The potential for agriculture to contribute to poverty alleviation and food security is vast--over 70 percent of the global poor live in rural areas and many depend on agriculture as their primary source of income. To date, agricultural growth in the developing world has been constrained by various trade barriers and trade-distorting subsidies, which arose primarily but not exclusively in developed countries as a means to protect their agricultural sectors. At the global level, however, agricultural protectionism has significantly hindered free trade and disproportionately harmed developing country farmers.

For the past decade, agriculture has been a consistent stumbling block in multilateral trade negotiations. While both developing and developed countries have a strong interest in reducing restrictions and distortions in world agricultural markets, the issues involved are politically sensitive and engage powerful special interest groups. This monthly update will provide an overview of agricultural trade issues and recent negotiations, with particular attention to the implications for poverty alleviation in the developing world.

Figure 1: Economic Dependence on Agriculture

Percent of gross domestic product generated from the agricultural sector by country income level, 2003

Source: EarthTrends 2007, using data from the World Bank 2006

Agriculture in the World Trade Organization

The World Trade Organization (WTO) is the primary international body negotiating multilateral trade agreements, with 150 participating countries. Under the WTO's predecessor, the General Agreement on Tariffs and Trade (GATT), agriculture was effectively exempt from international trade rules due to the sensitive nature of national food security concerns. Consequently, domestic agricultural support policies have cumulatively resulted in substantial distortions and trade barriers in global agricultural markets.

Box 1: Three Types of Agricultural Protection Export subsidies are financial benefits conferred on exporting firms by the government in order to encourage exports as opposed to domestic consumption. As a consequence, global prices are suppressed and domestic consumers may pay a higher price than foreign consumers for the same product. Export subsidies are considered to be the most trade distorting type of protection. Domestic support includes price supports and direct subsidies paid by the government to farmers. The most trade-distorting payments are those tied to levels of production, thereby encouraging overproduction and driving down world prices. Market access involves measures that protect domestic agriculture by restricting foreign imports. This usually involves high import tariffs or quotas, which restrict the quantity of imports for a particular product from a given country and allow domestic producers with high production costs to compete. In many countries, tariffs may exceed the value of the product by as much as 200 percent.

In 1995, the WTO Agreement on Agriculture finally brought agricultural commodities under the multilateral trading system. This landmark first step towards reforming agricultural trade committed developed countries to 15-36 percent reductions in all three types of protection over five years, while developing countries pledged smaller cuts over a longer time period. Furthermore, they agreed to resume negotiations to further liberalize agricultural trade by 2000.

The Doha Development Round of the WTO, launched in 2001, is explicitly mandated to improve welfare and reduce poverty in developing countries. Agricultural trade reform is at the center of these negotiations and is crucially important to achieving this goal, since most developing countries will gain from greater access to global markets. Now after six years of negotiations, it is unclear when and if the Doha Round will yield meaningful results. Although countries have agreed to eliminate export subsidies by 2013, the EU and U.S.--under pressure from powerful agricultural lobbies--are reluctant to make significant concessions on domestic support. Furthermore, WTO members remain divided over the "modalities" of reform: when and how should agricultural protection be phased out and with what special and differential treatment for developing countries?

Figure 2: Domestic Support to Farmers in OECD Countries, 2005

Source: EarthTrends 2007, using data from OECD 2006

Global Consequences of Developed Country Domestic Support

Each year, developed countries spend nearly US$300 billion in support of their farmers (see figure 2), or approximately 1.3 percent of gross domestic product (WRI 2006). In comparison, official development assistance to developing countries was only $80 billion in 2004 (OECD 2007). Although agricultural subsidies are often rationalized to assist small family farms and ensure national food security, the actual distribution of support is significantly skewed towards large farmers and agribusiness: the wealthiest 25 percent of farmers receive 90 percent of support in the U.S. and 70 percent in the EU (OECD 2007).

Developed country subsidies encourage overproduction of certain crops, thus leading to "dumping" of excess agricultural commodities on the world market and a general downward trend of world prices over recent decades, sometimes to levels below the cost of production (see figure 3). Since few developing countries have the financial resources to subsidize their farmers and export firms, they instead rely almost exclusively on high import tariffs and quotas to protect their domestic markets against these artificially low world prices. The tariffs, which often rival those imposed by wealthy countries, further impede international agricultural trade and economic growth.

Figure 3: Inflation-Adjusted World Market Grain Prices

Source: FAO 2006

Box 2: U.S. Cotton Subsidies In recent years, U.S. cotton subsidies have encouraged massive overproduction and export-dumping, driving world prices down to their lowest levels since the 1930s (well below the cost of production). In West and Central Africa, where an estimated 10 million people rely on cotton for their livelihood, this translates to a loss of up to US$250 million each year (Oxfam 2004). In 2003, Brazil filed a case with the WTO Dispute Settlement Body claiming that certain U.S. cotton subsidies were illegal. In a landmark decision, the WTO ruled against U.S. cotton support, forcing the U.S. to dismantle certain aspects of its program beginning August 2006. Figure 4: U.S. Cotton Subsidies and the GDP of Selected Cotton Export Countries, 2003 Source: WRI 2005

Discerning Winners and Losers from Agricultural Trade Reform

According to a World Bank study, abolishing all forms of agricultural protection would boost global welfare by nearly $200 billion per year by 2015, with some benefits accruing to poor farmers in developing countries (see Wise and Gallagher 2005 for a critique of this estimate). However, countries are highly heterogeneous in their agricultural trade concerns, and it is likely that some countries, or certain groups of people within countries, will not benefit from trade liberalization, at least in the short-run. Anticipating adverse effects and implementing measures to alleviate hardship will be important, particularly in the developing world.

Figure 5: Potential Distribution of Impacts

	Developed Countries	Developing Countries
Net food consumers	Eliminating domestic support would save the average family of four nearly US$1,000 per year in lower food prices and taxes (OECD 2007).	The urban poor will be hurt by higher food prices in the short-run. Overall economic growth may outweigh these costs in the long-run.
Net food importing countries	Countries with limited agricultural production potential will lose from higher food prices. Gains from trade liberalization in other economic sectors, which are also being negotiated in the Doha Round, could mitigate these losses.
Small farmers	Impacts will vary depending on the level of support previously received. Overall, losses are expected to be minimal.	Some small farmers may not benefit if they uncompetitive in world markets (i.e. lack access to market infrastructure, information, farm inputs, or land and water resources). Rural development policies will be necessary in the world's poorest countries to ensure benefits for these farmers.
Large farmers	Wealthy farmers will lose billions of dollars in domestic support.	Competitive large farmers, particularly those in wealthier developing countries such as Brazil and China, will be best positioned to profit from higher world prices and increased trade.
Estimated Net Gains	$120 billion (IPC 2005)	$40 billion (IPC 2005)

Agriculture is the driving force behind many developing economies, and liberalizing global markets could make significant contributions to poverty alleviation and food security in the developing world. However, it is increasingly acknowledged that trade liberalization, although generally beneficial for most countries, could be initially detrimental to some. A growing body of research is beginning to assess the potential impacts of reform on different types of households in different countries. The results of this research, and the subsequent policy recommendations for rural development in the world's poorest countries, will be vital to ensuring that the poverty-reducing potential of agricultural trade is fully realized.

RELATED LINKS:

International Food & Agricultural Trade Policy Council (IPC)

WTO Doha Ministerial Declaration

U.S. Department of Agriculture WTO Briefing Room

Center for Global Development: Trade Policy

OECD Agricultural Policy Statistics and Indicators

EarthTrends

Agricultural Production Indices

Data Table: Agriculture and Food Overview 2005 (pdf)

Poverty Data

Genetically Modified Crops May Boost African Agriculture

Related Publications

The State of Agricultural Commodity Markets 2006 (FAO 2007)

Reforming Agricultural Subsidies: "No Regrets" Policies for Livelihoods and the Environment (WRI 2006)