Executive Summary
In Maslow's hierarchy of needs, food is the most basic need for humans. It is thus no wonder agriculture is one of the most important issues facing the international community. The importance of agriculture is even more prominent for developing countries, as a large percentage of their population is involved in farming. Free trade advocates push for the elimination of all market distorting mechanisms and argue that, as with free trade in all areas, this will result in aggregate benefit for all. On the other hand, free trade in its theoretical sense has never been achieved. I believe that there are pros and cons for free trade in developing countries' agriculture sector. Nevertheless, free trade is ultimately the solution for world food security and poverty alleviation.
Introduction
Classical economic analysis shows that free trade increases the global level of output because free trade permits specialization among countries. The principle of "comparative advantage" says that countries prosper first by taking advantage of their assets in order to concentrate on what they can produce best, and then by trading these products for products that other countries produce best. All countries, including the poorest, have assets – be it human, industrial, natural or financial. This economic theory dates back to classical economist David Richardo. It is also supported by evidence: as shown by the experience of world trade and economic growth since the WWII. Tariffs on industrial products have fallen steeply and the world economic growth averaged about 5% per year in the 25 years after war, which is considered a high rate and was partly the result of lower trade barriers.
Agriculture plays a vital role in the economy and in the lives of people in developing countries. In African countries, agricultural sector is the main source of rural livelihoods and employs more than two thirds of the labour force. Agriculture generates more than a third of GDP in most African countries. In Asia, China and India, more than 50% of their population are involved in agriculture and agriculture contributes to 16% and 20% of their GDP respectively. Compare this to developed countries such as UK and Canada, only 2% of their populations are involved in agriculture, which contributes only 1-2% of their GDP.
International trade in agriculture is less than 10% of world trade today. Whereas 50% of the world's production of industrial goods enters international trade, only 25% of the world's agricultural production is traded globally. Since it is widely believed that trade liberalization helps poor countries to grow faster and this faster economic growth helps to alleviate poverty, is free trade a boon or a bane to developing countries in terms of their agriculture?
Current World Agriculture Scene
Before I attempt to answer this question, let's take a look at today's world agriculture trading scene.
While the economists broadly agree that multilateral free trade leads to the largest overall gains for society, trade distortion exists in various forms such as tariffs, subsidies and import quota. Trade distortion refers to a situation where the prices of goods are higher or lower than the levels that would usually exist in a competitive market. One most criticized trade-distorting measure is the export subsidies provided by governments of developed countries.
What are the reasons for government to support trade-distortion measures? Governments usually give three reasons for supporting and protecting their farmers, even if this distorts agricultural trade:
- To make sure that enough food is produced to meet the country's domestic demand
- To shield farmers from the effects of the weather and swings in world prices
- To preserve rural society
With government subsidies, farmers produce more than what they would otherwise do, and export their surplus production, often selling at a price lower than the cost of production. In international trade parlance, such practice is called "dumping". While "dumping" is strictly disallowed for industrial products in international trade, it is common practice for agriculture trade. According to the Institute for Agriculture and Trade Policy, corn, soybeans, cotton, wheat and rice are sold below the cost of production, or dumped. For example, wheat is sold for 40% below cost and rice is sold 20% below cost.
Such practices are only carried out in developed countries, as governments of developing countries do not have the financial resources to provide such subsidies to their farmers. With imported food much cheaper than locally produced food, farmers in developing countries are being squeezed out of business. For example, as the Philippine government lowers its import barriers to allow competition from the industrialized and heavily subsidized farming systems of North America and Europe, maize price in the Philippines is expected to drop drastically, resulting in a 30% drop in average household incomes of Philippine's maize farmers. According to an Oxfam report, US subsidized maize could be sold at less than half of the price of maize locally grown and that the livelihoods of up to half a million Filipino maize farmers are under immediate threat. (Oxfam: A group of non-governmental organizations from three continents working worldwide to fight poverty and injustice.)
Canada's Department of Agriculture estimates that developing nations would benefit by about $4 billion annually if subsidies in the developed world were halved.
World Trade Organisation
The World Trade Organization (WTO) was created to open up markets and promote international trade based on the "Free-Trade" paradigm. The WTO creates and monitors agreements to reduce trade barriers, and arbitrates in disputes over foreign market access, and violations of these agreements.
Under the framework of WTO, both developed and developing countries had agreed to reduce agriculture subsidies in the Uruguay Round. Developed countries agreed to cut their export subsidies over six years, 1995-2000, by 36%. Developing countries agreed to a smaller cut of 24% over 10 years, 1995-2004. Despite this reduction, developed countries, like the USA and the EU member states still have in place an elaborate system that protects local agriculturalists mainly through subsidies. The current negotiation round of the WTO is called the Doha Development Round. Talks are currently focused on agriculture and there is a deep division of views and interests between the developed and the developing countries.
Arguments Against Free-trade
As we have seen that trade-distorting measures are harmful to the agricultural sector in developing countries. Does that mean free-trade is always a boon to developing countries' agriculture sector? Unfortunately, it is not always the case.
In a world economy that is increasingly driven by advanced technologies, many developing countries' agricultural sectors are seriously under-capitalized with relatively low levels of productivity. In addition, there are many small scale farmers in developing countries as land is getting divided through inheritance amongst a growing population. In India, the average landholding fell from 2.6 hectares in 1960 to 1.4 hectares in 2000 and is still declining. In a free-trade environment, these small-scale farmers will face a losing battle in competition against their counter-parts from developed countries, which are often transnational corporations (TNCs) who enjoy massive advantage of economies of scale.
Economists may argue that if such developing countries do not have "comparative advantages" in agriculture, then it is alright for them to exit the sector, in fact they should, and to resort to importing food. Such thinking ignores the fact that agriculture is unlike other sectors, there are some non-trade concerns involved. Food security is one of the most important non-trade concerns. Food security means ensuring everyone has enough to eat. In poor developing countries, displaced rural farmers often do not have an alternative source of income, hence they found difficulties in purchasing imported foodstuffs however cheap they may be. Even if some developing countries are able to resort to buying imported food, these countries are usually the first to be hit when there is a sudden surge in food prices as in the recent food crisis in 2007-2008.
Other non-trade concerns include the need for developing countries to provide employment for a large rural population and to prevent migration into over-congested cities.
In addition, there are some other concerns over the pace of liberalization of agriculture trade. Some developing countries currently enjoy some preferential treatment in import barriers in developed countries. If normal tariffs fall too fast, their preferential treatment is eroded, so does their competitive advantage.
Another concern is from developing countries which do not grow enough food to feed their own populations. These nations are "net food-importing developing countries". Reduction in export subsidies in developed countries will adversely impact these countries with higher food prices.
Recent Development
There are some significant recent developments in the area of agriculture. The sharp rise of food prices in 2007-2008 triggered these latest developments. Food riots swept through three dozen countries, most of them developing countries, and two governments (Haiti's and Madagascar's) were overthrown.
On the other hand, food importers which can afford it – like Saudi Arabia, Kuwait, China, South Korea – have opted to grow food on land they own or control abroad rather than import it through international trade. The large "land grabs" in Africa and Asia are signs of distrusts in world markets.
The world's two largest rice exporters, Thailand and Vietnam, restricted rice exports to ensure domestic price stability. The Philippines, the world's largest rice importer, concluded that the international grain trade could no longer be trusted to supply its needs, it decided to sign contracts to buy in bulk.
With growing scepticism about world trade, there is the trend to shift from "food security" towards "food self-sufficiency". Senegal is a small African nation which imports 80% of its rice. Rocked by food riots in 2008, its government promised to become self-sufficient in staples. Others with the same aim include China, Malaysia, Columbia and Honduras. Everywhere, governments are more involved in farming through input subsidies.
While it is understandable for countries to resort to these short-term measures when faced with the worst food crisis in 30 year, these latest developments spell the danger of turning away from international trade. Pursuing self-reliance above all else is extremely wasteful because farming needs to be as efficient as possible if the world were to meet the demand of feeding 9 billion people in 2050. When climate change is affecting different parts of the world differently, it makes international trade even more important for agriculture.
Conclusion
In conclusion, I think free-trade is not always a boon for the developing countries in terms of their agriculture. There is indeed the need for some subsidies and protection to ensure food security, to support small-scale farming, to make up for a lack of capital, or to prevent the rural poor from migrating into already over-congested cities. However, it is dangerous for the world to turn away from trade, markets and efficiency. Global integration that has fueled economic growth and led to efficiency gains must continue to be pursued. In the long-run, trade liberalization is the way for developing countries to progress economically and only with increased income can these developing countries achieve sustainable food security and poverty alleviation.
The key lies in the collaboration of both developed and developing countries under the framework of international body such as WTO to jointly develop the appropriate international trade policies for agriculture. Such policies should be firmly on the path of trade-liberalization and not protectionism. Trade policies alone would not solve the world's hunger problem, the international community must also come up with effective non-trade measures such as modernization of agriculture, land management and food aids.
References
- "Geography: An Integrated Approach" by David Waugh
- http://www.wto.com
- http://www.time.com/time/magazine
- http://www.economist.com
- http://en.wikipedia.org/wiki/Free_trade
- HMCA document: World Trade Organization: Agriculture
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