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The Decline of Commodity Prices and Global Agricultural Trade Negotiations: A Game Changer?

Christophe Bellmann and Jonathan Hepburn

Abstract

With food prices reaching their lowest levels since 2006, governments have been under increased pressure to increase tariff protection or provide state aid to guarantee remunerative prices and maintain farm income domestically, often at the expense of smaller countries that cannot compete with the treasuries of large agriculture players. A review of trade-restrictive measures applied in the last 10 years confirms the resurgence of such isolating trade policies and a significant shift towards more government subsidies and market access protection. Based on this data and a review of recent policy changes in major economies such as the EU, US and China, this paper assesses the possible implications of this new price environment for future reforms of agricultural policies, including the prospects for removing trade distortions as envisaged under the 2030 Development Agenda.

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Author's notes

This paper was drafted in 2016 and accepted for publication in March 2017.

Full text

1. Introduction

  • 1 Read as a whole, the SDGs can be seen as a commitment to improve the functioning of markets, includ (...)

1In September 2015, the UN General Assembly adopted the 2030 Development Agenda, including a set of 17 highly ambitious Sustainable Development Goals (SDGs) supported by 169 targets. Under Goal 2, member states commit to correcting and preventing trade restrictions and distortions in world agricultural markets, including by eliminating export subsidies, as one of the means of achieving global food security, ending hunger and promoting sustainable agriculture.1 Building on these commitments, the Nairobi Ministerial Conference of the World Trade Organisation (WTO) established, three months later and for the first time in WTO history, a binding prohibition and gradual phase-out of trade-distorting export subsidies, taking one critical step towards the implementation of SDG 2. While significant in itself, this outcome only addresses one part of the broader agricultural trade reform agenda currently under negotiation in the WTO, with several other trade-distorting practices remaining in place. Yet if the SDGs are to be achieved, further reform will be essential. According to the OECD-FAO Agricultural Outlook for 201625 (OECD/FAO, 2016), a ‘business as usual’ approach in agricultural policies would see the number of undernourished people decline from around 800 million today to under 650 million in 2025—or at too slow a rate to achieve the SDG target of ending hunger and malnutrition by 2030.

2As trade diplomats come back to the negotiating table to tackle unfinished business, however, recent changes in global commodity prices may significantly affect the dynamics of on-going negotiations in this area and therefore of progress towards SDG 2. Over the last five years, the prices of several agricultural commodities have experienced a continuous decline from their 2011 peak. As these prices reach their lowest levels since 2006, domestic pressures facing policymakers worldwide are likely to evolve, ultimately affecting the prospects for international cooperative action.

  • 2 In trying to isolate domestic consumers from international price variations, however, policy measur (...)

3In times of high prices, the main challenge facing many countries usually consists in ensuring that domestic consumers, mostly in urban areas, have access to affordable food, not least to avoid food riots. During the 200708 and 2011 food price spikes, for example, several governments reacted by lowering tariffs on imported food or restricting exports to reduce domestic prices and increase available supply2 (Figure 1). Others focused on building domestic stocks through government purchases of food at administered prices. Still others provided direct support to consumers and vulnerable groups in the form of consumption subsidies or through social safety nets.

Figure 1: Responses to high food prices by region in 2007‒08 (sample of 77 countries)

Figure 1: Responses to high food prices by region in 2007‒08 (sample of 77 countries)

Source: FAO (2008, 42).

4In times of low prices, domestic pressures are more likely to come from producers concerned about remunerative prices and the need to maintain farm income. In the 1980s and 1990s, for example, long-term declining prices pushed governments, mainly in OECD countries, to support domestic prices and farm income through various forms of agricultural subsidies and border protection. As noted elsewhere:

  • 3 A considerable literature explores the political economy of agricultural trade negotiations and agr (...)

While these measures achieved their stated objectives at the domestic level … [they] exerted further downward pressure on international prices and made them more volatile. They also induced surpluses that had to be disposed of in international markets, often with the help of export subsidies… In developing countries, low and volatile prices provided disincentives to invest in agriculture, often resulting in lower domestic food production, while shifting consumption patterns towards less expensive, subsidised imported foods.3 (ICTSD, 2014, 3)

5With food prices reaching their lowest levels since 2006, new isolating trade policies return and significantly affect the political feasibility of future agricultural reforms. This article reviews the implications of the recent downward trend in agricultural prices for future trade talks. Firstly, it reviews price evolution and future projections, looking at the main factors behind such trends and associated changes in global trade flows. Secondly, based on a review of recent trade protectionist measures and changes in agricultural policies observed between 2006 and 2015, it assesses possible policy implications of this new price environment for future trade reforms and on-going trade negotiations. Finally, the article looks at possible avenues at the domestic, regional and multilateral levels to address these challenges and overcome the current deadlock in negotiations. In doing so it will review not only the prospects for unilateral reforms but also the role of regional trade agreements (including the so-called mega-regional agreements) and WTO negotiations.

2. Recent Trends in Prices and Trade Flows

6Markets for food and agriculture have been particularly volatile over the past decade, with a number of significant peaks and troughs characterising price trends for the basket of core food commodities that is tracked by the UN’s Food and Agriculture Organization (FAO). After an extended period in which real food prices mostly exhibited a downward trend, prices rose sharply upwards in 2006/07 and again in 2010/11 (Figure 2). With the financial crisis in 2008/09, in contrast, food prices dropped dramatically at the same time as output slowed in several major economies. Since 2011, prices again tended to move downwards until very recently. While these aggregate food price trends disguise distinctive patterns across different product groups, prices have nonetheless fallen significantly across the board (Table 1).

Figure 2: Food price index, 1962‒2016

Figure 2: Food price index, 1962‒2016

Note: 2002‒04 = 100

Source: Authors’ elaboration based on FAO data retrieved at http://www.fao.org/​worldfoodsituation/​foodpricesindex/​en/​ (accessed on 15 June 2016).

Table 1: Prices for key commodities have dropped significantly from recent peaks

Food price indices

Date of peak value

Peak value

July 2016

Percentage change from peak value

FAO Food Price Index

Feb 2011

240

162

-33%

Cereals

Jun 2008

268

148

-45%

Oils

Feb 2011

287

157

-45%

Sugar

Jan 2011

420

279

-34%

Meat

Aug 2014

212

160

-25%

Dairy

Feb 2014

275

142

-48%

Source: Authors’ elaboration based on FAO data retrieved at http://www.fao.org/​worldfoodsituation/​foodpricesindex/​en/​ (accessed on 4 August 2016).

7A number of factors can be identified as lying behind the fall in prices. These include a robust supply response to earlier food price spikes, weaker demand growth and in particular slower economic growth rates in China, and increasingly abundant stocks (OECD/FAO, 2016). Agricultural commodity prices have also tended to correlate with trends in energy markets, with oil prices exhibiting unusually marked upswings and downturns during recent years. While farm inputs, production, storage and transport all have long been influenced by energy prices, the rapid growth of the biofuel sector has created new types of relationships between agricultural and energy markets (De Gorter et al., 2015).

  • 4 See Donnan, S. (2016) ‘Global trade slowdown worse than thought’, Financial Times, 13 July, https:/ (...)

8Looking at global markets, world trade growth has slowed significantly since 2012, reaching about 3 per cent per annum—considerably lower than the pre-crisis average of 7 per cent for the 19872007 period, and less than the rate of GDP growth (Constantinescu et al., 2015). Economists remain divided on the causes of the slowdown. While some blame a creeping protectionism that has begun to drag on the world’s economy, others see long­-term trends at play, such as the shortening of global supply chains and the increasing role of digital trade.4 In 2015, the volume of world merchandise trade grew by 2.8 per cent (WTO, 2016). Despite this modest, positive growth in global volumes, the dollar value of world merchandise trade fell sharply by 13 per cent to USD 16 trillion, largely as a result of lower commodity prices and a general appreciation of the US dollar (WTO, 2016).

  • 5 This section draws largely on the analysis in the OECD-FAO Agricultural Outlook for 2016‒25, as wel (...)

9The OECD and FAO’s Agricultural Outlook (2016) anticipates that real agricultural prices are likely to remain relatively flat over the coming decade, with supply and demand both growing at broadly comparable rates.5 However, the agencies also foresee a ‘strong chance’ of at least one severe price swing during the same period, with assumptions around oil prices, yields and economic growth in particular subject to uncertainties. The Outlook finds that price trends are likely to diverge across different product groups. Rising average incomes in developing countries are likely to mean strong growth in demand for meat, fish and poultry, the authors say, meaning that prices for animal feed (grains and protein meal) are likely to rise relative to food staples such as wheat and rice.

10Improved productivity, rather than crop area expansion, is expected to be the main way in which supply will increase in response to growing demand, the Outlook finds—with yield improvements due to account for about 80 per cent of the increase in crop production. Factors behind slowing demand growth include slower population growth, which the OECD and FAO see as the main historical driver of increasing demand, and projections that income growth in ‘emerging’ economies is expected to be weaker in the immediate future. Furthermore, demand for farm goods from the biofuels sector is expected to stagnate as oil prices remain low, the two agencies say.

11Agricultural trade will grow at about half the rate it did in the previous ten years. However, for most commodities, the share of total production that is traded on global markets will stay relatively constant. Trade will also become more important in ensuring global food security, given natural resource constraints in many countries. Farm trade is projected to remain highly concentrated, with just five main exporters accounting for as much as 70 per cent of total exports—and with trade in some commodities being dominated by an even smaller number of countries.

3. The Evolution of Agricultural Trade Policy Over Time

3.1 The Rise of Protectionist Measures in Agricultural Trade

12In parallel with the decline in commodity prices, recent surveys of trade policy have observed a resurgence of protectionist measures. According to a report by the WTO Secretariat, WTO members applied 154 new trade-restrictive measures between mid-October 2015 and mid-May 2016, amounting to 22 new measures per month—the highest monthly average registered since 2011 (WTO, 2016). Agriculture has been an important focus of these trade-restrictive measures. According to the WTO Trade Monitoring Database, which has collected trade measures implemented by WTO members and observers since 2008, more than 20 per cent of all the measures documented between 2012 and 2015 targeted agricultural products.6 While it remains difficult to assess whether such protectionist pressures are effectively related to the decline in commodity prices, the significant shift in the type of policy tools used to implement those measures from 2012 onwards points to the fact that at least some of them have been explicitly designed to respond to the new price environment.

13An interesting source of information to illustrate this point is the data compiled by Global Trade Alert (GTA), which has systematically documented trade-restrictive measures since 2006.7 Comparing the situation during the 200711 prices spikes with the period from 2012 onwards, Figure 3 shows the number and type of trade-restrictive measures implemented worldwide on agricultural products. The count only includes measures in force during the selected periods and that ‘almost certainly discriminate against foreign commercial interests’ according to the GTA assessment. Overall, 204 trade-restrictive measures were identified during the price spikes period. Between 2012 and 2015, this number almost doubled to 398, with more than a quarter of the identified measures directly affecting the trade interests of least developed countries (LDCs), according to the GTA. Obviously, the numerical counting of such measures and programmes is only a very rough indicator. It does not imply that the identified measures are illegal from a WTO perspective, nor does it provide any indication regarding their potential impact. It illustrates, however, a significant change in the use of policy tools between the two periods, partly confirming the above hypothesis of a move towards more market access barriers and state aid in times of declining food prices.

Figure 3: Trade-restrictive measures implemented on agriculture and fish products

Figure 3: Trade-restrictive measures implemented on agriculture and fish products

Source: Authors’ elaboration based on data from the Global Trade Alert Database, http://www.globaltradealert.org/​ (accessed on 4 July 2016).

  • 8 The Agricultural Market Information System was established in 2011 under the French presidency of t (...)

14The large increase in state aid and (to a lesser extent) export incentives is particularly striking. It is too early to tell whether this reflects short-term contingency measures or, instead, a deeper change in agricultural policy orientations. However, several of these measures could already have significant impacts on third countries. Examples include the announcement by the EU in March 2016 of a EUR 500 million farm-aid package to support the bloc’s dairy, pig meat and fruit and vegetable sectors, which have been hit by slowing demand in China and by Russia’s import ban (ICTSD, 2016a). In July of the same year, this was further complemented by an additional envelope worth EUR 500 million from EU funds to support the dairy market (EC, 2016). Similarly, Figure 3 shows a significant increase in the use of market access barriers, in the form of import tariffs, import bans or quotas, and trade remedy measures such as anti-dumping, countervailing duties or safeguard measures. One example illustrating the use of this type of measure is South Africa’s decision to raise import duties on wheat by 30 per cent, to ZAR 1,591.10 (USD 104.18) per tonne in June 2016 (AMIS, 2016). According to the Agricultural Market Information System8 (AMIS, 2016, 6), this was the ‘seventh [duty] revision since October 2014 and follow[ed] consecutive increases of 34 percent and 78 percent that had occurred on 8 April and 25 September 2015 respectively’.

15Figure 4 further breaks down these trade-restrictive measures by imposing country or group of countries, highlighting the top 20 countries that have applied such measures between 2012 and 2015. It illustrates not only the wide distribution of protectionist pressures in agriculture but also the preponderance of major players in the implementation of such measures.

Figure 4: Top 20 countries applying trade-restrictive measures between 2012 and 2015 (Number of measures imposed per country)

Figure 4: Top 20 countries applying trade-restrictive measures between 2012 and 2015 (Number of measures imposed per country)

16Overall, the post-2012 shift towards market access barriers, trade remedies and state aid points to the fact that some of these measures—including some of the short-term changes made to existing policies—have been applied as a result of declining world prices for certain commodities.

17To further confirm this correlation, we take a closer look at trade measures applied specifically to those commodities that have shown a particular price decline in recent years. To do so, we review measures applied to cereals, oils, sugar and dairy, given the relatively steep price drop these products have experienced, falling between 35 per cent and 48 per cent compared to their peak value, as illustrated in Table 1, above. To undertake this analysis, we use data collected by the WTO Secretariat and made available through the Trade Monitoring Database.9 Interestingly, the database includes trade-liberalising measures as well as trade-restricting ones.

18As shown in Figure 5, these data confirm the significant growth in the use of import restrictions—mainly in the form of increased tariffs or quantitative restrictions—and the use of trade remedies after 2012. Import-restrictive measures more than tripled, from 25 in 200811 to 80 after 2012. The data also show how import-liberalising measures largely surpassed import restrictions during the price spikes period between 2008 and 2011, as governments struggled to provide affordable food for their consumers by temporarily removing trade barriers. Interestingly, trade-restrictive import measures applied to cereals, oils, sugar and dairy accounted for nearly 60 per cent of total trade-restrictive measures applied to agriculture, pointing once again to a probable link with the decline in commodity prices. While trade-liberalising import measures also grew significantly post-2012, a closer look shows that the countries implementing them were not the same as those imposing trade restrictions. While the main liberalising countries included relatively competitive producers like Brazil or Mexico, or large importers and developed countries or blocs such as the EU or Korea, countries imposing restrictions were essentially large developing countries and blocs such as India, Pakistan, Turkey, SACU, Argentina, Nigeria, China or Indonesia. Arguably, this is not particularly surprising, as these countries/blocs still have significant rural populations that rely on agriculture for their livelihoods and that remain fairly vulnerable to import competition.

19Complementing these raw figures, the following sections provide a short overview of recent agricultural policy reforms in major agricultural producers, exporters and importers, and examine potential consequences for future trade talks.

Figure 5: Trade measures applied to cereals, oils, sugar and dairy products

Figure 5: Trade measures applied to cereals, oils, sugar and dairy products

Source: Authors elaboration based on data retrieved at the WTO Trade Monitoring Database, http://tmdb.wto.org/​ (accessed on 9 November 2016).

3.2 Market Access: A Return to Isolating Trade Policies to Offset Low Prices?

  • 10 Those applied to all other WTO members.
  • 11 See Bureau and Jean (2013).
  • 12 See Bureau and Jean (2013).
  • 13 See also Bureau and Jean (2013).

20Over the last 15 years, unilateral liberalisation as well as regional trade agreements have resulted in a significant reduction in the tariff protection applied to agricultural goods. Globally, ‘applied most favoured nation (MFN) duties10 were cut from an average of 25 percent in 2001 to 19 percent in 2010, and applied duties (including preferential tariffs) from 16 percent to 14 percent. The cut in MFN applied duties was especially steep for developing countries, [falling] from an average of 31 percent to 23 percent, with preferential applied tariffs going down to 20 percent in 2010.11 China for example lowered its applied tariffs on a large set of commodities, including soybean and pork, to meet domestic demand and control inflation.12 Other countries also suspended tariff protection during the 200708 price spikes’ (ICTSD, 2015a, 4). In addition, the percentage of world agricultural trade covered under regional or bilateral preferential trade agreements has increased significantly ‘and at a faster rate than for manufactured goods’ (ICTSD, 2015a, 4).13

21The decline in commodity prices observed since 2011 is unlikely to change domestic policies radically if these have been consolidated in international commitments undertaken multilaterally (e.g. China’s or Russia’s accession to the WTO) or in bilateral and regional preferential trade agreements. However, low prices might put pressure on policymakers to apply temporary protection, or to simply undo some of the unilateral reforms implemented in recent years but not consolidated in international commitments.

  • 14 On the other hand, market opening also helps to offset problems resulting from domestic volatility.

22As countries open their markets they tend to become more vulnerable to international price variability, sometimes with significant risks for nascent or even well-established agricultural production.14 Of particular concern here is the persistence of episodes of ‘excessively low’ border prices that affect import-competing activities. Closely related to price fluctuation is the problem of import surges—generally defined as sharp temporary rises in import volumes above a trend level, potentially threatening otherwise viable and efficient domestic sectors. For many countries that remain price takers in world markets, the return to declining prices will likely increase internal political pressures to use border protection to counteract the transmission of distortions in world prices and protect import-competing sectors. This hypothesis appears to be confirmed by the significant increase in the use of unilateral temporary import tariffs, quotas, bans or trade remedies since 2012, as highlighted in Figures 3 and 5.

  • 15 E.g. anti-dumping, countervailing duties or general safeguard clauses.

23In the late 1990s and early 2000s these concerns prompted a group of developing countries—which later became known as the G-33 coalition—to propose the creation in the WTO of a special safeguard mechanism (SSM) (Dhar, 2016). Such a mechanism would enable developing countries to protect their domestic producers from import surges and price declines by temporarily raising their agricultural tariffs. To be effective, such an SSM should be easy to apply for developing countries already struggling with the complexity of existing trade remedy mechanisms in the WTO.15

24At that time, the international prices of major agricultural commodities were experiencing a steep declining trend (see Figure 6), and the FAO documented an increase in the number of cases of developing countries—particularly low-income, food-deficit countries—experiencing import surges of various products, often associated with negative effects on local production and the economy (FAO, 2005). The SSM proposal soon became a central and fairly controversial aspect of the WTO agricultural talks and partly contributed to the collapse of multilateral trade negotiations in July 2008 (ICTSD, 2008). Between 2004 and 2011, the incidence of import surges declined significantly, while cases of price depression fell nearly to zero for most commodities (Morrison and Mermigkas, 2014), reducing considerably the pressure and arguably the justification for an SSM.

25After 2011, however, the prices of the same major commodities returned to a downward trend (Figure 6), with all commodities experiencing a price decline of over a third. This also coincided with a renewed push by the G-33 for an effective SSM mechanism in the run-up to the WTO Nairobi Ministerial Conference (Dhar, 2016). The return to periods of declining prices will probably result in renewed political pressure to negotiate some sort of contingency tariff protection to deal with price depression. Arguably, resistance to lowering trade barriers on imports is likely to be fuelled further by the resurgence of agricultural subsidies in both developed and emerging economies, as such subsidies artificially lower world prices. This phenomenon is examined further in the section below.

Figure 6: Trends in international prices of major agricultural commodities

Figure 6: Trends in international prices of major agricultural commodities

Source: Authors’ elaboration based on IMF data retrieved at http://www.imf.org/​external/​np/​res/​commod/​index.aspx (accessed on 11 November 2016).

3.3 Domestic Support and the Risk of Further Suppressing World Prices16

  • 16 This section builds on and incorporates material from ICTSD (2015a), prepared by the authors.
  • 17 The Producer Support Estimate (PSE) is an indicator of the annual monetary value of gross transfers (...)

26In recent years, countries with large emerging economies—particularly India and China—have considerably increased their support for agriculture in an attempt to incentivise domestic supply, reduce income inequality or support small farmers’ incomes. In the meantime, trade-distorting payments in the EU, US and Japan have been declining—at least compared to the level they reached at the end of the Uruguay Round—leading to a trend of growing convergence between support levels in large, developed countries and emerging economies. Figure 7 illustrates this evolution by looking at the OECD producer support estimates (PSE)17 expressed as a share of gross farm receipts since 1995. While it shows slightly declining levels in the EU, Japan and the US, support as a share of gross farm income in China or Indonesia more than doubled over the last 5 years or so, reaching levels similar to those observed in the EU.

Figure 7: Producer support as a share of gross farm receipts

Figure 7: Producer support as a share of gross farm receipts

Source: Authors’ elaboration based on OECD Producer and Consumer Support Estimates database, http://www.oecd.org/​tad/​agricultural-policies/​producerandconsumersupportestimatesdatabase.htm (accessed on 4 July 2016).

27According to Brink (2014), the reduction in domestic support observed in the EU or the US is partly explained by policy changes, but also by rising prices between 2006 and 2011. At the policy level, successive reforms in the EU progressively replaced highly trade-distorting price support with more decoupled income support payments. In the case of the US, decoupled payments replaced certain more distorting instruments in the 1996 Farm Bill; however, overall, total payments shrank as world prices went up, triggering lower levels of support under programmes such as countercyclical payments.

  • 18 Passed as the Agricultural Act of 2014.
  • 19 While no WTO notification has been made since the 2014 Farm Bill, the most recently reported figure (...)

28In spite of these progressive improvements, recent policy decisions suggest that the trend towards lower trade-distorting support might slow down or even be reversed in the coming years, particularly if prices continue to fall. In the US, the 2014 Farm Bill18 eliminated several direct payments that had been classed as not more than minimally trade-distorting, and replaced them with subsidised insurance schemes that protect farmers from yield and price variation risks, thereby inducing potentially significant trade distortions (Glauber and Effland, 2016; Lau et al., 2015). Furthermore, the triggers for such payments are based on much higher expected production per acre and prices, thereby locking in the 200611 relatively high revenue expectation and increasing the risk of high budget outlays as world prices go down19 (Glauber and Westhoff, 2015). In the EU, the 201420 Common Agricultural Policy provides greater flexibility for countries to use certain trade-distorting instruments compared to the previous CAP. As a result, coupled aid has started to grow again, from less than EUR 3 billion in 2014 to nearly EUR 5 billion in 2015 (Matthews, 2015).

29Besides industrialised countries, the rise of emerging economies (particularly in Asia) has been accompanied by a rapid increase in farm support. Figure 8 looks more specifically at the case of China, and shows how producer support has increased in recent years, particularly for commodities like sugar, soybean, maize and milk. In the case of rice, policy even evolved from a situation in which farmers received negative support (i.e. were taxed) to a situation where single commodity transfers accounted for over 30 per cent of gross farm receipts.

Figure 8: China: Single commodity transfers as a share of commodity gross farm receipts

Figure 8: China: Single commodity transfers as a share of commodity gross farm receipts

Source: Authors’ elaboration based on OECD Producer and Consumer Support Estimates database, http://www.oecd.org/​tad/​agricultural-policies/​producerandconsumersupportestimatesdatabase.htm (accessed on 4 July 2016).

30This increase should probably not be attributed to the recent decline in prices. It rather reflects broader long-term concerns linked to specific domestic circumstances. For example, securing the domestic supply of food while reducing income disparities between rural and urban areas has traditionally been China’s main objective, whereas India focuses more on supporting the livelihood of small farmers while ensuring access to cheap food for consumers (ICTSD, 2015a). As emerging economies have started accumulating larger resources through which to provide state aid, domestic support programmes in agriculture have grown significantly, mostly in the form of price support policies, non-product-specific input subsidies, or investment aids. These schemes are often supported by government-run stockholding programmes for food security and by public distribution systems (e.g. India, China or Pakistan).

31While the trade-distorting impact of such instruments in times of high prices only raised limited concerns, in an environment of declining prices, input subsidies or high administered prices could potentially distort production and push prices even lower. For example, the minimum support prices guaranteed by governments in countries such as China, India or Pakistan increased continuously during the 200611 price spikes, partly to stay in line with international prices. However, as shown in Figure 9 for the case of wheat, when international prices started to fall, minimum guaranteed price levels continued to increase, thereby keeping domestic prices higher than world levels, with potentially important trade-distorting effects.

Figure 9: International wheat prices and the evolution of minimum guaranteed price schemes in China, India and Pakistan

Figure 9: International wheat prices and the evolution of minimum guaranteed price schemes in China, India and Pakistan

Source: ICTSD (2016c, 6).

32The extent to which support prices will be adjusted in the future remains uncertain, but according to AMIS (2016) the new Minimum Support Prices (MSPs) for 2016/17 in India actually increased again from previous levels by 4.3 per cent for common paddy rice, 4.1 per cent for grade A paddy, 5.2 per cent for wheat, 3 per cent for maize and 6.7 per cent for soybeans.

33As negotiators resume trade talks in Geneva on agricultural reform, progress on such issues may be made more difficult as a result of the new low price environment. Contrary to a situation in which prices are high, governments may be more reluctant to undertake reforms when faced with political pressure from domestic producers to increase support in the sector and not reduce it. Exporters of agricultural products, on the other hand, will likely argue that this new price environment makes further reform all the more urgent, and insist on the need to achieve meaningful results in the negotiations.

3.4 Export Subsidies: The End of Food Dumping?

34During the 1980s and 1990s, export subsidies were widely used as a mechanism to export surplus output from jurisdictions in which policies such as market price support, in combination with tariff protection, had led to overproduction of certain agricultural goods. These surpluses were eventually reduced as domestic support policies were reformed, while in a parallel process the 1986‒94 Uruguay Round of trade negotiations established caps on trade-distorting support. These developments can be seen to have contributed to a fall in the use of export subsidies and other measures with comparable effects, with export subsidies in the EU alone falling from over EUR 10 billion per annum in the early 1990s to almost zero today, and to a decline in the volumes of in-kind food aid as donors move increasingly towards cash-based food assistance (Díaz-Bonilla and Hepburn, 2016; Clay, 2014).

35The WTO Agreement on Agriculture, which was concluded at the end of the Uruguay Round, included disciplines on export subsidies, as well as other provisions intended to prevent these commitments from being circumvented. However, with the use of export competition instruments continuing in the 1990s, many countries wanted to establish stronger global rules to protect their farmers and agricultural exporters. While recourse to export subsidies made little sense during the price spikes period (with the exception of certain products for which expensive fuel constituted a large share of the input costs), the return to low prices could have resulted in countries reactivating their export subsidy programmes. Figure 3 tends to confirm this hypothesis with the number of export subsidy measures in agriculture roughly doubling in 201215 compared to their 200711 level.

36When they launched the Doha Round of trade negotiations in 2001, WTO members agreed, under pressure from agricultural exporters, to negotiate ‘reductions of, with a view to phasing out, all forms of export subsidies’ (WTO, 2001), a commitment that was followed four years later by an agreement, in the WTO’s Hong Kong ministerial declaration, to ensure the ‘parallel elimination of all forms of export subsidies and disciplines on all export measures with equivalent effect’ by the end of 2013 (WTO, 2005). Although some countries sought to fast track an outcome in this area in 2011 and again in 2013, the EU in particular continued to insist that any export competition outcome should be linked to progress in other areas. However, in the run-up to the 2015 ministerial conference, the bloc changed its negotiating stance, and joined forces with agricultural exporting countries such as Brazil to push for a deal on export competition at the trade body’s tenth ministerial conference in Nairobi, Kenya, in December (ICTSD, 2015b).

37The deal that was ultimately struck at that conference represented a significant milestone in WTO members’ efforts to reform the global rules that govern markets for food and agriculture. Trade ministers agreed to phase out export subsidies, and not to increase them above current levels. On export credits, export credit guarantees and insurance, although the rules that were agreed were less rigorous than those contained in previous draft negotiating texts, they established an eighteen-month maximum repayment period for developed countries, effectively ‘locking in’ existing practice in the US. New rules on international food aid were also agreed that sought to ensure it remained available in emergencies, but did not function as a disguised export subsidy. Finally, generic language on exporting state trading enterprises required countries not to use these bodies to circumvent their export subsidy commitments.

38The Nairobi package can be seen as a critical moment along a path that stretches back over many years and through successive episodes of falling and rising prices for food and farm goods. However, it is clearly the result of concerted efforts, over the long term, to address the trade-distorting effects of specific instruments associated with structural overproduction and the implications these may have for domestic markets. The breakthrough in this area, in Nairobi, may also be the result, in part, of growing anxiety among some WTO members that an increasing number of large developing countries may be adopting the types of policies that historically led to these problems in the 1980s and 1990s. While the Nairobi package provides ‘special and differential treatment’ for various types of developing countries, for example in the form of longer implementation periods for policy reforms, it nonetheless establishes deadlines for the elimination of export subsidies and similar commitments for other instruments that WTO members consider to have comparable effects. Overall, disciplines in this area might require further improvements (e.g. on food aid, export credits or state trading enterprises), but nonetheless constitute an insurance policy against the real risk that some Members might otherwise reactivate their export subsidy programmes as commodity prices fall.

3.5 Export Restrictions: An Opportunity to Act?

  • 20 Article XI of the General Agreement on Trade and Tariffs 1994 sets out the legal basis for the trea (...)
  • 21 Paragraph 12 of the WTO Agreement on Agriculture includes provisions requiring members to give ‘due (...)

39With policymakers in 2001 focused primarily on the problems associated with overproduction in agriculture, export restrictions and prohibitions—as well as export taxes—were not included in the set of issues that WTO members agreed to prioritise when they launched the Doha Round. Furthermore, the structure of the talks built upon the architecture of the Agreement on Agriculture that was concluded at the end of the Uruguay Round, where issues around restrictions on exports were again far from being the top priority for most negotiators.20 However, as food prices began to rise dramatically, especially for key products such as rice and wheat, concern began to grow that export restrictions imposed by governments in a bid to reduce price inflation on domestic markets were having the opposite effect on international markets—effectively sparking a domino effect, with consumers in the poorest food-importing countries hit hardest as global prices rose (Headey, 2010; Martin and Anderson, 2011). The then WTO Director General, Pascal Lamy, acknowledged ‘an imbalance in the WTO rule-book’, with stringent provisions on policies affecting imports, but less rigorous disciplines on those that have an impact on exports (ICTSD, 2011a). Indeed, successive efforts to address overproduction on global markets have resulted in extensive disciplines on agricultural domestic support and market access measures such as tariffs, but relatively few meaningful measures to protect poor, food-importing countries, such as disciplines on the ability of major exporting countries to impose export restrictions.21

  • 22 Indonesia has sought to promote the transformation of palm oil by imposing export taxes on crude pa (...)

40Interestingly, data from the Global Trade Alert database show the number of export restriction measures doubling in the period 201215 compared to the 200711 period, whereas one might expect such measures to decline in times of high prices (see Figure 3). However, a closer look at the specific measures reveals that the increase is almost entirely due to Argentina and Indonesia (17 measures out of 18). These two countries have tended to use export taxes not only to secure the availability of cheap food for domestic consumers but also to make farm goods cheaper for companies using them as inputs to produce value-added products.22 Figure 5, which focuses more specifically on cereals, oils, sugar and dairy, using WTO data, also shows a more nuanced picture: export restrictions actually declined slightly after 2012, while trade-liberalising export measures (largely putting an end to previous export restrictions) experienced significant growth. Indeed, 72 per cent of the measures aimed at removing export restrictions and taxes after 2012 were applied to those same commodities, as their prices experienced a steep decline.

  • 23 Japan, JOB(03)/41, 28 February 2003; Japan and Switzerland, JOB(08)/34, 30 April 2008. Prior to the (...)
  • 24 JOB/AG/18, 5 April 2011.

41During the initial years of the Doha Round, Japan and Switzerland tabled negotiating proposals on export restrictions,23 but by mid-2008 these had only been reflected in a short section of the draft negotiating text entitled ‘other issues’ and mostly related to improved transparency and notification requirements. However, in April 2011 the group of net food-importing developing countries (NFIDCs) put forward a proposal24 that would exempt the group’s members, along with least-developed countries, from any new export prohibition or restriction applied by non-NFIDC members. More generally, concerns around food price volatility were high on the political agenda following the price spikes, with agriculture ministers from the G-20 group of major economies agreeing in June of that year not to impose export restrictions on humanitarian food aid provided by the World Food Programme (ICTSD, 2011b). However, a proposal to adopt an identical commitment at the WTO was not supported by some of the large G-20 members, some of which had made use of these measures to keep prices down on domestic markets and may have sought more broadly to focus WTO talks around food security on the issue of public stockholding for food security purposes (ICTSD, 2011c).

  • 25 JOB/TNC/56/Rev.1 (5 November 2015) was submitted by the LDC group, and proposes that ‘In view of en (...)

42Arguably, trade officials may find that the fall in food prices could create the opposite problem to that which characterises domestic support and market access negotiations: while opposition to updating global disciplines may become less pronounced, the immediacy of political demands for action in food-importing countries is also likely to lessen. Nonetheless, a proposal from LDCs and another submission from Singapore are likely to mean that the issue will remain on the post-Nairobi agenda,25 with some observers suggesting that action in this area could constitute a realistic option for governments to pursue in the short term in the new negotiating context.

4. Conclusions and Possible Ways Forward

43Uncertainties in the factors affecting global supply and demand mean that it is difficult to reach definitive conclusions about the likely evolution of price trends in the years ahead, and how these may affect producers and consumers in different parts of the world. So far, the continuous decline in food prices observed since 2011 appears to be correlated with renewed protectionist pressures in both developed and emerging economies, as these countries introduce more state aid and market protection. But the level of prices is only one factor at play. For example, the dynamics of policy cycles in the EU or the US also play a role, with agricultural policies being reviewed at fixed intervals, sometimes resulting in delays in adjusting policies to new external pressures. Policymakers are also confronted with contradicting pressures from opposing sources. In the internal EU debate on the last CAP reform, environmentalist groups campaigned relentlessly for additional environmental requirements and a shift towards less trade-distorting farm support. Despite the final scope for expanding support linked to production, the constituencies that sought to reintroduce trade-distorting support have only been partially successful—not least because of fiscal pressures on EU members in the aftermath of the 2008 economic slowdown and the crisis in the eurozone.

44Compared to the situation prevailing in earlier periods of low prices such as the 1980s and 1990s, the most striking development is probably the rise of emerging economies such as China, India and Indonesia. As these countries accumulate enough resources with which to support agriculture, they might be tempted to follow the path of OECD countries that have traditionally been the main providers of trade-distorting subsidies and border protection. In times of low prices, such policies might result in significant externalities by further depressing international prices and exporting volatility onto world markets, largely at the expense of smaller countries that cannot afford to provide such income support to their farmers in times of low prices.

45So far, however, WTO negotiations aimed at reducing trade-distorting agricultural subsidies have progressed slowly, with limited prospects of a solution in the short term. While significant progress was achieved on export subsidies at the Nairobi Ministerial conference, the deal largely consolidated past reforms and did not address domestic support, where most subsidies are concentrated. At the heart of the matter is disagreement among large industrialised countries and emerging economies over their respective levels of concessions. On the one hand, emerging economies point to the large amount of subsidy entitlements enjoyed by developed countries, and argue that further reform should first and foremost result in significant cuts in those subsidies. Developed countries, on the other hand, argue that emerging economies need to undertake commensurate cuts in their growing levels of domestic support and tariff protection as they become more competitive internationally. As a result of persistent disagreements, large, developed players seem to have largely lost interest in the WTO Doha negotiations. Since 2008 they have been exploring alternative pathways to deal with their trade issues, as illustrated by the emergence of the so-called mega-regional agreements such as the EU–Japan free trade agreement, the conclusion of the Trans-Pacific Partnership (TPP), or the EU–US Transatlantic Trade and Investment Partnership (TTIP). Such negotiations not only tend to result in more ambitious liberalisation outcomes compared to what can be achieved multilaterally, they also conveniently exclude politically sensitive issues such as domestic support in agriculture, while embracing a wider set of issues including investment or regulatory convergence. In short, with the mega-regionals large players thought that they could achieve most of their liberalisation objectives outside of the WTO, without losing any multilateral bargaining chips.

46As illustrated by growing trade scepticism in the US and in Europe, the extent to which such mega deals offer a viable alternative to multilateral negotiations is, however, increasingly questioned. At the time of writing, major uncertainties remained around the prospects for a TPP ratification by the US and political opposition to the TTIP is growing rapidly in France and Germany. In contrast, the success of the last two WTO Ministerial Conferences, in Nairobi and in Bali, led to new agreements being reached in areas such as trade facilitation and export subsidies—potentially helping to revive negotiations in the global trade body. Indeed, after Nairobi, agricultural exporters and smaller developing countries concerned about the domestic support provided by their competitors have insisted on the need to achieve some outcome on domestic support by the next Ministerial Conference in 2017.

  • 26 This proposal was first floated by Crawford Falconer, former New Zealand ambassador to the WTO and (...)

47Keeping in mind these political realities and the need to rebuild confidence in the WTO, a possible pragmatic approach could consist in taking some intermediate steps. Previous agricultural reforms undertaken either unilaterally or as a result of international commitments have resulted in a situation where several countries apply an average tariff protection that is much lower than the maximum ceiling allowed under their WTO obligations. This gap is particularly apparent in developing countries, and would allow these countries, at least in theory, to increase their level of protection without breaching their WTO obligations. The same applies to domestic support in most developed countries. In emerging economies, subsidies provided through different support schemes have arguably increased significantly over the last five years, but remain largely below their maximum allowed level. A first modest step towards reviving WTO negotiations could therefore consist in consolidating tariff and domestic support levels at their current levels or at levels that are close, locking in past reforms without asking countries to reduce their current applied tariffs or domestic support.26 Falling prices since the Uruguay Round, combined with successive reforms of domestic support and the move away from price support mechanisms, have resulted in large gaps between applied levels of domestic support in the EU and US and their maximum entitlement under WTO rules. Similarly, on market access, developing countries like India and most African countries consolidated their tariffs at fairly high levels after the Uruguay Round. Since then, these countries have undertaken significant unilateral liberalisation, progressively increasing the gap between their bound and applied tariffs—often referred to as ‘water’. Such an approach would reduce the policy space or margin of manoeuvre that WTO members currently have, but would not change the status quo. It would not provide new market access opportunities or remove existing distortions; however, in a situation in which policymakers are increasingly confronted with political pressure to impose trade-restrictive measures, it would nonetheless provide legal certainty and an assurance that previous reforms will not be dismantled. It would also prevent a massive increase in trade-distorting practices, including in emerging economies.

48There is, however, no consensus among countries on the ‘value’ of a reduction in the level of water in tariffs or in domestic support. Governments tend to consider that policy space has a value and can be used as a bargaining chip. If such a move proves too difficult, it could initially be applied on a non-binding basis to build confidence progressively among members. A step in this direction could be achieved by the time of the next ministerial conference in 2017, and would lay the ground for future reforms. In a similar vein, WTO members might also find that the tendency towards falling prices makes it easier to reach agreement on new rules in other areas, such as reducing the impact of agricultural export restrictions on consumers in poor, food-importing countries. Especially if food price spikes recur in the years ahead, action in this area could help ensure that poor consumers are able to access food even if global markets become more volatile.

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Notes

1 Read as a whole, the SDGs can be seen as a commitment to improve the functioning of markets, including through addressing trade distortions, but also through action to address market failures, such as in the area of environmental sustainability. While some analysts have emphasised how government interventions such as tariffs and subsidies can distort trade (e.g. Hoekman and Martin, 2012), others have argued that such measures can play a role in supporting development, especially in low-income countries (e.g. FAO, 2015; Chang, 2002).

2 In trying to isolate domestic consumers from international price variations, however, policy measures have often resulted in exacerbating price increases on the world market. Export restrictions, for example, significantly contributed to exacerbating the negative effects of price spikes on food security in food-importing countries by reducing their ability to access food at affordable prices on world markets.

3 A considerable literature explores the political economy of agricultural trade negotiations and agricultural policy making (for a review see Swinnen, 2010). Clearly, the factors influencing the decisions taken by domestic policymakers are complex and varied, and result from a number of often contradictory factors, including pressures from different farm group constituencies, consumers, taxpayers, the food processing industry, and other economic sectors that may be affected either directly or indirectly by policy changes. Policy and negotiating stances are also affected by dynamics among countries at the international level, which may be characterised both by similarities and significant differences among country groups (see, for example, Hopewell, 2015).

4 See Donnan, S. (2016) ‘Global trade slowdown worse than thought’, Financial Times, 13 July, https://www.ft.com/content/97a10864-490b-11e6-8d68-72e9211e86ab (pay wall) (accessed on 13 July 2016).

5 This section draws largely on the analysis in the OECD-FAO Agricultural Outlook for 2016‒25, as well as on the 2014 and 2015 editions of the same report.

6 Authors’ calculations based on data retrieved at http://tmdb.wto.org/searchmeasures.aspx?lang=en-US for agricultural products (accessed on 4 July 2016).

7 See http://www.globaltradealert.org (accessed on 30 August 2016).

8 The Agricultural Market Information System was established in 2011 under the French presidency of the G-20 group of major economies. It works as an inter-agency platform to enhance food market transparency and encourage coordination of policy action in response to market uncertainty.

9 See http://tmdb.wto.org/default.aspx?lang=en-US (accessed on 11 November 2016). Contrary to the GTA data set, the WTO data does not include state aid or subsidies and focuses instead on import measures (mainly tariffs, quotas and quantitative restrictions), trade remedies (safeguards, anti-dumping and countervailing duties), export measures (export taxes and restrictions) and other types of measures.

10 Those applied to all other WTO members.

11 See Bureau and Jean (2013).

12 See Bureau and Jean (2013).

13 See also Bureau and Jean (2013).

14 On the other hand, market opening also helps to offset problems resulting from domestic volatility.

15 E.g. anti-dumping, countervailing duties or general safeguard clauses.

16 This section builds on and incorporates material from ICTSD (2015a), prepared by the authors.

17 The Producer Support Estimate (PSE) is an indicator of the annual monetary value of gross transfers from consumers and taxpayers to support agricultural producers. It measures support arising from policies targeting agriculture relative to a situation without such policies—i.e. when producers are subject only to general policies (including economic, social, environmental and tax policies) of the country.

18 Passed as the Agricultural Act of 2014.

19 While no WTO notification has been made since the 2014 Farm Bill, the most recently reported figures suggest that trade-distorting support has already increased compared to 2011. See ICTSD (2016b).

20 Article XI of the General Agreement on Trade and Tariffs 1994 sets out the legal basis for the treatment of these measures in the multilateral trading system, along with Article 12 of the WTO Agreement on Agriculture.

21 Paragraph 12 of the WTO Agreement on Agriculture includes provisions requiring members to give ‘due consideration’ to the impact of these measures on food security in other countries, and to consult them beforehand, while another clause provides an exemption for developing countries that are not net exporters of the foodstuff concerned.

22 Indonesia has sought to promote the transformation of palm oil by imposing export taxes on crude palm oil, while Argentina has emphasised the role of agriculture as a source of tax revenue to finance public spending and achieve fiscal surpluses. In an attempt to incentivise the export of products with local value addition and offset tariff escalation in destination markets, primary products have been systematically taxed at higher rates than processed products (Regúnaga and Tejeda Rodriguez, 2015). The Argentinian government elected in 2015 removed or reformed many of these measures.

23 Japan, JOB(03)/41, 28 February 2003; Japan and Switzerland, JOB(08)/34, 30 April 2008. Prior to the launch of the Doha Round, the Cairns Group of agricultural exporting countries also tabled a proposal in this area, G/AG/NG/W/93 on 21 December 2000; and in 2002 the Cuban delegation also submitted a proposal, JOB(02)/190.

24 JOB/AG/18, 5 April 2011.

25 JOB/TNC/56/Rev.1 (5 November 2015) was submitted by the LDC group, and proposes that ‘In view of ensuring food security in LDCs, no non-LDC Member, shall apply any export restriction on any foodstuff imported by any LDC, if the exporting member is a net exporter of the foodstuff concerned’. On 13 July 2016, Singapore also submitted JOB/AG/77, which addressed transparency around export restrictions.

26 This proposal was first floated by Crawford Falconer, former New Zealand ambassador to the WTO and chair of the trade body’s agricultural negotiations (see Falconer, 2015). It has subsequently been discussed informally during the negotiations.

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List of illustrations

Title Figure 1: Responses to high food prices by region in 2007‒08 (sample of 77 countries)
Caption Source: FAO (2008, 42).
URL http://poldev.revues.org/docannexe/image/2384/img-1.png
File image/png, 78k
Title Figure 2: Food price index, 1962‒2016
Caption Note: 2002‒04 = 100
Credits Source: Authors’ elaboration based on FAO data retrieved at http://www.fao.org/​worldfoodsituation/​foodpricesindex/​en/​ (accessed on 15 June 2016).
URL http://poldev.revues.org/docannexe/image/2384/img-2.png
File image/png, 48k
Title Figure 3: Trade-restrictive measures implemented on agriculture and fish products
Credits Source: Authors’ elaboration based on data from the Global Trade Alert Database, http://www.globaltradealert.org/​ (accessed on 4 July 2016).
URL http://poldev.revues.org/docannexe/image/2384/img-3.png
File image/png, 21k
Title Figure 4: Top 20 countries applying trade-restrictive measures between 2012 and 2015 (Number of measures imposed per country)
URL http://poldev.revues.org/docannexe/image/2384/img-4.png
File image/png, 100k
Title Figure 5: Trade measures applied to cereals, oils, sugar and dairy products
Credits Source: Authors elaboration based on data retrieved at the WTO Trade Monitoring Database, http://tmdb.wto.org/​ (accessed on 9 November 2016).
URL http://poldev.revues.org/docannexe/image/2384/img-5.png
File image/png, 72k
Title Figure 6: Trends in international prices of major agricultural commodities
URL http://poldev.revues.org/docannexe/image/2384/img-6.png
File image/png, 80k
Credits Source: Authors’ elaboration based on IMF data retrieved at http://www.imf.org/​external/​np/​res/​commod/​index.aspx (accessed on 11 November 2016).
URL http://poldev.revues.org/docannexe/image/2384/img-7.png
File image/png, 60k
Title Figure 7: Producer support as a share of gross farm receipts
Credits Source: Authors’ elaboration based on OECD Producer and Consumer Support Estimates database, http://www.oecd.org/​tad/​agricultural-policies/​producerandconsumersupportestimatesdatabase.htm (accessed on 4 July 2016).
URL http://poldev.revues.org/docannexe/image/2384/img-8.png
File image/png, 16k
Title Figure 8: China: Single commodity transfers as a share of commodity gross farm receipts
Credits Source: Authors’ elaboration based on OECD Producer and Consumer Support Estimates database, http://www.oecd.org/​tad/​agricultural-policies/​producerandconsumersupportestimatesdatabase.htm (accessed on 4 July 2016).
URL http://poldev.revues.org/docannexe/image/2384/img-9.png
File image/png, 18k
Title Figure 9: International wheat prices and the evolution of minimum guaranteed price schemes in China, India and Pakistan
Credits Source: ICTSD (2016c, 6).
URL http://poldev.revues.org/docannexe/image/2384/img-10.png
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Cite this article

Electronic reference

Christophe Bellmann and Jonathan Hepburn, « The Decline of Commodity Prices and Global Agricultural Trade Negotiations: A Game Changer? », International Development Policy | Revue internationale de politique de développement [Online], 8.1 | 2017, Online since 16 November 2017, connection on 22 November 2017. URL : http://poldev.revues.org/2384 ; DOI : 10.4000/poldev.2384

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About the authors

Christophe Bellmann

Christophe Bellmann is a Senior Resident Research Associate at the International Centre for Trade and Sustainable Development (ICTSD) in Geneva, Switzerland.

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Jonathan Hepburn

Jonathan Hepburn is a Programme Manager at the International Centre for Trade and Sustainable Development and leads the ICTSD’s programme on agricultural trade and sustainable development.

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Copyright

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International Development Policy is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.

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