireland, as it was then known, as cheaper food imports facilitated rural-urban migration. Between 1965 and 2015, food imports also allowed the Republic of Korea to transform its economy. If the country had not protected its agricultural sector, a higher level of food imports would have accelerated its structural transformation even more.344
However, when the non-farm sectors of the economy do not grow quickly, structural transformation can worsen the distribution of income between rural and urban economies, especially when the rural-urban migration is lagging behind. Relatively slow growth in farm incomes during the process of structural transformation creates significant social challenges for policy makers. Although absolute poverty falls as the economy grows, the increasing gap between rural and urban incomes results in political tensions. In some cases, poverty may increase, especially when the economy grows slowly and people find it difficult to exit agriculture.
The solution would be to increase investments, promote education and to introduce measures so that labour markets function well helping people to move from agriculture to other economic sectors. However, this takes time and historically the response to such challenges has been to protect the agricultural sector from international competition and to support farm incomes.345 For example, in the United States of America, the integration of agriculture into the non-farm economy was not fully completed until the 1980s.346 Indeed, trade policies, when analysed in the context of structural transformation, can be seen as outcomes of a political process that balance the preferences of different social groups.
Today, as developing countries move along their structural transformation paths, and depending on the rural-urban income gap, the size of their agricultural sector, poverty and food security considerations, the demand to protect agriculture and support farmers increases. In this context, addressing the uneven income distribution between urban and rural areas and ensuring food security using domestic support and trade policies is challenging. For example, the use of administered prices by some developing countries to build public food stockholdings for food security purposes has become contentious.
While some countries maintain that the use of administered prices is trade-distorting and, therefore, should be identified as such in line with WTO rules, others, especially those that implement large food aid programmes, see that WTO disciplines restrict their policy instrument set in providing public goods and carrying out income redistribution.347, 348
Social preferences change along the development path and so does the demand for policies. Policy makers are confronted with the need for solutions to balance these preferences, meet multiple objectives and address global challenges. Today, most people are increasingly aware of connectivity between economies, the environment and social well-being, and attach great importance to the outcomes of globalization. Trade, as all economic activities, creates winners and losers and this impact may be large. It can also generate negative environmental or social externalities. In food and agriculture, although trade policies and domestic support address a broad array of mostly economic objectives, they are also viewed as tools to deliver environmental benefits349 or healthier diets.350
Current discussions on repurposing agricultural support and trade policies bring an additional dimension to the debate on how to harness global markets to contribute towards sustainable development. Nevertheless, using only the current set of trade policy instruments may be costly and insufficient to achieve all sustainability targets, especially when trade policy does not directly affect the source of externalities. Challenges such as climate change mitigation or better nutrition should be tackled by targeted policies that act on the relevant margin, that is by policies that directly influence the choices producers and consumers make.351
WTO members agreed on eliminating agricultural export subsidies at the WTO Ministerial Conference held in Nairobi in 2015, and established the Trade Facilitation Agreement, which became effective in February 2017. However, several areas related to agriculture, such as market access, the treatment of public food stockholding and agricultural domestic support, remain under discussion. The size and diversity of the WTO – covering most countries of the world – coupled with shifts in economic power among its members, have resulted in difficulties in achieving consensus, especially as issues on the negotiating table have become more complex, such as the concerns related to the impact of trade on environmental and social sustainability, for example.262, 263
The proliferation of regional trade agreements
With the deadlock in multilateral trade negotiations, RTAs have emerged even more rapidly.264 By limiting the number of countries involved and focusing on their strategic interests, RTAs can be more targeted and can be concluded more easily than multilateral negotiations, where a large number of countries and divergent views result in a lack of consensus. While the WTO has taken some significant steps towards behind-the-border convergence in regulations, many RTAs envisage much deeper levels of integration among their signatories.265, 266
While the number of RTAs in force has rapidly increased (see Box 1.2),267 at the same time the average number of policy areas with (legally binding) provisions contained in RTAs has also increased steadily from an average of around 8 policy areas in the 1990s to more than 17 over the period 2010 to 2015.268 The agricultural sector appears to be increasingly included in RTAs. In analysing 54 RTAs, a recent study found that agriculture is progressively treated similarly to other sectors, although many agreements still exclude some agricultural products from specific provisions.269 In agriculture, RTAs may facilitate deeper integration by harmonizing NTMs, including technical and food safety standards and domestic regulations, in areas in which multilateral negotiations have made little progress as preferences across countries worldwide diverge widely.270 However, RTAs usually do not address (potentially trade-distorting) domestic support to agriculture.271
RTAs, by definition, imply concessions between signatories, while excluding others. This has raised concerns about the erosion of non-discrimination, one of the most fundamental principles of the WTO multilateral trade system.ay, 272, 273 RTAs give preference to members, which can create trade between signatories and divert trade away from non-signatories. This may lead to inefficient outcomes or even to the fragmentation of global trade in competing blocs, thus hindering global integration.274, 275
Their proliferation and the fact that many RTAs overlap (see Box 4.3 for an example) has given rise to the claim that RTAs can also be “building blocks” toward multilateral trade reform. However, such overlapping of RTAs can pose significant challenges for compliance and transparency due to multiple rules with respect to tariffs, NTMs and rules of origin,az, 276 which can differ by agreement, trading partner and product, and can even lead to conflicting regulatory standards across different trading blocs, thus raising trade costs.277, 278, 279, 280 Negotiating and implementing an RTA requires considerable resources, which could be beyond the reach of many countries.281
Studies have found mixed evidence on the impact of RTAs on trade.282, 283 A study investigating the effects of RTAs on agricultural trade, based on more than 60 agreements, found that the increase in trade among signatories was much larger in agriculture compared to non-agriculture. The analysts attributed this to the larger gains from liberalization due to relatively high levels of protection in agriculture before the RTA entered into force. The effects were also found to differ across specific agreements and were subject to the length of their phase-in periods.284
The impact of RTAs on trade depends on the provisions of the agreement and the characteristics of the countries involved.285 Recent trade agreements no longer emphasize market access but instead focus on behind-the-border regulatory issues, including domestic policy coordination in a much broader sense.286, 287 Many RTAs pursue deeper integration in the sense of going far beyond the traditional shallow trade liberalization agenda. These agreements are often much more complex as they tend to pursue economic objectives and to add provisions targeting social and environmental sustainability outcomes (see Part 3).288, 289
The evidence of the effects of deep RTAs on trade is mixed. A study suggests that deeper trade agreements can create more trade and be less likely to divert trade than traditional regional agreements due to improvements in domestic policies, such as competition policies and institutions, which are especially relevant in the presence of global value chains.290
An analysis of the impact of deeper trade agreements in a group of 96 countries during the period 2002–2014 suggests that merchandise trade between signatories can increase up to 44 percent, which is much more than a traditional shallow trade agreement based only on preferential tariffs. The trade-diverting effect of preferential tariffs is found to be offset due to changes in regulations in the signatory countries that strengthen competition and improve custom procedures, thus benefiting non-signatories too.291, 292 Although RTA trade provisions that are also part of the WTO’s mandate and those that enhance institutional quality are generally trade promoting, this does not need to be the case for deeper provisions beyond the scope of the WTO.293 There are also concerns about the welfare implications of special interests and lobbies that engage in deeper RTA negotiations (Box 4.2).
BOX 4.2Deep trade agreements
The establishment of the WTO in 1995 reduced tariff levels, promoted trade and provided a set of rules that shaped the international trade system. Together with the process towards liberalization, the number of RTAs increased significantly, raising concerns about the future of multilateralism (see Part 1, Box 1.2 and Figure 1.12). Trade liberalization accelerated with most RTAs focusing on market access and import tariff reductions between the signatories. At that time, few agreements, such as NAFTA signed in 1994, went beyond market access and included environmental and labour issues. Recent trade agreements go beyond market access and aim at deeper trade integration, focusing on harmonizing non-tariff measures and domestic regulations.
The reasons for this shift from relatively shallow to deeper trade agreements are multifaceted. Countries may believe that the gains from traditional trade agreements have been exhausted after decades of progressive globalization. When global value chains are important, deeper trade agreements can reduce trade costs related to compliance with multiple and different standards. Another important consideration is the increasing level of awareness of consumers over the impacts of their purchasing choices on foreign countries. Increasing environmental and social concerns give rise to stringent environmental and labour standards for domestic products, which would be subject to foreign competition from imports from countries with lower standards (see Part 3). Countries may sign deeper trade agreements to facilitate domestic economic reforms.352
Deeper trade agreements shift attention to non-tariff measures and, generally, promote the harmonization of practices and processes across signatories, with the aim of reducing trade costs.353 These agreements go “behind-the-border” and promote cooperation in a broad set of areas, including investment, trade facilitation, standards, competition policy, environmental issues, labour rights and other. In this way, they expand the WTO disciplines or extend their reach beyond the WTO set of rules. Some recent agreements establish institutions that oversee the coordination of regulatory agencies in the signatory countries, such as the Regulatory Cooperation Forum of the Comprehensive Economic and Trade Agreement between the European Union and Canada (see also Part 3). Because of their influence on domestic policies, deeper trade agreements have in some cases triggered strong popular opposition and a recent study explores how globalization shocks evoked anti-trade sentiment and influenced voter preferences against trade openness.354
There is little evidence of the welfare impacts of deeper trade agreements in food and agriculture globally. Nevertheless, the welfare implications of deep trade agreements are difficult to measure. Many low-income countries may not have the capacity to engage in complex negotiations and reform domestic policies, develop implementation instruments and meet the regulatory standards of developed economies.
The process of negotiations on non-tariff measures, such as standards, is also important. Negotiations for shallow trade agreements that focus on market access tend to dilute the influence of special interests as lobbies for exporters act as counterweights to import-competing lobbies. This can result in increased welfare. For deeper trade agreements, the extent to which special interests align across signatory countries deserves close attention. When deep trade agreements promote the convergence of product standards, the result will depend on whether special interests in signatory countries are aligned or in conflict. For example, industry interests may be aligned across countries, as all firms would benefit from less regulation, and this may result in adverse welfare implications.355, 356 Analysts suggest that in the context of negotiations on the Transatlantic Trade and Investment Partnership (which concluded without an agreement), the engagement of special interest groups was very different from that in traditional trade agreements.357
Agriculture remains a contentious sector when it comes to trade negotiations. Its direct linkages with food security, food safety and health, and culture and heritage help explain why this is the case. In addition to the implications for production costs, differences in standards in food and agriculture also raise food quality and food safety concerns in importing countries.
For example, an analysis of submissions to the consultations of the United States Trade Representative in the context of negotiations for the Transatlantic Trade and Investment Partnership suggests that there was almost no opposition by industry interests to the negotiations, and conflict was observed only in agriculture where business interests were not aligned.358
The ongoing trade agreement discussions between the United States of America and the United Kingdom of Great Britain and Northern Ireland following the latter’s exit from the European Union illustrates the divergent views over standards in food and agriculture. British producers and consumers expressed concern over the possibility of allowing food and agricultural imports from producers required to meet less stringent regulations in the United States of America. These concerns are related to production costs, food quality and food safety. American producers, on the other hand, perceive additional regulations as an unnecessary and unjustifiable burden to their production processes.359
Before Brexit, most British pork and poultry import needs were met by European Union members, and the possibility of sourcing poultry from the United States of America to fill import gaps illustrates producer and consumer concerns. In the United States of America, it is mandatory for all producers to treat chicken with antimicrobial rinses, known as pathogen reduction treatments, to eliminate potentially harmful pathogens. There is concern that this practice is a disincentive for having high standards throughout the supply chain, since the rinse at the end is meant to ensure food safety. This, together with economies of scale, can lower production costs.360 While imports of chicken from the United States of America could have a negative impact on farmers’ incomes, British consumers would benefit from the lower priced chicken. Nevertheless, British consumers perceive chicken imported from the United States of America to be of lower quality and they have concerns about consuming chicken treated with an antimicrobial rinse. The antimicrobial rinse practice is safe but ensuring food safety through a single control point in the value chain could raise food safety risks to consumers if that control were to fail.361
The degree to which governments negotiate comprehensive and deeper trade agreements appears to be positively related to their level of economic development – the richer a country, the deeper its trade agreements. RTAs are also deeper when more WTO members are involved in the agreement, as provisions contained in RTAs usually build on existing WTO policies. Indeed, WTO members appear to use RTAs not to undermine or circumvent the rules, but rather to build on trade-promoting policies embedded in the multilateral system.294, 295
