inception report for the agriculture sector study · the inception report provides the results of...

SUSTAINABILITY IMPACT ASSESSMENT

OF PROPOSED WTO NEGOTIATIONS

INCEPTION REPORT FOR THE

AGRICULTURE SECTOR STUDY

Prepared by

Oliver Morrissey, Dirk Willem te Velde and Ian Gillson ODI, London, UK

In association with:

Impact Assessment Research Centre Institute for Development Policy and Management

University of Manchester, UK

Revised version: 27 April 2004

This report was prepared with financial assistance from the Commission of the European Communities. The views expressed herein are those of the Contractor, and do not represent any

official view of the Commission.

This Report has been prepared for the European Commission under Framework Contract No Trade 01/F3-1 (Sustainability Impact Assessment of Proposed WTO Negotiations)

Specific Agreement No. 3.

Project Reports and information about the project are available from

the project website:

http://idpm.man.ac.uk/sia-trade

SIA of WTO Negotiations – Agriculture Sector Study Inception Report Page i

http://idpm.man.ac.uk/sia-trade

CONTENTS

ABBREVIATIONS .....................................................................................................................................1

EXECUTIVE SUMMARY.........................................................................................................................2

1. INTRODUCTION.............................................................................................................................6

2. REVIEW OF NEGOTIATIONS ON AGRICULTURE ...............................................................8

3. STUDIES OF THE IMPACT OF LIBERALISATION OF TRADE IN AGRICULTURE ....15

4. ELABORATION OF SCENARIOS..............................................................................................18

5 SCREENING I: SELECTION OF PRODUCTS .........................................................................19

6. SCREENING II: COUNTRY GROUPS AND CASE STUDIES ...............................................26

7. OUTLINE OF APPROACH ..........................................................................................................31

8. LINKS TO THE OTHER SECTOR STUDIES ...........................................................................34

9. SELECTIVE REFERENCES ........................................................................................................36 List of Tables Table 1: Value of Agricultural Trade by Region 1998-2002, billion dollars (excluding EU internal

trade) .............................................................................................................................................. 7 Table 2: Derbez Proposals on Market Access ..................................................................................... 11 Table 3: Derbez Proposals for Reductions in Domestic Support ........................................................ 13 Table 4: Derbez Proposals for Reductions in Export Subsidies .......................................................... 14 Table 5: Effects on World Agricultural Prices of Eliminating all Agricultural Policy Distortions, by

Commodity and Policy................................................................................................................. 16 Table 6: Effects of Liberalisation for Four Cash Crops ...................................................................... 16 Table 7: Agriculture Imports, India.................................................................................................... 28 Table 8: Elasticity Estimates ............................................................................................................. 30 Annex 1: Terms of Reference for the Agriculture Study

SIA of WTO Negotiations – Agriculture Sector Study Inception Report Page ii

ABBREVIATIONS ACP African Caribbean Pacific AMS Aggregate Measure of Support CAP Common Agricultural Policy CCA Causal Chain Analysis CGE Computable General Equilibrium CoA WTO Committee on Agriculture DG Directorate General EBA Everything-But-Arms EC European Commission EU European Union FMD Foot and Mouth Disease GDP Gross Domestic Product IDPM Institute for Development Policy and Management IIED International Institute for Environment & Development LDC Developing Country LDC Least Developed Country LIDCs Low-income developing countries (non-LDC) MEDCs Major Exporting Developing Countries M&E Mitigating and Enhancement NGO Non-Governmental Organisation NTB Non-Tariff Barrier OECD Organisation for Economic Cooperation and Development ODI Overseas Development Institute OOECD Other OECD, represents non-EU developed countries RPDCs Relatively Protected Developing Countries S&D Special and Differential SIA Sustainability Impact Assessment SP Sugar Protocol SPS Special Preference Sugar SSG Special Agricultural Safeguards TOR Terms of Reference TRIPS Trade Related Intellectual Property Rights TRQs Tariff rate quotas UN United Nations UNCTAD United Nations Conference on Trade and Development UNEP United Nations Environment Programme URAA Uruguay Round Agreement on Agriculture USA United States of America WTO World Trade Organisation

SIA of WTO Negotiations –Agriculture Sector Study Inception Report Page 1

EXECUTIVE SUMMARY The Inception Report provides the results of the preliminary screening exercise for the key sustainability impacts associated with liberalisation of trade in agriculture. The screening concentrates on identifying major product groups and specific products for focus, and on identifying country groups and specific countries for case study. The detailed SIA will be undertaken by an ODI team (Oliver Morrissey, Dirk Willem te Velde, Ian Gillson and Steve Wiggins) over the period May-September 2004. Assistance will be provided by IIED on assessing social and environmental impacts, and by in-country associates for the country case studies. The first section of the Inception Report reviews the importance of agriculture in world trade. Section 2 provides an overview of the current state of play on WTO negotiations regarding agriculture, and section 3 reviews some recent studies estimating economic effects of liberalisation proposals. These reviews inform our choice of scenarios for analysis, and these are set out in Section 4. The screening exercise is detailed in sections 5 (on commodities) and 6 (on countries), and Section 7 outlines how the SIA methodology is adapted to meet the specific circumstances of agriculture. Section 8 examines the links between the agriculture sector study and the sector studies for forest and distribution services. Negotiating Modalities on Agriculture Negotiations within the WTO on liberalisation of trade in agriculture identify three pillars, or components. The first is market access, reducing tariffs and non-tariff barriers to trade. Under current proposals, developed countries are expected to make the largest reductions in tariffs, and developing countries are required to make lesser reductions. The least developed countries (a sub-set of developing countries) are not required to implement any tariff cuts. The second pillar is reduction of export supports, especially export subsidies. The third pillar is trade-distorting domestic support, and a major negotiating issue here is which forms of domestic support are trade-distorting and which are exempted from reforms. As with market access, in the case of export and domestic support the developed countries are required to implement the greatest degree of liberalisation. In general, developing and least developed countries have minimal or no export or domestic supports. Scenarios for the SIA The study will take the current situation (i.e. current prices and patterns of trade and production) as the baseline. Three scenarios will be considered, one for each of the three pillars • Tariff reductions - partial liberalisation. This scenario will apply percentage reductions in tariffs

on agricultural imports. The degree of reduction will be greatest for developed countries, which will be projected to end up with the lowest levels of tariffs. The pattern of tariff reductions applied can be tailored to the type of country and product under examination.

• Reductions in export support. In our scenario, the effect of reductions in export support is

represented by the effect on the world price, as it is this that generates changes in trade and production patterns. As the SIA will not model alternative scenarios, we will use the range of estimated world price effects from existing modelling studies to identify upper and lower bound estimates of the likely effects of potential reforms. The studies used will also include estimated effects on the countries reducing export support.

• Reductions in domestic support. The approach is the same as that for export support. The effect of

alternative reductions in domestic support will be represented by the range of effects on the world price, as given in existing modelling studies. The studies used will also include estimated effects on the countries reforming their domestic support measures, and these results will inform the SIA for the developed countries.

These scenarios will be used to generate effects of trade measures on world prices for reductions in export and domestic support, and on import prices for tariff reductions. These price effects alter incentives, leading to changes in production and trade patterns. We refer to these as ‘adjustment’ or short-run effects. The SIA concerns how countries respond to these effects and their impacts.


Screening I: Commodity Groups and Specific Products

As it is not feasible for the SIA to address all agricultural products, we select six products that permit the SIA to address a very broad range of issues. The selection must include products affected by reforms to domestic and export support, including some that are important imports for developing countries and some that are important exports for different types of developing countries (especially the least developed). It is also important that the selection includes some products relevant to health and food safety issues, to food security concerns, to niche markets and to concerns of the poorest countries. We also want to ensure that the products chosen allow us to make links with the forestry and distribution services studies. The six products selected are: Wheat – producers in developed countries receive support and exports are subsidised;

liberalisation may have significant effects on world prices. Some developing countries are exporters, and benefit from liberalisation, others are importers and may be adversely affected by higher world prices. For the latter, an important issue is how domestic producers of wheat or substitutes are able to respond. Is a product for which GMO issues are relevant. Rice – meets the same broad criteria as wheat, but tends to be more important for Asia, whereas

wheat is relatively more important for other regions. Also allows us to consider issues relating to geographic indicators (such as basmati). Beef – illustrates the important issues relating to meat/livestock, such as food safety and animal

welfare. Is highly protected in some countries, and some developing countries are significant exporters. Provides a link to the forestry study, as expanding land for ranching has been associated with deforestation in Brazil. Sugar – a major example of a product that is highly protected in developed countries, can be

exported at low cost by some large developing countries, but is an important (relatively high cost) export product for many low-income developing countries. Sugar illustrates many of the tensions between different types of countries in the negotiations. Cotton – illustrates a similar range of concerns to sugar, but tends to cover different countries.

Also provides an example of niche markets for developing countries, in the case of organic and/or fair trade cotton. Green vegetables – has emerged as a significant non-traditional export for many of the poorer

developing countries. Is a good example of a product for which global value chains dominate the market, and provides a link to the distribution services study. Contract farming and food safety issues are also rlevant.

Although the SIA will focus on only these six products, they cover most of the important issues in the negotiations and cover products important to different types of countries. Where appropriate, the SIA will refer to other products. Screening II: Country Groups and Case Studies

Six country groupings or ‘types’ will be covered in the study. The European Union (EU) and non-EU other OECD countries (OOECD) are the two groups to represent developed countries. For developing countries, four ‘types’ are distinguished, for each of which we will select one country for case study, determined on the basis of how representative they are of the issue and crops we concentrate on. • Developing countries that are significant net exporters for a wide range of products. Their main

concerns will be increased access to foreign markets, and they are unambiguous beneficiaries from liberalisation. Brazil is a suitable example.

• Developing countries with a relatively protected agricultural sector, exporting some products but importing others. These countries can benefit from liberalisation in some products, but lose in others (where they reduce protection), and thus face mixed impacts. India is the example.


• Least developed countries, which currently benefit from the most preferential treatment. They typically export cash crops and import food grain (although many have constrained but significant domestic production capacity). These countries could benefit from liberalisation if they can increase exports or if higher import prices provide a stimulus to domestic producers. Tanzania is taken for the case study.

• Low-income developing countries that are not classified as least developed but are quite similar in terms of the pattern and efficiency of their agricultural sector. These countries may be expected to reduce tariffs by more than least developed, and compete with the more preferentially treated least developed countries in their export markets. Ghana will be taken as an example.

The types chosen allow us to address not only the differential impacts of liberalisation across countries, but also the tensions between different types of countries in the negotiations. Specifically, we have developed versus developing exporters, exporters versus importers among developing countries, and least developed versus low-income countries. Outline of Proposed Approach The SIA approach adopted starts from a generic causal analysis at the level of country and commodity groups, concentrating on quantifiable impacts on prices and associated effects on production and trade. These quantifiable impacts are then explored further to identify the most likely significant impacts (economic, social and environmental). Country-level and commodity-specific case study evidence is used to provide qualitative and quantitative information on impacts, and a number of country case studies are undertaken to explore linkages in greater detail. Five steps can be distinguished for the SIA. Step 1. Identify the trade measures. For the subsequent analysis, all trade measures (scenarios) will be represented by their price effects. Tariff reductions alter import prices, whereas reductions in export and domestic support alter world prices. Step 2. Identify the adjustment effects: the changes in relative prices induce changes in patterns of production and net trade effects. Elimination of tariffs means that the price of imports is reduced, which normally implies an increase in imports, and perhaps a reduction in domestic production.. The elimination of export subsidies will tend, in contrast, to increase world prices and therefore increase import prices, at least in the short-run. The countries removing subsidies will lose export market share, and could become net importers, whereas exporting countries that did not have subsidies will increase their market share. Countries that were initially net importers will face higher prices, and the impact depends on whether domestic producers can respond to the increase in incentives. Step 3. Identify the economic effects (economic SIA). In the case of imports, it is important to distinguish domestic producers that compete with the product from those that consume the product (consumers can be of final products or purchasing intermediate inputs, such as animal feed). In general, consumers gain from lower prices but competing producers lose (lower production and/or lower profits) unless they can respond with increased efficiency. Producers of the product for export would be expected to gain and may increase investment and employment. An important issue regarding agriculture is that possibilities for crop substitution are quite significant, although the extent depends on cross-price and factor substitution elasticities, which vary by country and farming system. In general, employment effects can be short-run adjustment costs whereas investment effects are more likely to occur in the medium to long term. Step 4: Identify the social effects (social SIA). The social nature of agriculture will vary by country and crop. In developed countries this is included in the notion of multifunctionality, in developing countries it relates to discussions of livelihoods. As trade liberalisation affects the mix of crops grown, it may have important community and livelihood impacts, varying according to the social nature of farming systems within different regions of a country. These can only be considered in detail in


country case studies. In the assessments of country and commodity groups, we can identify the most likely social impacts. Step 5: Identify the environmental effects (environmental SIA). Three broad types of impact can be distinguished. The first is land degradation, the impacts on the sustainable use of land, and irrigation with impacts on river systems. The second is broader environmental degradation, which can have impacts on biodiversity and environmental quality. A third type of impact relates to animal welfare. The SIA will consider all of these potential impacts, which may of course be positive or negative and will differ by product and across and within countries. There is another set of impacts that are both social and environmental in nature, for example regarding choices between organic and GMO crops and the (related) role of multinationals. If liberalisation increases the influence of multinationals, this can have major impacts. For example, contract farming is becoming more widespread and although it tends to have economic benefits it may impose social costs. Organic farming may be encouraged to access niche markets, and this could have favourable social and environmental impacts. A related issue, for developing countries, is fair trade initiatives, which may be encouraged by liberalisation. Where possible and appropriate, the SIA of agriculture will be linked to the other two studies. Distribution services are particularly relevant as agricultural products are processed and traded within distribution chains, what are known in the literature as value chains. There are unlikely to be many general links between the forestry and agriculture studies, but there will be links in particular cases. In some countries, where expanding agriculture means bringing more land into use, increased agriculture production can be at the expense of depleting forests (e.g. land clearing). This may apply to Brazil, and will be addressed in that study. The SIA will endeavour to be as comprehensive as is feasible in covering the most significant impacts on different types of commodities and countries, incorporating cross-cutting effects, relationship with the other SIA studies and identifying appropriate mitigating and enhancing measures.


1. INTRODUCTION Multilateral liberalisation of trade in agricultural commodities offers all countries (developed and developing) potential gains from trade. Increased market access, as other countries reduce their barriers to imports, would allow many developing countries to increase their exports, to developed countries and globally. Import liberalisation also offers benefits: consumers gain from access to a wider variety of cheaper goods, and competition from imports encourages domestic producers to become more efficient. A less restricted and less distorted global trade regime encourages increased efficiency in the allocation of resources, both within and across countries. The gains are not evenly distributed and some countries, and some producers within countries (especially those who lose protection and are constrained in their ability to increase efficiency), will incur losses. Multilateral trade liberalisation in agriculture will affect patterns and intensity of production, within and across countries, and will therefore have social and environmental impacts, both positive and negative. The purpose of the SIA is to identify the probable distribution of gains and losses associated with the variety of economic, social and environmental impacts. The study will recommend mitigating and enhancement measures that can promote benefits, minimise losses and compensate losers. There are three basic components to negotiations on liberalisation of trade in agriculture – reduction of tariffs and non-tariff barriers (NTBs), reduction of export support (especially subsidies) and removing the trade distortions associated with domestic support measures. The SIA study will consider each of these separately and assess their combined effects, specifically the effects of liberalising imports and expanding exports in particular sectors of agriculture in particular types of countries. The SIA will focus on the impacts of those reforms that are most directly related to trade, and specifically will focus on the impacts on developing countries. Although general impacts on the EU and other developed countries will be addressed, more detailed analysis and country case studies will be confined to developing countries. In the context of agriculture, where subsidies for domestic farmers are significant and pervasive in many developed countries (especially in the EU and US), reforms to domestic support will have significant impacts on farmers, agribusiness and consumers in those countries. Although such impacts are not ignored, the economic, social and environmental impacts on developed countries will not be addressed in detail. Exporting countries (actual or potential) expect to benefit from enhanced market access. However, the extent of benefits will vary for different countries and enhancing measures may be required to ensure that benefits are realised. Cheaper imports benefit consumers of final and intermediate goods. There will be losses and adjustment costs in countries opening up to increased competition from imports, and these costs are likely to be greater the higher the degree of initial protection and the poorer the country. As poorer countries typically have inflexible economies and their agricultural producers face multiple constraints (e.g. limited access to inputs, irrigation, markets, technology, etc), they will face difficulties in meeting the costs and actually making the required adjustments. One cannot presume that in all cases liberalisation will have a beneficial economic impact (the costs and/or constraints on adjustment may be too great in some countries, or for certain producers). Even where the economic impacts are positive, it cannot be assumed that the environmental and social impacts are always positive or insignificant. Where adverse impacts are likely, mitigating measures will be discussed, distinguishing both short-run and long run issues. The study will cover the range of agricultural commodities, drawing distinctions between food and cash crops, temperate and tropical products, and crops and livestock (noting that measures relating to the latter can impact on animal feeds). As it is not feasible or practical to try and address the full range of agricultural products in any detail, the analysis will concentrate on specific products. The products are selected to represent broad categories of agricultural commodities: food grains (wheat and rice), livestock (beef), cash crops (cotton, sugar) and horticulture (green vegetables). The products are also selected to ensure that a wide range of issues relevant to the negotiations can be addressed. For example, most of the products are affected by all three elements of reform (tariffs, export and domestic support), all are important exports for some developing countries, some are important imports for developing countries, and some are especially important for the least developed countries. The commodity impact analysis concentrates on the products in question, at both country and global levels. Where appropriate, especially in the country studies, other products will be considered.


The overall sustainability impact on any particular country will depend on the composition of its agricultural trade, the structure of the agricultural sector (including economic and social contexts) and the nature of production (encompassing how agriculture relates to the environment). For any country, the beneficial (adverse) impact for one product may be offset by adverse (beneficial) impacts on other products. It is not feasible to consider all countries, and the study will consider six representative groups of countries, two developed and four developing. The EU and other OECD are the two groups of developed countries. The four developing country ‘types’ are chosen to represent major exporters, countries with high levels of protection, least developed countries (LDCs) and low-income countries (whose agriculture sector is similar to that of LDCs, but who cannot avail of LDC status). Within each developing country ‘type’ one country will be selected for a detailed case study. This Inception Report provides the results of the preliminary screening exercise for the key sustainability impacts associated with liberalisation of trade in agriculture. The screening concentrates on identifying major product groups and specific products for focus, and on identifying country groups and specific countries for case study. Section 2 provides an overview of the current state of play on WTO negotiations regarding agriculture, and section 3 reviews some recent studies estimating economic effects of liberalisation proposals. These reviews inform our choice of scenarios for analysis, and these are set out in Section 4. The screening exercise is detailed in sections 5 (on commodities) and 6 (on countries), and Section 7 outlines how the SIA methodology is adapted to meet the specific circumstances of agriculture. The detailed SIA will be undertaken by an ODI team (principally Oliver Morrissey, Dirk Willem te Velde, Ian Gillson and Steve Wiggins) over the period May-September 2004. Assistance will be provided by IIED on assessing social and environmental impacts, and by in-country associates for the country case studies. To complete this section and put the study in context, we briefly review the place of agriculture in world trade. Importance of Trade in Agriculture Table 1 shows the value of agricultural trade, by region in 1998 and 2002. Agriculture accounts for about ten per cent of total world merchandise trade, similar in value to all mining products (including oil). However, trade in agriculture has not expanded as rapidly as global trade, i.e. the rapid sustained growth has been in manufactures. Developing countries’ share of world agricultural exports rose slightly from 36% in 1990 to 38% in 1998, a significant proportion of which is trade between developing countries. The EU is the single largest market for developing countries, importing almost 30% of their agricultural exports in the late 1990s, compared with 15-20% for North America and about ten per cent for Japan. Table 1: Value of Agricultural Trade by Region 1998-2002, billion dollars (excluding EU internal trade)

Region 1998 2002 Exports Imports Exports Imports Western Europe 76.0 100.8 76.8 96.5 European Union 56.1 64.4 57.4 61.2 Switzerland/Norway 2.7 7.1 2.8 7.3 Transition Economies 17.2 29.3 16.6 28.0 North America 72.7 52.7 72.1 57.8 Caribbean 6.1 4.1 5.0 4.8 Asia 70.4 101.7 72.1 107.3 Japan 1.6 34.8 1.6 33.6 Australia/NZ 20.0 3.6 22.2 4.5 Developing Asia 48.8 63.4 48.3 69.1 Africa 19.5 22.1 17.7 22.3 Middle East 5.4 19.9 6.5 18.8 Latin America 58.0 26.3 59.2 24.4 Total agricultural trade 308.1 327.5 309.3 331.8

Source: Derived from UN COMTRADE statistics.


The domestic support policies of most developed countries, especially the EU and US, have had a significant effect in distorting world trade in many agricultural commodities. By restricting imports and subsidising exports, these policies depress world prices, which constrains the ability of developing countries to export and thus denies them market share. Furthermore, the subsidised exports undermine the competitiveness of local producers in importing countries. This could create food security problems in importing (developing) countries, although this is unlikely as in many cases the subsidised imports do not compete directly with local produce. In countries that are net food importers, consumers benefit from the subsidy. In the European Union, WTO negotiations and the heavy financial burden of the Common Agricultural Policy (CAP) have constituted strong pressure to liberalise trade in agriculture. The CAP already accounts for about half the EU budget, although farming represents less than five per cent of total employment and less than 1.5 per cent of EU GDP (Serger, 2001). This understates the true importance of agriculture, as agri-business (especially food) probably accounts for a fifth of GDP, and many of the subsidies actually go to business rather than farmers (this is even more relevant to the US). This has resulted in the situation where the CAP fails to meet the needs of most farmers, is a burden on consumers and distorts world trade, resulting in strong impetus for change. Proposed reforms include Agenda 2000, which sets new rules for market intervention and reduces price support, especially for cereals (EC, 2000). A similar distinction, between domestic support and trade per se, arises for other developed countries with high protection and domestic support (e.g. US, Japan, Norway and Switzerland). Consequently, negotiations on liberalising trade in agriculture have been complicated by the need to address reform of domestic support in addition to trade policies. Had it only been tariffs and non-tariff barriers at stake (as for most other sectors, where export subsidies are prohibited), liberalisation of trade in agriculture could have proceeded faster. For the purposes of this study it is essential to distinguish the issues of domestic support and trade. Developed countries are not required to eliminate support for their domestic agriculture sectors. The issue is how they provide support, and specifically that they do so in a way that does not distort world trade. In our analysis we will use projections of the effect on world markets of removing the trade-distortions associated with domestic support. Typically, these will be represented as estimated effects on world prices, from which one can infer potential effects on exporting and importing countries. Elimination of export subsidies will also be represented as affecting world prices. We will represent tariff and NTB liberalisation as affecting domestic prices (i.e. lower tariffs reduce import prices). It follows that we do not need to review the modalities that are being discussed in negotiations on agriculture in the WTO in great detail, as our scenarios will be relatively simple. The direct trade reforms are the reductions in tariffs and non-tariff barriers that these countries implement, as it is these that influence the price in the local market of agricultural imports (given world prices). Reforms to export and domestic support in developed countries will affect domestic and world prices, and these price effects will induce changes in patterns of net trade. The effect on the world price is an appropriate summary indicator of the effect on relative incentives that will determine the impact on developing countries. The detail of the reforms will also have implications for the developed countries. We will not undertake any global modeling or simulations in this study, but will simply take estimates of world price effects from studies that are available. 2. REVIEW OF NEGOTIATIONS ON AGRICULTURE The Uruguay Round Agreement on Agriculture (URAA), which was incorporated into the WTO, aimed to liberalise agricultural trade. The Agreement included specific commitments by WTO Member governments to reduce protection in the areas of market access, domestic support and export subsidies (the three pillars of the URAA). The implementation period for these country-specific commitments was six years, beginning in 1995. For developing countries, however, this reduction, along with other commitments, could be implemented over a ten-year period. Agricultural negotiations are conducted within the WTO by the special (negotiating) session of the WTO


Committee on Agriculture (CoA), set up by the URAA. This Committee is responsible for overseeing the implementation of the Agreement, as well as future negotiations.

The URAA (Article 20) ensured that new negotiations would begin in 2000 to continue the process. These negotiations are now well under way and the Doha Ministerial declared that ‘modalities for further commitments [in agriculture], including provisions for special and differential treatment, [were] to be established no later than 31 March 2003’.1 These modalities are to set out targets – including numerical targets – and rules-related elements, based on which Members will subsequently prepare their individual offers. Defining modalities is one of the most critical stages of the agriculture talks, as the modalities to be agreed will determine the shape of the final outcomes of the agriculture negotiations under the Doha mandate. On 12 February 2003, Stuart Harbinson, Chair of the CoA, submitted his first modalities proposals. Despite leaving unresolved the issues around the further reduction of Members’ tariffs, export subsidies and domestic support, these proposals offered options for modalities even in the most contested areas, such as that of the formula for tariff reduction. On substance, the paper comprehensively addressed special and differential treatment for developing countries in most of the modalities items – as provided for in the Doha Declaration – although no particular role was assigned to agricultural non-trade concerns on an across-the-board basis. Following intense discussions of the first proposal at the Special Session held between 24 and 28 February 2003, a number of participants indicated that the draft did not correspond in various ways with their vision of the modalities that needed to be established. Both importers and exporters of agricultural products expressed disappointment with the document, seeing proposals as either too ambitious or not ambitious enough. Most WTO Members did express a willingness to examine technical matters, such as tariff quota administration, some aspects of special and differential treatment in the area of market access, and export support measures (e.g. export credits, food aid,). However, although a number of useful suggestions emerged, positions in key areas remained far apart. Many developing countries insisted on the immediate elimination of export subsidies, elimination of trade-distorting support and capping, and tighter rules for non-distorting support. On 18 March 2003, Harbinson issued a revision of the first draft modalities,2 based on the outcome of negotiations and consultations among WTO Members. However, having actually intended to prepare a third modalities draft, he found himself unable to do so, owing to Members’ inability to compromise on the key parameters for an agricultural framework accord. There were differences in views with regard to appropriate provisions for special and differential treatment, even among developing countries. There were also differing views regarding how much and what ways to take into account non-trade concerns, such as food security, poverty alleviation, rural development, protection of the environment, food safety, and animal welfare. In particular, WTO Members were dissatisfied by the fact that the revised draft ignored what they called the majority view (75 out of 145 WTO Members), which favoured the use of the Uruguay Round formulae for tariff reduction as opposed to Harbinson’s three-band approach. Although most of the members of the WTO agreed on the need to make progress in the reform of agricultural markets, consensus did not emerge as to how to achieve this objective. Finally, on 31 March, Harbinson had to declare formally that Members’ efforts to agree on agricultural modalities by the end-March deadline had failed. Agricultural negotiations improved in the period immediately preceding Cancún, with the EU and the US having tabled a joint paper outlining a framework for agricultural modalities on 13 August 2003. The document, which differed radically from those issued earlier by Harbinson, prompted a complete counter-proposal from 20 developing countries, as well as less comprehensive proposals and comments from a number of other WTO Members. Based on these contributions, the Chair of the General Council, Carlos Pérez del Castillo, issued a compromise ‘framework for establishing modalities in agriculture’ – the Pérez del Castillo text – on 24 August 2003. This was attached as Annex A to the draft Cancún Ministerial text. Further discussions in Cancún led to a revised annex in

1 WT/MIN(01)/DEC/1 2 TN/AG/W/1/Rev. 1


http://www.canadaegg.ca/english/trade/wto-ag.html

the new draft declaration, the Derbez text, which was compiled by the Ministerial Chair, Mexican Foreign Minister Luis Ernesto Derbez, and circulated on 13 September 2003. On 14 September, the WTO Ministerial Conference held in Cancún ended without consensus on any of the issues under discussion. One of the principal reasons for the Members’ failure to adopt the draft Ministerial Text formally was continued disagreement on the substance of the agriculture draft, largely based on the EU-US joint paper. In the remainder of this section, we outline the proposals made in the Derbez text. A key feature of the Derbez proposal is the general absence of numbers or dates for reductions in tariffs, domestic support and export subsidies (the general expectation was that these were to be negotiated later). As such, information contained within square brackets […] in the following sections are estimates based on number or details proposed in the negotiations pre-Cancún (as indicated in the footnotes). This is done as we require some numbers on which to base our scenarios for the SIA analysis.

Market Access Of the three pillars covered by the URAA, barriers to market access have been estimated as inflicting the greatest damage to efficient agricultural exporters, although the effects of such barriers vary widely among countries. The Uruguay Round committed industrial countries to reducing agricultural tariffs by 36% on a simple average basis and by a minimum of 15% at the product level. In order to minimise liberalisation, many countries used the degrees of freedom implied by simple averaging to apply proportionately higher reductions to the lowest tariffs. As a result, very little liberalisation took place in highly protected sectors, like sugar and dairy. Tariffication of non-tariff barriers also produced many specific tariffs that, by making the level of protection contingent on the level of international prices, distorted the pattern of production and trade more than ad valorem tariffs. Tariff escalation also remained a prevalent characteristic of agricultural protection. Tariff rate quotas (TRQs) were a response to the URAA obligation to provide minimum access to markets: low in-quota tariffs facilitated imports up to a threshold level, above which the tariff rose steeply. The utilisation rate of TRQs has been declining but they remain highly discriminatory, as most are country-specific. The allocations to specific countries are most prevalent for dairy products, sugar and beef. The URAA developed an additional trade measure, the special agricultural safeguards (SSGs). The products eligible for protection by these were those that had undergone a tariffication of non-tariff barriers (NTBs) and that could only be invoked after quotas were filled. A loophole was that these safeguards could be implemented without an injury test: safeguards were triggered by certain threshold levels on import prices and quantities. In the URAA, eight OECD countries retained the right to use SSGs on their tariffied products. On market access, Derbez proposed a three-pronged approach to tariff cuts, subject to a minimum average cut in tariffs across all agricultural products (see Table 2). Least developed countries were to be exempt from reduction commitments. In addition, the Derbez text proposed that developed countries provide duty-free and quota-free market access for agricultural products originating from least developed countries. Within the market access modalities, some flexibility was provided for sensitive products: increases in market access could be achieved through a combination of tariff reductions and increases in TRQs. To address tariff peaks, the Derbez text proposed a cap for developed country tariffs. Tariff escalation was to be managed by a requirement that tariff reductions on processed products be increased (by an unspecified multiple) if the tariff on a processed good were higher than that in its primary form.


Table 2: Derbez Proposals on Market Access

Approach Time Period Developed Countries

(i) percentage [33%] of tariff lines cut using [36%]** linear reductions in average tariffs, subject to a minimum [15%]** cut per tariff line

(ii) percentage [33%] of tariff lines cut using the Swiss

formula with a coefficient of [25]** (iii) percentage [33%] of tariff lines would be duty-free

[6 years]**

[6 years]**

[6 years]**

Developing Countries

(i) percentage [33%] of tariff lines cut using [24%]* linear reductions in average tariffs, subject to a minimum [10%]* cut per tariff line

(ii) percentage [33%] of tariff lines cut using the Swiss

formula with a coefficient of [37.5]** (iii) percentage [33%] of tariff lines would be bound

between 0% and 5%

Delayed implementation

[10 years]**


[10 years]**


[10 years]** Least developed countries

Exempt from reduction commitments

*

*

Notes: * Following the Uruguay Round, developed countries committed to reducing agricultural tariffs by 36% on a simple average basis and a minimum reduction of 15% at the product level over six years. Developing countries committed to reducing agricultural tariffs by 24% on a simple average basis and a minimum reduction of 10% at the product level over 10 years. ** A Swiss formula is defined as:

)()(

0

01 Ta

TaT

+×

=

where T0 is the initial bound tariff rate and T1 the final bound rate. This approach produces much steeper cuts on higher tariffs. Proposals from several countries pre-Cancún suggested leaving a maximum tariff of 25% in developed countries (requiring a developed country coefficient no greater than 25). Assuming developing countries are required to make two-third of the cuts of developed countries, as in the Uruguay Round, this would imply a developing country coefficient of 37.5. Special Products In addition to allowing developing countries to make lower tariff reductions and to have longer implementation periods, the Derbez text proposed that developing countries be provided with special flexibilities with respect to their commitments for a (not defined) number of products deemed important for food security, rural development and livelihood concerns. Such ‘special products’ would be subject to fewer liberalisation commitments, with a view to maintaining a certain level of tariff protection. In particular, special products would only be subject to linear cuts; where tariff bindings were deemed to be very low there would be no requirement to reduce tariffs.

The Derbez text provided no indication as to the manner in which special products were to be defined and selected, although a number of developing countries have requested that they be self-selected.3

3 These are the Dominican Republic, Honduras, Kenya, Nicaragua, Panama and Sri Lanka.


Safeguards Safeguards are temporary contingency restrictions on imports taken in order to deal with special circumstances, such as a sudden surge in imports. These restrictions normally come under the Safeguards Agreement but the Agriculture Agreement has its own special provisions (Article 5). In agriculture, unlike with normal safeguards, higher safeguards duties can be triggered automatically when import volumes rise above a certain level, or if prices fall below a certain level. In addition, it is not necessary to demonstrate that serious injury is being caused to the domestic industry.

The special agricultural safeguard (SSG) can only be used on products that have been tariffied – these amount to less than 20% of all agricultural products (as defined by ‘tariff lines’). They cannot be used on imports within the tariff quotas and they can only be used if the government has reserved the right to do so in its schedule of commitments on agriculture. For developed countries, the Derbez text proposed that the use and duration of the SSG remain under negotiation. For developing countries, in addition to the concept of Special Products, the Derbez text proposed the establishment of a ‘new special safeguard mechanism’ (SSM) for use on certain products and under certain circumstances (to be negotiated). There is some concern about how an SSM will relate to the provisions regarding special products.

Domestic Support During the Uruguay Round, negotiators attempted to separate domestic policies that had no direct effect on agricultural trade (e.g. government-supported research) from those that did have clear trade and production-distorting effects (e.g. government-fixed minimum purchase prices). The first were included in what is called the Green Box and the second in the Amber Box. Under the URAA, policies in the Amber Box were subject to reduction commitments whereas those in the Green Box were not and could even be increased. In addition to the Green Box, three other forms of assistance were not affected by the URAA reduction commitments. These were those which corresponded to (i) developmental objectives in developing countries; (ii) de miminis levels according to which 5% (10% in the case of developing countries) of the contributions in the Amber Box were exempt; and (iii) direct payments for production-limiting programmes or the so-called Blue Box (mainly used by the EU). The commitment that developed countries made under the URAA was to reduce, in the base period, by 20% over a period of six years, the value of domestic assistance granted by Amber Box policies (aggregate measure of support or AMS. Figures representing the reduction of AMS from the base period (1986-88) to 1997 indicate that this obligation was met. The EU made reductions from $80.7 billion to $56.9 billion; Japan from $33.8 billion to $26.2 billion; and the US from $23.9 billion to $6.2 billion. However, the economic impact of this compliance was lessened as a result of not only an increase in Green Box subsidies but also several other considerations. First, owing to low international prices in the base period, domestic policies afforded very high levels of assistance. Secondly, the levels of AMS in the base period proved to be inflated by policies that had been transferred to the Blue Box, which was free from reduction commitments. This implies that it was possible for a country to have complied with the URAA simply by making this switch and then notifying the WTO. Thirdly, the commitment to reduce AMS at the aggregate and not the product level implied that assistance to specific commodities could be increased. Fourthly, the AMS excluded support provided by protection. Finally, it is thought that Blue Box policies are more distortionary than Green Box policies and yet the former were excluded from the URAA obligations. The Derbez Text The Derbez proposals for reductions in domestic support are illustrated in Table 3. The overall architecture of the URAA is to be maintained, with the three categories of domestic support measures preserved.


Table 3: Derbez Proposals for Reductions in Domestic Support

Domestic Support: Amber Box (trade-distorting measures)

1. Developed countries: a) Reduce the Final Bound Total AMS in the range of […]% – [60]*% [over 5 years]* b) Product-specific AMS capped at their respective average levels during the period […]

[2000–02] 2. Developing countries: As above but with lower reductions [40%]* and longer implementation periods [10 years]*

3. Least developed countries: No change Domestic Support: Green Box (at most, minimally trade-distorting support)

1. Developed countries: No reductions 2. Developing countries: No reductions 3. Least developed countries: No change Domestic Support: Blue Box (direct payments under production-limiting programmes)

1. Developed countries: a) Not to exceed 5% of the total value of agriculture production in the 2000-2002 period by

[2007]** b) Subsequently, subject to an annual linear reduction of [10]**% for a further period of [5]**

years 2. Developing countries: As above but with lower annual linear reductions [3%]** and longer implementation periods [10 years] ** 3. Least developed countries: no change

Notes: * The revised Harbinson text proposed reducing AMS from final bound levels by 60% over five years (40% over 10 years for developing countries). ** The revised Harbinson proposal advocated capping and then reducing blue box support for developed countries by 50% over five years (33% over 10 years for developing countries).

The Derbez text proposed broadly reducing Amber Box support by a range of percentages to be negotiated – countries with larger trade-distorting supports were to make a greater effort. The proposal specified that the reductions should be on ‘total AMS’ (i.e. for the whole agricultural sector) but that product-specific AMS should be capped at some (unspecified) historical level to reduce the ability of governments to shift support between products. The Derbez text also required a reduction in the combined value of supports in the Blue Box, de minimis and Amber Box, compared with the levels in 2000. Under Blue Box support, the Derbez text proposed modifying the definition – removing the reference to ‘production-limiting programmes’ from Article 6.5 of the Agriculture Agreement – and limiting this to 5% of the value of agricultural production by the end of the implementation period. In addition to capping the Blue Box, annual linear reductions in support were to be made beyond the end of the implementation period. The Derbez text maintains the Green Box virtually unchanged, other than calling for a review to ensure that it is minimally trade-distorting.

Export Competition Article IX of the URAA listed six categories of export subsidies that were to be subject to reduction obligations. These included: direct payments by governments to firms, industries or producers contingent on export performance; subsidised stock exports; producer-financed export subsidies; export marketing-cost subsidies; export-specific transportation subsidies; and subsidies on goods incorporated into exports. The URAA obliged industrial countries to reduce over six years the base


(1986-90) period volume of subsidised exports by 21% and the budgetary outlays by 36%. The URAA export subsidy limits were defined by commodity categories but some of these were so broad that many degrees of freedom were left to switch subsidies among products within categories. As a result, export subsidy rates on individual products could vary from year to year, compounding uncertainty and distortions in the trading system. There were other problems associated with export subsidies granted by the major industrial countries. First, low international prices in the base year facilitated the binding of high levels of export subsidies. Secondly, the Peace Clause (Article XIII of the URAA) severely limited the application of countervailing measures against export subsidies. The Peace Clause (which expired at the end of 2003) protected subsidy-using countries that complied with the agreement from being challenged under other WTO agreements. Thirdly, in addition to those listed explicitly in Article IX of the URAA, export subsidies that also had the potential to distort trade (e.g. officially supported export credits and credit guarantees) were not included and therefore not subject to reduction commitments. Fourthly, food aid allowed by the URAA had similar effects to those of export subsidies when such aid was tied to commercial exports. Finally, by subsidising crucial inputs, some countries covered a higher subsidised volume than agreed in the URAA. The Derbez Text The Derbez proposals for reductions in export subsidies are outlined in Table 4. First, the paper proposed the elimination of export subsidies to an unspecified list of products, of particular export interest to developing countries, in a timeframe to be determined. Secondly, for the remaining products, the Derbez draft proposed that an end date for phasing out all forms of export subsidies (i.e. including subsidised export credit and some forms of food aid) would be negotiated. Table 4: Derbez Proposals for Reductions in Export Subsidies

Export Competition: Subsidies

1. Developed countries:

a) Elimination of export subsidies on products of particular interest to developing countries, implemented over a [5]* year period

b) For the remaining products, Members reduce export subsidies, with a view to their phasing out [9 years]* 2. Developing countries: As with 1b) but with longer implementation periods [12 years]** for reductions 3. Least developed countries: no change

Notes: * The revised Harbinson text proposed the elimination of export subsidies over a period of nine years. However, for a group of products the elimination would take place within five years. ** For developing countries the Harbinson proposal advocated phasing out 50% of export subsidies within 10 years, and the rest within 12 years.

Summary and Conclusion In considering liberalisation scenarios it is useful to distinguish between market access tariffs (and NTBs), export support and domestic support. There is broad commitment to reducing tariffs and NTBs, but countries are not expected to liberalise to the same extent. Developed countries are expected to reduce tariffs the most, whereas LDCs are not required to reduce tariffs. Exceptions will be granted for special products and what could be termed ‘grey area’ NTBs (e.g. health and SPS standards). Negotiations are likely to focus on the speed and structure of reductions, and on what exceptions will be granted (both for countries and products), but the final basic aim is reduced tariffs for most countries. Similarly, there is broad commitment to reducing export support, and to


eliminating export subsidies on products of interest to developing countries. Again, negotiations are likely to focus on the speed of reduction or elimination and exceptions to allow. The situation regarding domestic support is much more complex, as there is no general commitment to eliminating support, and only limited agreement on the forms of support that are not trade-distorting. From the perspective of the agriculture sector in highly protected developed countries, the way in which domestic support is reformed matters greatly. From the perspective of global trade and the impact on agriculture in developing countries, the details are less important. What matters for other countries are the effects on net trade in specific commodities and, especially, the effects on world prices. The SIA analysis will not consider alternative scenarios for reform of domestic support in any detail, nor will it consider the impacts on the EU (or other developed countries) of alternative scenarios for reform to domestic support. 3. STUDIES OF THE IMPACT OF LIBERALISATION OF TRADE IN AGRICULTURE There have been many studies reviewing and estimating potential economic effects of alternative scenarios for liberalising trade in agriculture, including reforms to export and domestic support arrangements. This section provides an initial and partial review, to illustrate the approaches taken, the range of findings, and to give examples of the types of information generated that can be used in the SIA. Some studies use partial equilibrium analyses (e.g. Benjamin et al, 2003; Binfield et al, 2003; Fabiosa et al, 2003), which can be useful for detail on specific commodities, but computable general equilibrium (CGE) are more common (e.g. Hertel et al, 2992; ERS/USDA, 2001. Fabiosa et al (2003) investigate a scenario in which all tariffs and trade distortions associated with domestic support are eliminated. They estimate a significant increase in trade, especially for meats, dairy products and vegetable oils. The major beneficiaries are large exporters such as Argentina, Australia and Brazil; the EU loses most of its market share in livestock and dairy exports. Benjamin et al (2003) have a more restricted focus, looking at the impact of reform of the CAP on world trade in cereals. They estimate that world prices for wheat would increase by about 20% and maize by some 9%, whereas producer prices in the EU could fall by as much as ten per cent for wheat and six per cent for maize. As a result, production and net exports by the EU would fall (although the EU would remain a net exporter). Binfield et al (2003) also focus on CAP reform, but consider a wider range of crops. The most dramatic reductions in EU prices are for rice (over 30%) and rye (some 20%), whereas reductions in one or two per cent are estimated for wheat, barley and maize prices. Global trade models using CGE estimation give projections for the effects on world prices of different (types of) countries. Hertel et al (2002) model 40% reductions in tariffs, export subsidies and domestic support, providing results disaggregated by region. A comparable study, ERS/USDA (2001) considers full liberalisation of tariffs, export subsidies and domestic support separately and together, with results by region and crop. Both studies predict significant gains in global economic welfare, and significant changes in patterns of trade. The highly protected market of the EU would see a huge increase in imports, but the improved efficiency and lower consumer prices imply a significant increase in welfare. In general, the welfare gains are greatest for those countries that are initially the most highly protected. Developing countries that are food exporters, especially in South America, will also derive significant gains (through increased exports).


Table 5: Effects on World Agricultural Prices of Eliminating all Agricultural Policy Distortions, by Commodity and Policy

Source: ERS/USDA (2001) Table 5 illustrates the type of price effects estimated from CGE models under various liberalisation scenarios. It is evident that removal of domestic support in developed countries has the greatest impact on grains (especially wheat) and oilseeds. Global tariff elimination has the greatest impacts for sugar, livestock, rice, vegetables, processed foods and other crops. Although export subsidies are never the single most important factor, they are important for vegetables, sugar and livestock. Table 6 provides a selective summary of model simulations of removing trade protection (tariffs and quotas), and trade support including domestic support and export subsidies where applicable, for four cash crops of particular importance to developing countries. The type of liberalisation differs, but in many cases corresponds to one main type of liberalisation, and can be used in the assessment of the effects of the scenarios considered in this study. For instance, liberalisation in the cotton sector relates to producer support. A decrease in cotton subsidies in the US will decrease cotton production in the US which will raise world cotton prices. This will provide new export opportunities for exporters to the US. While it is not probable that complete removal of subsidies will be established in the short-run, simulations of this kind are nevertheless informative of the range of impacts that can be expected in terms of world prices and production and trade structures. The mid-term report will provide a more elaborate discussion of these and other model simulations and how they can be used in the assessment of the scenarios that will be considered in this study. Table 6: Effects of Liberalisation for Four Cash Crops Product Scenario Effect on prices Economic impacts Sources cited Sugar Removing all trade

protection and support (incl.$6.4 billion support in OECD)

Rise of 40% in world sugar prices; decrease in prices in “protected markets” of 65% in Japan, 40% in Western Europe and 25% in US

Annual global welfare gains of $4.7 bn; gains for producers in Brazil, but higher consumer prices; lower consumer prices in Japan offset lower producer prices; producer losses in US are $200 mn greater than consumer gains; consumer gains in Western Europe are $4.3 bn and producer losses are $3.3 bn; preferred producers loose $450 mn annually

Borrell and Peace 1999 Sheales, Gordon, Hafi and Toyne 1999

Cotton Removal of protection and support (consisting mainly of $4 bn annual producer support) in cotton sector (and other commodity sectors)

rise of 13% in cotton price

World cotton trade rises by 6%, but increases in Africa (13%), Uzbekistan (5.8%) and Australia (2.7%) and declines in US (3.5%). Cotton production declines by 6.7% (US) and 70.5% (EU)

Food and Agricultural Policy Research Institute


Product Scenario Effect on prices Economic impacts Sources cited Removal of (all) direct

subsidies Increase of average cotton price of 30% in 2000/01 and 71% in 2001/02

ICAC, cited in Baffes (2004)

Removal of production and export subsidies

Increase in world cotton prices of 10.7%

Reduction in US cotton production (20%), US cotton exports (50%),.

Quirke, 2002, cited in Baffes (2004)

Groundnuts Peanut trade liberalisation and removal (tariffs, price controls and subsidies).

Peanut price rise of 8% over 3 years,

Welfare increase of $791 mn (losses in EU, but increases in US, China, India and Africa) effects mainly due to China and India

Table 18, 21 in Diop, Beghin, Sewadah (2004)

Full trade liberalisation of groundnuts, meal and oil (tariffs, price controls and subsidies).

Rise in market prices of 19% (groundnuts), meal (18%) and oil (17%)

Welfare increase of $868 mn (losses in EU, but increases in US, China, India and Africa) effects mainly due to China and India

Table 16, 21 in Diop, Beghin, Sewadah (2004)

Rice Elimination of all border barriers and support (worth $26bn in OECD)

Price increase of 33% for long-grain rice and 90% for medium and short-grain rice

Produces in Cambodia, China and Vietnam are main gainers

Source: Reported in chapter 3 of the World Bank Global Economic Prospects 2003 and the background papers. Potential impacts of concern Within the European Union, proposed reductions in support for domestic agriculture generate significant concern from the agricultural sector itself, and against this more widespread concern over the CAP tax burden. Similar issues apply in the USA. The multi-functional nature of agriculture also generates concern over other potential impacts, particularly in the EU, on the rural environment, rural communities and animal welfare. The impacts of trade liberalisation are closely related to reform of the Common Agricultural Policy, which has been fairly extensively studied (Colman and Roberts 1997, EC 2000, EC 2001). Potential impacts in developing countries have been examined in numerous case studies and reviews (e.g. UNEP 1999, UNEP 2000, Winters 2000, McCulloch et al 2001, Matthews 2002). Principal concerns (WWF 1999, Oxfam 2002) relate to changes in the positive and negative effects of trade distortions on poverty and food security, in both the short term and the long term, and potential changes, again in both directions, to export opportunities from developing to developed countries. The SIA for major food crops (Maltais et al, 2002) evaluated impacts in one particular part of the agriculture sector, with emphasis on specific crops. This emphasis was found to limit the effectiveness of some aspects of the study, where the partial substitutability of one crop for another (e.g. wheat and rice) may cause significant impacts. Other significant interactions may also occur elsewhere, e.g. between crops and livestock (through the production of animal feed crops). Interactions of this nature must be taken into account in identifying the extent to which detailed SIA is required across the entire agriculture sector, together with analysis of sub-sectors of particular concern. Other cross-cutting issues to be considered include environment-related trade barriers (Fontagné et al 2001), TRIPS (particularly in relation to genetically modified crops (Laird 2002), anti-dumping rules (OECD 2001) and the Doha negotiations over implementation in developing countries. These will be addressed, as and where appropriate, in the course of the SIA.


4. ELABORATION OF SCENARIOS Taking the current situation as the baseline, we propose three scenarios, one for each of the ‘pillars’ of the negotiations. Although the three pillars will be negotiated in tandem, they are quite distinct in terms of scenarios. In particular, tariff reduction requirements vary between developed, developing and least developed countries. For implementing the scenario, we can distinguish different degrees of tariff reductions for the different types of countries. The other pillars are quite distinct, however, as in practice few developing countries have significant export or domestic support measures in place and, even where they do, are granted a long period to make reductions. Thus, our scenarios concentrate on reductions by developed countries. These reductions will affect other countries through their effect on the world price of the product in question, and consequent effects on the pattern of global trade. Reforms to domestic support may also alter domestic prices in reforming countries, although the extent to which this occurs will depend on the details of the reform (in particular any non-trade-distorting support that replaces the trade-distorting support). As the SIA will not undertake and simulation modelling of the effects of these reforms, our scenarios will be implemented using the range of estimated effects from existing studies (such as those reviewed above). The three liberalisation scenarios (or three components of the broader scenario) are: Tariff reductions (partial liberalisation) – following the discussion of the Derbez text we will

consider different reductions for each type of country to their own tariffs. Developed countries will be expected to reduce tariffs by 36% (subject to a maximum post-liberalisation tariff of 25%). Developing countries will be expected to reduce tariffs by 24% (subject to a maximum post-liberalisation tariff of 40%). Least developed countries have no reduction requirements. Reduction of export support – our scenario, for each product studied, will be the range of world

price effects estimated from existing studies. The effect on the world price represents the incentives for trade effects – exporters will increase market share, whereas importers will find that domestic producers face increased incentives to expand production. In the country removing support, production (and exports) would be expected to fall, and in some cases they may become net importers. The magnitude of these responses will depend on the extent to which the world price increases (relative to the domestic production price for any country). Reform of trade-related domestic supports –we will review existing studies that model the effects

of different scenarios to extract the range of estimated effects on world prices for affected products, and the associated effects on net trade patterns. For countries other than those reducing support, the approach is identical to that for export support, i.e. the scenario is represented by world price changes. For the countries reducing domestic support, we will consider studies that estimate the effect on domestic prices.

For considering the impact on a particular country, what matters is how reforms alter the relationship between the domestic production price and the world price (this relative price represents incentives). There is a very wide range of world price effects estimated from existing studies. For example, in Table 5 above the estimated effect on the world rice price of removing export supports was 2%, whereas broader liberalisation increases this world price effect to 10% (and the studies cited in Table 6 produce effects of 33% up to 90%). This is an issue to explore in the analysis for each product, and will be reported on in the mid-term report. Detailed data on tariffs and trade flows will be used for the economic impact assessment (summarised in Box 1). For the social and environmental impact assessments, detailed data are only likely to be available in the country case studies, although many factors can be identified for particular products.


Box 1: Trade Data Availability

Data on agricultural production was taken at the country level from the FAOSTAT database. Data for agricultural trade flows (import/export values and quantities) and trade measures (applied tariffs) for use in the analysis were taken from two sources: the United Nations (UN) COMTRADE Data Base and the United Nations Conference on Trade and Development (UNCTAD) TRAINS Data Base.

Yearly trade flow and trade measure data are available for 700 agricultural products at the 6-digit Harmonised System level (HS 1988/1992 version) with data from 1988 to 2002, for most countries (excluding the EU and US).

The HS is a tariff and trade classification. Most countries use HS as the basis for recording their trade and tariffs in order to standardise the content, format and structure of outputs and make them comparable across countries. The HS classification is hierarchical in structure. That is, it is constructed to go from very low levels of aggregation to successively higher ones. For example, HS1988/1992 is a 6-digit classification (Sub-Headings) which can be collapsed into 4-digits (Headings), 2-digits (Chapters) and 1-digits (Sections). The consideration of M&E in full measures, at a later stage in the SIA, will complement the scenario analyses at two levels. First, the transition from price effects to final impact may require flanking measures (e.g. to encourage reallocation of resources from low potential to high potential export crops). The ‘short-run’ assessment will identify any such measures required to ensure transition to the long-run scenario, and will evaluate the likelihood of the measures being effectively implemented. Second, the SIA of the scenarios will identify adverse impacts for some countries and these will require mitigating measures. 5. SCREENING I: SELECTION OF PRODUCTS To implement the SIA we will concentrate on a limited number of products. We have decided to select six: wheat and rice as representative of food grains, beef to represent livestock, cotton and sugar to represent cash crops, and green vegetables to represent horticulture. These are selected so we include products of specific interest to different types of countries, and in particular some that have been identified as of concern by developing countries. We also include products that are particularly important as imports and as exports for developing countries (especially LDCs), products that feature under all three pillars of the negotiations, and products that allow us to address specific issues of importance in the SIA (in particular linking to the two other SIA sector studies). The main criteria used were: • Some products should be significantly affected by reforms to export and/or domestic support

(wheat, rice, beef, sugar and cotton). • Some products should be important for food importers (wheat, rice) • Some products should be especially important in exports of low-income or least developed

countries (sugar, cotton). • Some products should be included in special preferences for trade of low-income or least

developed countries (beef, sugar) • Some products should represent emerging export markets for low-income or least developed

countries (green vegetables). • Some products should relate to major health or food safety issues (beef). • Some products should relate to niche markets, such as organic products (cotton) • Some products should relate to animal welfare (beef) • Some products should allow a link to the distribution services study (green vegetables) • Some products should allow a link to the forestry study (beef).


Concentrating on a narrow range of products facilitates more elaborate scenarios and a more detailed SIA for country types. Where feasible, and especially in the country studies, the SIA will cover other products. Also, to illustrate specific issue it may be desirable to refer to other products. For example, fair trade initiatives as examples of niche market product differentiation are more relevant to coffee and cocoa that sugar and cotton (although a niche market has emerged for organic cotton). Although we concentrate on only a six products, these allow us to address most major issues of concern to different types of countries. In this section we discuss three products that are of particular importance to developing and least developed countries as exporters – beef, sugar and cotton. This overview is intended to highlight some of the issues that will be addressed in the SIA, and why concentrating on these products is appropriate. We leave the review of green vegetables and food grains to the mid-term report, but refer readers to Maltais et al (2002), on which we will draw for our analysis of food grainss (specifically wheat and rice).

Beef/Veal (and Beef/Veal Policies) The US and EU are the largest beef producers and together account for a third of world beef production. They are followed by Brazil, China, Argentina and Australia. The US is the largest beef consumer accounting for 19% of world consumption, followed by the EU (11%), Brazil (9%), China (9%) and India (4%). Over the past decade world beef production has grown by 0.8% per year, whereas pig meat and poultry production increased by 2.6% and 5.1%, respectively. Over the same period global beef trade grew by 1% per year, whereas world pig meat and poultry trade grew by 19% and 13% per year respectively. Clearly, beef has been losing its share of the global meat market. A major contributor to this loss is the higher relative price of beef. In the main protected markets, higher levels of protection have been afforded to beef compared to pig meat and poultry (an exception being the high level of protection afforded to the pig meat industry in Japan). Beef Trade One quarter of world beef production enters into international trade. Global beef trade is segmented into an ‘Atlantic’ market and a ‘Pacific’ market. The Pacific market mainly comprises Japan, South Korea, other East Asian and South East Asian markets, the US, Australia and New Zealand. The Atlantic market mainly comprises the EU, North Africa, the Middle East and Latin America. Countries trading in the Atlantic market are geographically closer, have historical trade links and tend to be affected by foot and mouth disease (FMD). Mostly, they have been denied access to the FMD-free and more lucrative Pacific market. At times, there are exceptions to this general trade pattern, but overall Australia, New Zealand and the US tend to concentrate their exports in Pacific markets, particularly Japan and South Korea, while South American countries concentrate on EU, North African and Middle East markets. A high proportion of EU exports compete with South American beef exports in the North African and Middle East markets. Access to the EU by Pacific market exporters is restricted by tariff quotas and the requirement to be free from hormone growth promotants, but not any disease issues. Due to the limited export opportunities in the highly protected market, beef exports are of relatively minor importance for most developing countries. Even in those developing countries that are major exporters in volume terms (e.g. Mongolia, Nicaragua), or are major producers (e.g. Brazil, Uruguay), beef is minor relative to exports. In terms of their share in total exports, beef are most important for Mongolia (2.9%), Nicaragua (2.3%), Chad (1.5%) and Botswana (0.2% or 2% of total non-diamond exports).

Government Support to the Beef Sector The EU, Japan and South Korea are the most protectionist countries in the world beef market. Beef protection in the EU is exceptionally high (beef import tariffs now average 80%) and has increased. Government expenditures to combat BSE and FMD in recent years have added to measured protection levels. Beef protection in South Korea has also increased since the late 1980s (beef import


tariffs now average 30%). By contrast, the significant reforms in Japan, where import quotas were replaced with tariff-only protection, have resulted in a decline in protection levels (beef import tariffs now average 50%). South Korea and Japan mainly provide assistance to their beef producers through tariff protection. In contrast, the EU provides at least half of its aggregate assistance to the beef sector through domestic support and export subsidies. The EU is the only producer which uses export subsidies in the beef sector. Preferences In 2002, the trade surplus between total EU exports and imports of beef was 25,000 tonnes. In 2003, the EU became a net importer of beef for the first time. Brazil, Argentina and Uruguay are the main beneficiaries of expanding EU beef demand whereas quarantine restrictions, including the hormone ban, continue to restrict US exports to the EU. In some member states Latin American beef has started to replace traditional imports from African countries (especially Botswana) with preferential import quotas. The Beef Protocol Currently, four Southern African countries (Botswana, Namibia, Swaziland and Zimbabwe) enjoy access to the EU market under preferential conditions (subject to quota) through the Beef and Veal Protocol under the Cotonou agreement. This protocol waives the EU’s ad valorem duty (12.8%) and reduces the specific duty charged on specified volumes (ranging from €1414/tonne to €3041/tonne) of chilled de-boned beef by 90%. The quotas set out for are set out in figure 6. Exports of beef from Southern African beneficiaries to the EU market largely consist of high quality cuts of beef for which premium prices can be obtained. This means that prices received by Southern African beef exporters tend to be much higher than the EU intervention price for beef. It also means that supplies of these high grade quality cuts are limited. As a consequence, during periods of drought the supply of high graded meat tends to be disproportionately reduced. This is a major factor in the under-supply of beef to the EU market in certain years under the Beef Protocol. Arrangements to allow a transfer of quotas between Beef Protocol beneficiaries has meant that in certain years Zimbabwe has been able to export more than its allocated beef quota. In contrast, Botswana has never been able to fulfil its entire beef quota. Swaziland rarely fills more than 10% of its quota, although this is in part attributable to the rules of origin applied to beef exported under the protocol, which prohibits the export of beef from ‘non-originating’ cattle. This is a problem for Swaziland whose beef industry has been developed as an appendage of the much larger South African industry. The rules of origin applied under the Beef Protocol also affect Namibia’s ability to fulfil its quota. During times of periodic drought it is common for cattle to be moved across the border to non-drought affected areas of South Africa. This movement is then reversed in the post-drought recovery period as Namibian cattle farmers restock. However, the rules of origin then prohibit export of meat from these animals to the EU market under the Beef Protocol. In addition to exports of beef under the Beef Protocol, Botswana and Zimbabwe have developed exports of prepared and preserved meat (in the form of canned corned beef exports). In 1992 Botswana exported 1,511 tonnes of canned meat but these exports gradually declined over the course of the 1990s to a low of 419 tonnes in 1996, before recovering somewhat to 595 tonnes in 1999. In the case of Zimbabwe exports of canned meats totalled 4,553 tonnes in 1993, but declined to 2,273 tonnes in 1996, recovering slightly to 2,715 tonnes in 1997 before declining to 1,567 tonnes in 1999. For these products no specific duties are applied and only a 16.6% import duty has been applied since 2000 (formerly 24.4% in 1995).

Cotton (and OECD Cotton Subsidies) Cotton is one of the rare agricultural products where both production and consumption are more or less global in extent. The value of world cotton production in 2001/02 was $20 billion, down from


$35 billion in 1995/96 when cotton prices were 50% higher. There are more than 70 cotton producing and exporting countries, while many developed and developing countries depend on imports of cotton lint for their spinning and textile industries. Although cotton is produced in many countries, eight account for some 80% of global output: China, US, India, Pakistan, Uzbekistan, Turkey, Brazil and Australia. The past decades have been characterised by major changes in trade flows as a result of a geographical shift in international cotton yarn and fabric production. China has been the dominant consumer in recent years, consuming more than a quarter of global cotton output. Other major textile consumers are India, the US and Turkey, which (taken with China) consume three-quarters of cotton output. A number of East Asian countries have emerged as important cotton consumers, such as Indonesia, Thailand, Korea and Taiwan. Cotton Trade Around 26% of world production enters into world trade. Some of the largest cotton producers such as China, India, Pakistan and Turkey scarcely export as their production is almost entirely for domestic consumption. The five largest exporters – US, Uzbekistan, Australia, Greece and Brazil – contributed 70%, while West and Central African countries accounted for 10%, of total cotton exports in 2001. There has been significant fluctuation in trade from one year to the next, especially at individual country level but world exports have risen by 18% in volume between 1991 and 2001. Cotton is a major source of income and export earnings to many developing countries. The share of cotton in total exports from a number of West and Central African countries is especially high: 65% for Benin; 45% for Burkina Faso; 42% for Mali; and, 34% for Chad. Notably, the share is also high for Uzbekistan (45%); Tajikistan (20%); Turkmenistan (15%); Paraguay (8%); Kyrgyzstan (8%); and, Zimbabwe (7%). The main cotton trade flows are from the major exporters to countries in Asia. The latter region has become the leading importer of cotton in line with its expansion in spinning and textiles. In general, the structure of cotton imports is less concentrated than exports. The largest cotton importers are Indonesia, the EU, Turkey, China, Mexico, Thailand, and India. The largest increases in cotton demand are taking place in producing countries. In 2002 cotton consumption by China, Turkey, Pakistan and India rose by 670,000 tonnes, contributing to a 500,000 tonne increase in world imports as cotton consumption outpaced domestic production in these countries. The average world tariff on cotton is 5.3%. Cotton tariffs range from 90% (China) to 0% (for 64 countries including the EU, Australia and Turkey). Of the other largest cotton-producing countries Brazil imposes a tariff of 9.2%, India imposes a tariff of 5%, Pakistan imposes a tariff of 5% and Uzbekistan imposes a tariff of 30%. The average tariff for West and Central African countries is 7%. Cotton remains the world’s most important fibre in textile production, with a share of about 40% in recent years. World cotton prices have fluctuated during the 1990s around an average $1.34 per kilogram. The price of cotton expressed in current US dollars fell in 2001/02 to its lowest annual level in thirty years (less than $1 per kg), resulting in lower production and higher consumption in the following year. Consumption exceeded production by 1.9 million tonnes in 2002/03 (the surplus being taken from stocks) and the average price for the year was $1.23 per kilogram (a one third increase over the previous year) reaching $1.65 per kilogram by December 2003. The instability and downward movements in prices have been caused by a number of factors: unpredictable fluctuations in production and exports from India, Pakistan and China; reductions in the costs of production; long-term inroads of synthetic fibres; and, subsidies granted by key cotton-producing countries. Government Support to the Cotton Sector Cotton prices have been depressed by government support to cotton exporters, notably in the US, China and EU. Price distortions caused by government interventions in the cotton sector have been declining over time, but they are still significant. In 1999/00, eight countries had distortionary policies, affecting 52% of world cotton production. This was down from 1986 when 25 countries had distortionary policies affecting 69% of world production. Cotton producing countries with little or no intervention include: Argentina, Australia, El Salvador, Guatemala, Israel, Nicaragua, Nigeria,


Paraguay, Peru and Venezuela. Interventions, whether taxes or support subsidies occur through domestic market activities by state enterprises, price supports and import duties or quotas. The International Cotton Advisory Committee (ICAC) estimates that for eight countries which support cotton production – US, China, Greece, Spain, Turkey, Brazil, Mexico and Egypt – the level of direct production assistance between 1997 and 2002 has ranged between $3.8 billion and $5.3 billion. For 2001/02, the combined support granted to the cotton sector by the US was $2.3 billion. The EU’s support (to Greece and Spain) totalled $700 million and $1.2 billion in China in 2001/02. Producers in Turkey, Brazil, Mexico and Egypt received a combined total of $150 million in support. India was also a big cotton supporter during 2001/02, with support reaching $500 million. Brazil was the first country to contend that the subsidies granted by the US to its cotton farmers contravened WTO rules, in that they depressed world prices and were injurious to Brazilian cotton growers. Brazil claimed that cotton subsidies were exempt from the normal immunity granted under the peace clause of the URAA, which protected countries using subsidies that complied with the Agreement from being challenged under other WTO agreements. This immunity only applied as long as the level of domestic support for a commodity remained at or below 1992 levels. Brazil maintained that since 1992, the US had doubled the level of support to its farmers through subsidies programs. In 2003, Brazil complained against US subsidies under the WTO dispute mechanism. On 10 June 2003, Burkina Faso on behalf of Benin, Mali and Chad presented the WTO’s Trade Negotiations Committee with a new proposal for cotton entitled Poverty Reduction: Sectoral Initiative in Favour of Cotton. The initiative called for two decisions to be taken at the Cancun Ministerial:

1) The establishment of a “mechanism for phasing out support for cotton production with a view to its total elimination”, which would provide for “substantial and accelerated reductions in each of the boxes of support for cotton production”; and,

2) The establishment of transitional measures for least-developed countries: “until cotton production support measures have been completely eliminated, cotton producers in least-developed countries should be offered financial compensation to offset the income they are losing, as an integral part of the rights and obligations resulting from the Doha Round.”

According to the proposal – co-sponsored by Benin, Burkina Faso, Mali and Chad, and supported by 13 other West and Central African countries - the elimination of subsidies for cotton production and export is their “only specific interest” in the Doha Round.

Sugar (and OECD Sugar Policies) Sugar cane is an almost ideal commodity for some developing countries to grow for domestic consumption and export. It can be produced efficiently in tropical climates under a wide range of technologies from low-input labour-intensive to high-input fully-mechanised. Sugar is locally consumed in all producing countries and processing can be varied to meet the needs of low-income domestic or high-income foreign consumers. There are few problems in meeting sanitary and health standards because sugar cane juice is boiled during initial processing and raw sugar cane is boiled again when refined to produce white sugar. The biggest problem for producers is the limited export opportunities and low world prices, which are caused largely by the policies in OECD countries. The EU, Japan and the US provide domestic producers with price support that is at least double world market prices. Such high support prices have reduced the rate of growth of domestic consumption, encouraged production of alternative sweeteners and led to high production by local producers who would not be competitive at world market prices. Imports have been limited by quotas and high tariffs and surplus production has been exported with subsidies or disposed of at world market prices to avoid storage. The impact of such policies has been to depress world prices by about one-third and limit the growth of imports. Such policies have converted these countries from importers of half the world’s internationally traded sugar in the early 1980s to net exporters on balance during the past decade. The URAA has done little to change this situation.


The reason for the high support to producers in these countries relates partly to the competitiveness of sugar beets versus sugar cane. According to cost of production estimates, the average cost of producing sugar from beets is nearly twice the average cost of producing sugar from cane. Sugar beet accounts for half of US sugar production, 80% of Japanese production and nearly all of EU production. India, the EU and Brazil are the largest sugar producers with roughly 14% of world production each during 2001. They are followed by the US and China which each produce about 8% of the world’s sugar, with Thailand, Mexico and Australia each producing about 5% of the total. India is the largest sugar consumer accounting for 15% of world consumption, followed by the EU (10%) and Brazil (7%). About two-thirds of world sugar consumption is now in developing countries, compared to one-third in 1970, and sugar consumption is growing by about 2.6% per year in developing countries compared to no growth in developed countries. Sugar Trade Sugar trade is dominated by Brazil and Russia, with Brazil accounting for about one-quarter of world exports and Russia accounting for 14% of imports during 2001. The EU is the second largest exporter, followed by Australia, Thailand and Cuba which each export about 8-10% of the world total. An important change that has taken place in the world sugar market has been the increasing share of developing countries in world sugar consumption and imports, and the increasing share of developed countries in exports. Approximately one-half of world sugar imports are now by developing countries compared to less than one-quarter in 1970. This has diminished the importance of developed country imports to developing country exporters. It also reflects increased competition from developed country exporters, which are heavily concentrated in refined sugar (especially the EU) which has reduced export opportunities for value added refined sugar exports from developing countries. The value of world sugar exports has remained relatively constant in nominal dollars ($11.8 billion in 1985 versus $11.6 billion in 2000), and sugar has remained an important source of export earnings for a number of developing countries. However, the share of developing countries’ exports in world sugar exports has declined from 71% in 1985 to 54% in 2000, as developed country exports have increased and the share of higher-value refined sugar exports by developed countries has increased. Twelve countries received 10% of more of their total export earnings from sugar during 200. In contrast, during 1985, 10 countries received 20% or more of their total export earnings from sugar. World sugar prices experienced large peaks in 1974 and 1980, but prices have been relatively low and stable since then, though slightly higher in the 1990s than the 1980s. This pattern has been caused, in large part, by policies in both developed and developing countries that have isolated consumers and producers from international prices and diminished their price responsiveness. This, however, has been changing somewhat as some developing countries have reformed their policies during the past two decades and the share of developing countries in global consumption and imports has increased due to population and income growth. This has led to greater price responsiveness of sugar producers and consumers and is likely to reduce the severity of future price spikes. The collapse of the former Soviet Union also led to the abandonment of dedicated sugar imports from Cuba and increased trade at world market prices. Many developed countries still maintain highly protected sugar sectors and thus contribute to the likelihood of price spikes, but they now account for only one-third of consumption and one-half of imports compared to slightly more than half of world consumption and 60% of imports when the last sugar price spike occurred in 1980. Government Support to the Sugar Sector More than half of the value of sugar production in OECD countries in 2001 came from government support or transfers from consumers. Such high support typically limits consumption, through high prices to consumers, and encourages production even when a country does not have a comparative advantage in sugar production. Support to OECD sugar producers in 2001 totalled $6.35 billion, compared to the value of world sugar trade of $11.6 billion and developing country exports of $6.5 billion. The EU provides the largest support ($2.71 billion) to sugar producers, while the US provides $1.3 billion, and Japan provides $0.44 billion. A number of developing countries also provide high levels of support to sugar producers although much of this is through border protection. Among other


(non-OECD) developing countries, China imposes import restrictions (76% import tariff) that generally keep domestic prices higher than world prices. India, the largest sugar producer, has a heavily regulated domestic sugar market and high import tariffs (60%). Kenya has high tariffs (100%) and import quotas to protect domestic producers. Despite some liberalisation of sugar policies, roughly 80% of world production and 60% of world trade is at subsidised or protected prices. Only three major producers (Australia, Brazil and Cuba) have sugar sectors which produce and operate at world market levels. These three producers account for a combined 20% of world production and 40% of world trade. The remaining 80% of world production and 60% of world trade relies on production subsidies, export subsidies or preferential access to protected markets. The EU, Japan and US account for 20% of world production and have average producer prices for sugar which are more than double world prices. China and India account for another 20% of world production and protect producers with prices which are higher than world market prices. The remaining 40% of production is in countries which either produce for preferential markets (as is the case with Fiji, Mauritius and the Philippines) and thus receive higher than world market prices, or they protect their domestic producers with policies which restrict imports to provide above market prices. Preferences Preferential access to the EU’s sugar market and its high prices have been used as development assistance since the 46 countries from the ACP signed the Lomé Convention in 1975 and became eligible to sell sugar to the EU at internal prices. The Sugar Protocol (SP) of the Lomé Convention provided for imports of specified quantities of cane sugar, raw or white, which originate in the ACP states at guaranteed prices. The sugar imported under the Lomé Convention is known as Preference Sugar or SP sugar, and Mauritius is the major beneficiary. An additional import allocation was made of between 200,000 and 350,000 tonnes of sugar to primarily ACP countries in 1995. This sugar was called Special Preference Sugar or SPS sugar but unlike SP sugar, this allocation was not permanent, the quantity could vary based on import needs, and the price paid for SPS sugar was 85% of the SP guaranteed price. In addition, the EU took over the WTO import commitments of the new members joining the EU in 1995. These included a tariff quota of 85,500 tonnes, mainly from Brazil, with an in-quota tariff rate of 98ECU per tonne. The EU has also granted several countries in the Balkans temporary access to its sugar market and imports under this programme totalled 100,000 tonnes in 2001/02. In total, the EU permanent commitment is 1.39 million tonnes (white sugar equivalent) plus additional quantities of up to 450,000 tonnes of temporary imports. This commitment was expanded by unspecified amounts by the Everything But Arms Initiative (EBA) in 2001. The EBA initiative allows duty-free access to the EU sugar market to the 48 least developed countries (39 are ACP). Initially, EBA commitments will be limited by quotas, and the sugar imported under EBA will be counted against the SPS sugar quota. The EBA quota will increase annually until full duty-free access for white and raw sugar is allowed in 2009. There are safeguard clauses in EBA which could be used to limit imports, but this would be difficult for the EU to impose because it would be seen as a policy reversal by the least developed countries. The imported sugar will eventually displace domestic EU production and could strain the EU sugar regime. EU enlargement may also create new problems for the EU sugar programme. Most of the ten countries scheduled to join the EU in May 2004 are sugar producers and expect the same level of support as currently received by EU sugar producers. These countries produce one-fifth as much sugar as the EU and have higher per capita consumption. Poland is the largest sugar producer of the ten countries scheduled to join in 2004, with nearly 60% of the group’s total production. Reform of Sugar and the WTO Pressures for change in the EU sugar regime come from a number of sources. Processed food manufacturers would like to see reduced sugar prices because they find it difficult to export products containing sugar due to WTO limits on subsidised exports. Sugar exporters, such as Brazil and Australia, would like to see exports reduced because they contend that they depress world prices and reduce export opportunities. Enlargement adds new pressure because it would add to surplus sugar production, which cannot be exported because of WTO commitments. However, efforts for reform


also face numerous obstacles. Among them, lower intervention prices would affect ACP countries that currently supply sugar to the EU on preferential terms, and prompt requests for new forms of development assistance. The current EU sugar regime runs until June 2006, and the European Commission opened discussions on reform of the EU sugar regime on September 23, 2003. However, unlike other commodities scheduled for reform discussions: cotton; olive oil; and, tobacco, reform proposals were not offered for sugar. Rather, three scenarios for reform were presented, which ranged from an extension of the present sugar arrangement beyond 2006 to complete liberalisation of the present regime. Complicating the reform discussions is the WTO investigation launched on 29 August 2003 in response to complaints by Brazil, Australia and Thailand that the EU sugar regime illegally subsidises the industry and depresses world prices.

6. SCREENING II: COUNTRY GROUPS AND CASE STUDIES Trade reform has mixed benefits for any country, depending on the structure of production and trade balance on affected commodities. Import liberalisation (easier access at lower prices) increases competition against those competing with imports, and this may include food producers. In general, countries with more efficient agricultural sectors, which are most likely to be exporters, are the best able to compete with imports. The important issue is whether the imports are at true market prices or are in fact subsidised. The current situation is one of export subsidies that may impact adversely on some importing countries. Liberalisation that includes the elimination of export subsidies will tend to increase world prices. This benefits competitive exporters and import-competing producers, but may imply that consumers in importing countries face higher prices. It follows that is very important to distinguish between exporting and importing countries, which of course varies for different crops. Six country groupings will be used the study, and within each of these except the EU one country will be chosen as ‘illustrative’ (and, in the case of developing countries, for a case study): The EU – as many of the significant reforms have to be implemented by the EU, and the EU is a

major importer of agricultural commodities from low-income and least developed countries, it is appropriate to consider it as one group. Other OECD (OECD). In general we will take the US as the main example, but will refer to Japan

to highlight issues relating to beef and rice. Major Exporting Developing Countries (MEDCs) – mostly Cairns Group, these are countries that

are net exporters across a range of agricultural products, especially food grains. MEDCs have a particular interest in market access, typically have low or no export and domestic supports, and most have relatively low tariffs. Brazil will be the case study country. Relatively Protected Developing Countries (RPDCs) – countries that tend to have high tariffs on

agriculture, typically export some agricultural products but import food grains, typically have low or no export and domestic supports. These countries are likely to be reluctant to reduce tariffs significantly, but seek market access for specific products. Many countries in North Africa, South Asia and Middle East fit this profile. India will be the case study. Least Developed Countries (LDCs) – receive the most favourable treatment under WTO and most

preferential access to EU. Typically export a narrow range of tropical cash crops, import food grains and have a constrained domestic sector, typically have low or no export and domestic supports. Their interests tend to be product-specific. For the products they export, the issues are i) whether liberalisation will reduce their margin of preference and ii) are they price competitive on the global market. For food imports, liberalisation (removal of export and domestic supports) can increase the prices they face, the impact of which depends on the ability of domestic producers to respond. Tanzania is chosen as the case study. Low-income Developing Countries (LIDCs) – essentially the same as LDCs, in terms of structure

of agriculture sector and trade, but gain lower preferences, and with similar interests (and often for the same products). Can benefit from liberalisation if the relative margin of preference for LDCs exporting products in which they compete is reduced. However, they may be expected to reduce tariffs by more than LDCs. Ghana is chosen as the case study.


These country types are inevitably imprecise, but capture the two most important distinctions among developing countries. First, that between major (competitive) exporters, especially of food crops, and importers or relatively protected countries (that would be expected to import more if they liberalised). Second, that between comparable low-income countries, in the sense that they have similar levels of efficiency and produce competing products, some of which (LDCs) benefit from more favourable treatment than others (LIDCs). The main deficiency in using this grouping system for assessment purposes is that it fails to capture the variations in the types and levels of impacts between countries within the same group and within individual countries. The detailed assessment narratives will elaborate on these issues insofar as possible. In the limited time available for the study it will not be feasible to consider more than a few countries and products in detail. The SIA of major food crops (Maltais et al 2002) considered similar country groupings: developed countries (high food importers and net food exporters), developing countries (net food importers and net food exporters) and least developed countries (all food importers). Our major differences are that we give less attention to developed countries, consider the full range of agriculture products, and do not assume all LDCs are net importers (even of food, as they may have potential to be self-sufficient). The Maltais et al study highlighted marked differences in the overall impacts of liberalisation according to whether a country is a net importer or exporter, but identified strong similarities of case study findings within each group. However, it also noted that for a large country like India, wide variations in effects exist within the country (depending on product and region). It should also be noted that the Maltais et al study focused on particular food crops. Where a country is a major exporter of one agricultural product and a major importer of another, a similar range of impacts may occur within the country. Among developing and least developed countries, Matthews (2002) has suggested that there are at least five developing country groupings that will be affected differently: • major agricultural exporters (e.g. Brazil, Argentina, Thailand) • low income countries close to self-sufficiency (e.g. India) • medium to large net importing countries (e.g. Egypt, Kenya, Pakistan) • small island state net importers • net importing least developed countries In effect, we will cover four of these categories (small island states being the omitted one). Brazil and India amongst our cases obviously cover the first two. For the others, Tanzania captures LDCs and Ghana represents low-income countries. Furthermore, Tanzania represents countries with a reasonable potential for food self-sufficiency, whereas Ghana represents countries with weaker potential. A preliminary issue to consider is how responsive are imports to changes in tariffs, or liberalisation more generally. Any SIA implicitly assumes that trade liberalisation alters prices which in turn affects trade, especially imports. In the remainder of this section we illustrate how the SIA will apply this to case study countries, and provide a preliminary evaluation of how they might respond. Sensitivity of agricultural imports to tariff changes An assessment of the impact of a reduction of tariffs on the economy begins with an analysis of the sensitivity of agriculture imports with respect to tariffs (it is not limited to this, because changes in tariffs affect consumption through changes in prices in addition to changes in volumes). One way is to summarise available anecdotal evidence of import surges after tariffs were reduced supported by analysis of data on import surges associated with tariff reductions. We will do this as part of the SIA. Here we illustrate how statistical analysis can estimate the import elasticity with respect to tariffs. This provides parameters to quantify the impact of liberalisation. In general we are interested in estimating a relationship between imports of agricultural products on the one hand and tariffs on agriculture products on the other hand, controlling for other variables such


as prices of agricultural products and domestic production or demand. To illustrate how this might be done, we first consider the example of India. Table 7 gives information by product group (we use 23 product groups) of share in total agriculture imports, and the unweighted average applied tariff rate. Clearly, imports of edible oils (roughly half of agriculture imports) and edible vegetables (about a quarter) dominate Indian agricultural imports. Average applied tariffs range from 20.4% for cut flowers to 122.3% for beverages etc. In the detailed SIA, this data can be used to estimate the effect of tariff reductions on import volume by product group. To do this we need information on the price elasticity of imports, as tariff reductions are price effects. As an exercise, we used data on tariffs and imports, by product group over 1988-2000, for all four of the case study countries to estimate import elasticities. Provisional results are summarised in Table 8 below. In very general terms, imports are inelastic – a 10% reduction in prices will lead to a less than 5% increase in imports (i.e. the price elasticity is less than –0.5). This, of course, will vary by product (and country, as shown in the table for analysis across products), an issue to be addressed in the detailed SIA study. Table 7: Agriculture Imports, India

Product Group

Product Description Share in total agriculture imports

(2001)

Unweighted applied average tariffs

01 Live animals 0.01 % 35.0

02 Meat and edible meat offal 0.00% 39.9

04 Dairy prod; birds' eggs; natural honey; edible

0.28% 37.2

05 Products of animal origin, nes or included.

0.40% 35.0

06 Live tree & other plant; bulb, root; cut flower

0.04% 20.4

07 Edible vegetables and certain roots and tubers

24.82% 35.3

08 Edible fruit and nuts; peel of citrus fruit or

8.62% 39.1

09 Coffee, tea, matï and spices. 3.31% 44.8

10 Cereals 0.03% 49.4

11 Prod.mill.indust; malt; starches; inulin; wheat

0.26% 35.1

12 Oil seed, oleagi fruits; miscell grain, seed,

0.84% 34.7

13 Lac; gums, resins & other vegetable saps & ext

1.00% 35.0

14 Vegetable plaiting materials; vegetable products

0.05% 35.0

15 Animal/veg fats & oils & their cleavage products

54.24% 67.0

16 Prep of meat, fish or crustaceans, molluscs et

0.02% 40.0

17 Sugars and sugar confectionery. 0.65% 41.9

18 Cocoa and cocoa preparations. 0.36% 35.0

19 Prep.of cereal, flour, starch/milk; pastrycook

0.59% 36.5


20 Prep of vegetable, fruit, nuts or other parts

0.41% 35.0

21 Miscellaneous edible preparations. 2.00% 43.4

22 Beverages, spirits and vinegar. 0.47% 122.3

23 Residues & waste from the food indust 1.43% 35.0

24 Tobacco and manufactured tobacco substitutes

0.15% 35.0


Table 8: Elasticity Estimates Elasticity of (log) agriculture imports with respect to tariffs and (log) unit value (India)

Weighted LS Unweighted OLS Change in log unit value -0.52 (-3.25) -1.13 (-16.6) Change in tariffs 0.001 (0.66) -0.002 (-1.38)

Note: t-statistics in parentheses, estimates based on 849 observations of commodities over time, the

weight used for the final column is value of imports 2001. Elasticity of (log) agriculture imports with respect to (absolute) tariffs (India)

Weighted LS Unweighted OLS Change in tariffs -0.001 (-0.28) -0.009 (-1.38)

Note: t-statistics in parentheses, estimates based on 76 observations of 23 commodity groups over

time, the weight used for the final column is value of imports 2001.

Elasticity of (log) agriculture imports with respect to (absolute) tariffs, Brazil

Weighted LS Unweighted OLS Change in tariffs -0.006 (-2.97) -0.01 (-3.46)

Note: t-statistics in parentheses, estimates based on 299 observations of commodities over time, the

weight used for the final column is value of imports 2001.

Elasticity of (log) agriculture imports with respect to (absolute) tariffs, Tanzania

Weighted LS Unweighted OLS Change in tariffs 0.043 (2.80) 0.009 (0.62)

Note: t-statistics in parentheses, estimates based on 46 observations of 23 commodity groups in two

time periods, the weight used for the final column is value of imports 2001.

Elasticity of (log) agriculture imports with respect to (absolute) tariffs, Ghana Weighted LS Unweighted OLS Change in tariffs -0.09 (-1.09) -0.016 (-0.22)

Note: t-statistics in parentheses, estimates based on observations of 23 commodity groups in one time

period, the weight used for the final column is value of imports 2001.


7. OUTLINE OF APPROACH The very poorest countries are typically predominantly rural. The combined effects of changes in prices and domestic policies will affect farmers in different ways, depending on how the relative margins on the crops they produce are affected. One possibility is that relative incentives to agricultural producers will alter in favour of food crops, especially if urban food subsidies are removed (as these are often engineered by reducing the price paid to farmers). Supply response should lead to an increase in output, and a corresponding increase in farm incomes (as farmers shift to more profitable crops). There should be a positive direct effect on rural employment, although this may require an increase in aggregate output. This depends on how ‘mobile’ are factors within agriculture, but in general both land and labour should be quite mobile between crops. Agricultural reforms that improve factor mobility, such as improved access to credit and functioning markets for land, or productivity can play an important role here.

These effects will relate to substitution possibilities between crops (a crucial feature of supply response). The effect on aggregate output is less clear, and depends crucially on the scope for adopting new technologies. A benign scenario would assume farmers can gain access to new technology, increase yields and profitability, and so increase food output and exports, whilst allowing lower domestic food prices. If the real price of food were reduced, both rural and urban poverty could be reduced. A less optimistic scenario would be where farmers’ ability to increase yields and profitability were constrained. If increased output (or increased import competition) reduced food prices, less efficient farmers may suffer from reduced real incomes. The overall impact is impossible to predict, as it depends on features specific to the farmers and country in question, in particular the pattern of production and the severity of constraints to substitution and expanding yields. Nevertheless, if agriculture sector reforms are implemented, the potential impact of trade liberalisation on farmers is beneficial. The SIA approach adopted starts from a generic causal analysis at the level of country and commodity groups, concentrating on quantifiable impacts on prices and associated effects on production and trade. These quantifiable impacts are then explored further in the causal chain analysis to identify the most likely significant impacts (economic, social and environmental). Country-level and commodity-specific case study evidence is used to provide qualitative and quantitative information on impacts, and a number of country case studies are undertaken to explore linkages in greater detail. Assessment Methods Causal chain analysis (CCA) is the fundamental assessment method used in each of the SIAs. The fundamental purpose of CCA is to identify the significant cause-effect links between a proposed change in an existing trade agreement (or proposed new agreement, or New Round) and its eventual economic, environmental and social impacts (i.e. its impacts on sustainable development). The aim of CCA is to distinguish the significant cause-effect links in the chain. Significance criteria have to be formulated and then used to eliminate non-significant sections and terminate further analysis beyond these sections. The analysis is usually undertaken, in logical sequence by section, from ‘cause’ to ‘effect’. However, a useful cross-check can be undertaken by reversing the analysis (i.e. sequentially, by section, from ‘effect’ to ‘cause’) to ensure that the projected impacts are sufficiently ‘explained’ by the trade agreement change. Both the causal chain analysis itself, and the causal chain analysis findings, may be presented in the form of a causal chain diagram (sometimes called a cause-effect diagram). This shows each of the cause-effect sections which has been investigated (plus some sub-sections, in more detailed diagrams) in their logical order of causality, distinguishing those that are significant from those that are not. The approach adopted will be partial equilibrium in nature, i.e. a causal chain analysis, although information for this may be obtained from existing simulations from general equilibrium models. The starting point will be the current pattern of trade and restrictions to market access (specifically tariffs and quantifiable non-tariff barriers) prevailing for each sector in the representative countries, with consideration of existing preferential and bilateral trade agreements. The first step will be to identify the likely effect of changes in trade measures on trade (choice of demand and supply elasticities will be guided by the existing literature). The effect on imports will be estimated from the country


reducing its own trade barriers for the sector, while the effect on exports will be based on increased market access to trading partners. Having estimated the net trade effect (the adjustment effects), we can proceed to the SIA. Representation of Causal Chain Analysis Step 1. Identify the trade measures. The most readily quantified measures are reductions in tariffs and export subsidies and certain quantitative NTBs (e.g. quantitative restrictions). Other NTBs are more difficult to quantify, and we will only identify them and discuss qualitative effects. The SIA will concentrate on those trade measures the effects of which are readily quantifiable. In the SIAs of specific products and the country case studies, important NTBs will be identified. Reforms to export and domestic support can be quantified as effects on world prices. Thus, this first step is to translate the trade measures identified in the scenarios into price effects, specifically the change in world and domestic relative prices. Step 2. Identify the production (or adjustment) effects, and the associated net trade effects, distinguishing imports from exports – these are the direct responses induced by price changes. Elimination of tariffs means that the price of imports is reduced. This should result in an increase in imports, unless domestic producers of competing products are able to reduce their prices (by absorbing lower profits and/or increasing efficiency). In general, consumers gain but import-competing producers lose. In certain cases there may be very little effect on the volume of imports, especially if the domestic sector is efficient and/or flexible. The elimination of export subsidies will tend, in contrast, to increase world prices and therefore increase import prices, at least in the short-run. For some importers of some products, the two effects can cancel out. However, once the trade effects occur these may affect prices. The countries removing subsidies will lose export market share, and could become net importers, whereas exporting countries that did not have subsidies will increase their market share. Only if the expansion of supply from the latter exceeds the reduction in export supply from the former will the final effect be to reduce world prices, in the medium to long term. Under the FAL scenario, the product-specific effects on prices and trade patterns will need to be incorporated. In general, these effects are similar to those of removing export subsidies (typically, the same products are involved). Step 3. Identify the economic effects (economic SIA). In the case of imports, it is important to distinguish domestic producers that compete with the product from those that consume the product (consumers can be of final products or purchasing intermediate inputs, such as animal feed). In general, consumers gain from lower prices but competing producers lose (lower production and/or lower profits) unless they can respond with increased efficiency. For cash crops that are processed, the consumers (or users) of the imports are firms, and they are likely to benefit. Competing or processing producers may increase investment if they anticipate increasing efficiency, but the likely impact on employment is negative. Producers of the product for export would be expected to gain and may increase investment and employment. Note that, in general, employment effects can be short-run adjustment costs (levels of employment and/or real wages respond) whereas investment effects are more likely to occur in the medium to long term. An important issue regarding agriculture is that possibilities for crop substitution are quite significant, although the extent depends on cross-price and factor substitution elasticities which vary by country and farming system. The issue, to be explored in the SIA, is that although the direct effect may be on one crop, there are indirect effects on other crops. For example, if the removal of export subsidies increases the world price of food, food-importing countries will have an incentive to increase domestic production. A consequence is that domestic farmers may shift from cash crop to food crops. Thus, in evaluating impacts (economic, social and environmental) one has to consider not only the effects on production of that crop, but also the relative effects of substituting one crop for another. Step 4. Identify the social effects (social SIA). The balance of economic winners and losers in an economy will determine the initial production, income (wage) and employment effects. If the prices of food imports are reduced, consumers benefit – there is a social benefit of cheaper food, as it is a particular benefit for the poor. The overall social impact will depend on the flexibility of the


economy and factor markets (especially for land), and the ability of the government to compensate for adjustment costs. Experience suggests that poorer countries are less flexible and government resources more limited, hence adjustment costs are likely to be greater. Richer countries are better able to compensate for adjustment costs. A more important set of social impacts relates to the fact that agriculture has a social dimension. In developed countries this is included in the notion of multifunctionality, in developing countries it more often relates to discussions of livelihoods. Changes in agricultural production can have a wide range of social impacts. Some of these relate to land use and farming systems – for example, whether land is owned by farmers or by the community (the latter is common in many African countries), or whether agriculture is large-scale or predominantly small-holder. The social nature of agriculture will vary by country and crop. For example, in Africa food crops are often grown on community owned land, livestock is grazed on community land (pastoralists), whereas cash crops can be a mixture of plantations and small-holders. As trade liberalisation affects the mix of crops grown, it will have important social impacts. These community and livelihood impacts will tend to be specific to countries, and even to farming systems within different regions of a country. These can only be considered in detail in country case studies. In the assessments of country and commodity groups, we can identify the most likely social impacts. Step 5: Identify the environmental effects (environmental SIA). Three broad types of environmental impact can be distinguished. The first is land degradation, the impacts on the sustainable use of land. If increased production causes land to be used more intensively, this often reduces land quality and undermines sustainability. Examples include erosion of topsoil, cutting down trees on slopes to increase land (with result that soil is washed away), clearing forests for farming (a link to the forestry study). The second is broader environmental degradation, associated with increased use of fertilizers, pesticides and other chemicals (either to increase yields or reduce production costs). This can have impacts on biodiversity and environmental quality. A related impact would be more intense irrigation with impacts on river systems. A third type of impact relates to animal welfare – more intensive livestock farming tends to be associated with less consideration of animal welfare (e.g. battery farms). The SIA will consider all of these potential impacts There is another set of impacts that are both social and environmental in nature, regarding choices between organic and GMO crops and the (related) role of multinationals. Trade in agriculture commodities is dominated by multinational companies but, more importantly in the current context, so too is the provision of seeds and GMOs. If liberalisation increases the influence of multinationals, as is quite likely, this can have major impacts. For example, contract farming is becoming more widespread; while this can have beneficial economic impacts (by providing market access), it can have adverse social impacts (reducing the independence of small farmers). Furthermore, GMOs may be promoted as ‘more efficient’ on economic grounds, but can have adverse social and environmental impacts. On the other hand, organic farming may be encouraged to access niche markets, and this could have favourable social and environmental impacts. A related issue, for developing countries, is fair trade initiatives, which may be encouraged by liberalisation. Trade liberalisation increases te intensity of price competition for standard products, and therefore provides an incentive (if not a need) for small-scale (higher cost) producers to differentiate their products. Organic farming and fair trade initiatives are examples of such product differentiation. Agriculture is not simply an economic activity – it is inherently a social and community activity, inextricably linked with the environment. Trade reforms that alter the patterns of production, will have economic, social and environmental impacts. These will be diverse and vary from crop to crop, country to country, but in most cases they are likely to be significant, whether positive or negative.


8. LINKS TO THE OTHER SECTOR STUDIES Where possible and appropriate, the SIA of agriculture will be linked to the other sector studies. Distribution services are particularly relevant as agricultural products are processed and traded within distribution chains, what are known in the literature as value chains. The nature of these chains is discussed below, to identify aspects of the two SIA studies that can be related to each other. There are unlikely to be many general links between the forestry and agriculture studies, but there will be links in particular cases. In some countries, where expanding agriculture means bringing more land into use, increased agriculture production can be at the expense of depleting forests (e.g. land clearing). This may apply to Brazil, and will be addressed in that study. However, in most countries, increases in agriculture production are achieved by intensification – application of technology and better quality inputs to increase land yields. Global value chains in agricultural products Agriculture products are increasingly linked to final consumers through so-called global value chains. A value chain describes the full range of activities which are required to bring a product or service from conception, through the intermediary phases of production (transformation and producer services inputs), delivery to final consumers and final disposal after use (Kaplinsky, 2000). A value chain can be called global when it involves different stakeholders at different stages in different countries. A chain consists of a number of different actors each specialising on different functions but that are linked through certain ways of co-operation in a network. Below we will describe briefly the value chains involving cotton, leather, food and vegetables, wood, tea, coffee and cocoa. In the context of this SIA on negotiations in agriculture, important implications of the emergence of value chains or closer co-operation amongst firms with specialised functions include

• Exports of agriculture products involve a number of activities including distribution services. This means that successful agriculture exports will depend on interactions with services such as efficient distribution channels. Increasingly, the distributors determine where to source, what, when and how. This provides a direct link with existing trade rules and trade negotiations in the distribution sector.

• A closer integration of firms may have consequences for whether and how tariffs reductions are passed through the value chain, and this may affect the ultimate economic and social impact of tariff changes.

• Value chains are increasingly used to promote compliance with environmental and social standards.

Cotton – Textile - Clothing One well-known example of the emergence of value chains is the cotton-textile-clothing value chain from raw materials to fibre production, to textile and clothing production and finally to retail and other end-uses. Fibres based on cotton are substitutes for chemical fibres. In the buyer-driven textile-clothing chain large retailers, branded marketers and branded manufactures play an important role in co-ordinating production networks, typically involving developing countries whose firms are contracted to supply goods according to specification. Gereffi (1999) argues that profits in buyer-driven chain derive not from scale, volume, and technological advances as in producer-driven chains, but rather from unique combinations of high-value research, design, sales, marketing and financial services that allow retailers, branded marketers and branded manufacturers to act as strategic brokers in linking overseas factories with evolving product niches in the main consumer markets. Clothing in the US and Northern Europe is now dominated by a handful of retailers, leading to buyer-driven commodity chains. A handful of firms (retailers, branded marketers/manufactures, etc.) determines where to source clothing. The ability to move from manufacturing products towards managing producer networks, design, product development and distribution is an important factor in competitiveness as is the ability to keep up to date with the latest trends in consumer demand. Just-in-time production, design and efficiency in marketing have now become crucial in the sector. Consequently, sourcing and distribution firms may have an important impact on what cotton to use and where to source.


Fresh fruits and vegetables The value chain for fresh fruit and vegetables involve seed design, growing, post-harvest processing, exporting and retailing, implying that agriculture exports depend on efficient distribution networks. Dolan et al. (1999) find that in the UK, large supermarkets have captured most of the market for imported fresh vegetables and play a critical role in defining what is produced, how and by whom, even if they do not own farms. Retailers and importers increasingly capture a significant share of the value added, leaving little for developing country processors and growers, where competition is high. Brand names are gaining in importance.

Canned deciduous fruit involves seed design, growing, post-harvest processing, exporting, buyers and retailing. Developing country producers and wholesalers used to dominate this value chain. Now European and US growers and canners are important. It is expected that brand names and marketing will increase in importance, and hence retailers and branders will capture a significant share of value added. Hence, value chains involve specialisation of activities, varying by product. Only a small part of the value added of a final product ready to be consumed relates to activities during manufacturing or agriculture processes. The value of a manufactured product reflects increasingly information or retail content, blurring the line between services, manufacturing and agriculture. Manufacturing contribution to agriculture-processed products is 13% for packaging of fresh vegetables from Kenya to a UK supermarket, and 15% for canning and 12% for production of cans of fruit from South Africa to a UK supermarket. Other costs relate to raw material costs, export and import costs and retail margins (Kaplinsky, 2000). What may once have been a clearly defined product produced in one country is now split up into different activities in different countries. Coffee Brazil, Viet Nam and Colombia, Cote d’Ivoire and Central America are the main exporters of coffee. Ponte (2001) describes a value chain for coffee, see chart 5. International coffee trade exists of “green”, instant and roasted coffee. Most trade is in green coffee and takes place between producing and consuming countries, while at the other side of spectrum, roasted coffee is usually traded amongst consuming countries. There are various steps before green coffee can be exported. For instance, it has now become common for an international trader (in the consuming country) to require pre-shipments or pre-auction samples from exporters (in the producing country), which has been made possible advances in distribution services such as logistics and expansion of international courier services. When Green coffee arrives in the port of destination, the international trade may sell directly to a roaster or to a broker. Roasters blend various coffees and ground it. There are various types of manufacturing processes, such as for decaffeinated coffee or instant coffee. There are also various speciality coffees including so-called fair traded ones. Cocoa Bedford et al. (2002) describe the value chain for cocoa in the case of Indonesia, the world’s third largest producer after Cote d’Ivoire and Ghana. This chain appears to be longer, more complex and less integrated than value chains for other commodities. Cocoa is being passed on from predominately smallholders in developing countries to confectionary manufactures in developing countries. This process involves a complex trading network consisting of large numbers of collectors, traders, exporters, commodity exchanges, processors and manufactures, as well as service companies such as distribution companies, warehouse operations and financial intermediaries. Although multinationals such as Nestle, Kraft Jacob Suchard and Cadbury Schweppes dominate a large share of the market downstream, and international companies now dominate cocoa trading in Indonesia, Bedford et al suggest that there is not as much control over the entire value chain as for other commodities.


9. SELECTIVE REFERENCES

Anderson, K., B. Dimaranan, J. Francois, T. Hertel, B. Hoekman, W. Martin (2001), “The Cost of Rich (and Poor) Country Protection to Developing Countries”, CIES Discussion Paper 136, Adelaide University.

Anderson, K., Erwidodo and M. Ingco (1999) ‘Integrating Agriculture into the WTO: the Next Phase’ paper presented at WTO/World Bank Conference on Developing Countries in a Millennium Round, Geneva, September. Antle, J., J. Lekakis, and G. Zanias, eds. (1998) Agriculture, Trade and the Environment. Edward Elgar Cheltenham. Baffes, J. (2004), “Cotton. Market setting, Trade Policies and Issues”, World Bank Policy Research Working Paper 3218. Bedford, A., M. Blowfield, D. Burnett and P. Greenhalgh (2002), Value Chains: Lessons from the Kenya tea and Indonesia cocoa sectors, Natural Resources Institute In focus 3. Benjamin, C., C. Gueguen and M. Houee (2003), ‘World Cereals Markets under Alternative Common Agricultural Policy Reforms’, paper presented at the 25th International Conference of Agricultural Economists, Durban, South Africa, 16-22 August. Binfield, J., P. Westhoff and R. Young (2003), ‘Reforming the CAP: A Partial Equilibrium Analysis of the MTR Proposals’, paper presented at the 25th International Conference of Agricultural Economists, Durban, South Africa, 16-22 August. Bouet, A., L. Fontagne, M. Mimouni and X. Pichot (2001), “Market Access Maps: A Bilateral and Disaggregated Measure of Market Access”, CEPII Paper 18. Carson, C. (1998) ‘The Uruguay Round Agreement on Agriculture’ paper prepared for OECD Workshop on Emerging Trade Issues in Agriculture. Paris, October. Colman, D. and Roberts, D. (1997) ‘Economics of the CAP in transition’ in M.J. Artis and N. Lee (eds.) The Economics of the European Union: Policy and Analysis, second edition, Oxford University Press, Oxford. Diao, X., A. Somwaru and T. Roe (2001). “A Global Analysis of Agricultural Reform in WTO Member Countries”, in Agricultural Policy Reform – The Road Ahead / AER, 802, 25-42. Dicken, P. (1998), Global Shift. Transforming the World Economy, Paul Chapman Publishing, London. Diop, N., J. Beghin, M. Sewadah (2004), “Groundnut Policies, Global Trade Dynamics, and the Impact of Trade Liberalization”, World Bank Policy Research Working Paper 3226. Dolan, C., J. Humphrey, C Harris-Pascal (1999), “Horticulture commodity chains: the impact of the UK market on the African fresh vegetable industry”, IDS working paper 96. ERS/USDA (2001) Agricultural Policy Reform in the WTO—The Road Ahead. Washington DC: ERS/USDA. European Commission (1999a) The EU Approach to Agriculture (Internal paper). European Commission (1999b) Contribution of the European Community on the multifunctional character of agriculture. European Commission, Directorate General of Agriculture.


European Commission (2000) Agenda 2000 Cap Reform Decisions: Impact Analyses European Commission Directorate General for Agriculture: Brussels. European Commission (2001) EU agriculture and the WTO. European Commission Directorate General for Agriculture: Brussels. Fabiosa, J., J. Beghin, S. de Cara, C. Fang, M. Isik and H. Matthey (2003), ‘Agricultural Markets Liberalization and the Doha Round’, paper presented at the 25th International Conference of Agricultural Economists, Durban, South Africa, 16-22 August. Finger, J.M. and Schuler, P. (1999) ‘Implementation of Uruguay Round Commitments: The Development Challenge’, paper presented to WTO/World Bank Conference on Developing Countries in the Millennium Round. Geneva, September. Fontagné L, von Kirchbach F and Mimouni M (2001), A First Assessment of Environment-Related Trade Barriers, Working Document 01-10, CEPII Gereffi, G. (1999), “International trade and industrial upgrading in the apparel commodity chain”, Journal of International Economics, 28, pp.37-70. Hertel, T.W., K. Anderson, J.F. Francois and W. Martin (1999) ‘Agriculture and non-agricultural liberalisation in the Millennium Round’ paper presented at the 1999 Global Conference on Agriculture and the New Trade Agenda from a Development Perspective: Interests and Options in the WTO 2000 Negotiations. Sponsored by the World Bank and WTO, Geneva, October 1-2. Hertel, T.W., K. Anderson, J.F. Francois and W. Martin (2002) ‘Agriculture and Non-agricultural Liberalization in the Millennium Round’, in M. Ingco and L. Winters (eds), Agriculture and the New Trade Agenda From a Development Perspective, Cambridge: CUP. Josling, T. (1998) ‘The Uruguay Round Agreement on Agriculture: A Forward Looking Assessment’, paper prepared for OECD Workshop on Emerging Trade Issues in Agriculture. Paris, October. Kaplinsky, R., O. Memedovic, M. Morris, J. Readman (2003), “The Global Wood Furniture value chain: What prospects for upgrading by developing countries”, UNIDO sectoral studies series, www.unido.org Kaplinsky, R. (2000), “Spreading the gains from globalisation: what can be learned from value chain analysis”, IDS Working Paper. Laird S (2002) “A round by any other name: The WTO Agenda after Doha” Development Policy Review 20 (1) Laird, S. (2002), “A Round By Any Other Name: The WTO Agenda After Doha”, Development Policy Review, 20, pp. 41-62. Matthews A (2002) Developing countries’ position in WTO agricultural trade negotiations Development Policy Review 20 (1) McCulloch, N, Winters, L.A. and Cirera, X (2001) Trade Liberalization and Poverty: A Handbook Centre for Economic Policy Research, London McKay, A., O. Morrissey and C, Vaillant (1997) ‘Trade Liberalisation and Agricultural Supply Response: Issues and Some Lessons’, European Journal of Development Research, 9 (2), 129-147. OECD (1998a) Agriculture and the Environment: Issues and Policies, Paris.

OECD (2001) The Development Dimensions of Trade, OECD Paris


Oxfam (2002) Rigged Rules and Double Standards: trade, globalisation, and the fight against poverty, Oxfam, Oxford Ponte, S. (2001), “The ‘Latte Revolution’? Winners and Losers in the restructuring of the Global Coffee Marketing Chain”, CDR working paper 01.3 Ruffer T, Jones S and Akroyd S (2002a) Development Box Proposals and their Potential Effect on Developing Countries, Vol 1 Main Report, Oxford Policy Management, Oxford Ruffer T, Jones S and Akroyd S (2002b) Development Box Proposals and their Potential Effect on Developing Countries, Vol 2 Country Case Studies, Oxford Policy Management, Oxford Runge, C.F. (1998) ‘Emerging issues in agricultural trade and the environment’, OECD Workshop on Emerging Trade Issues in Agriculture, October. Serger S S (2001), Negotiating CAP reform in the European Union – Agenda 2000, Report 2001:4, Swedish Institute for Food and Agricultural Economics, Lund UNEP (1999) Trade Liberalisation and the Environment: Lessons Learned from Bangladesh, Chile, India, Philippines, Romania and Uganda United Nations, Geneva UNEP (2000) Country Projects on Trade Liberalisation and the Environment and on the Design and Implementation of Economic Instruments United Nations, Geneva Winters L A (2000) Trade Liberalisation and Poverty PRUS Working Paper 7, University of Sussex, Brighton World Bank (2003), Global Economic Prospects, World Bank, Washington. World Trade Organisation (1999) Trading into the Future World Trade Organisation, Geneva WTO (2000) Committee on Agriculture Special Session: EC Comprehensive Negotiating Proposal G/AG/NG/W/90 World Trade Organisation, Geneva WTO (2001) Ministerial Declaration. WTO Ministerial Conference Fourth Session Doha, 9 –14 November 2001. WT/MIN(01)/DEC/1 WTO (2001a) Market access: unfinished business post-Uruguay round: inventory and issues Special studies 6, WTO Geneva WTO (2002) Agriculture Negotiations: The Issues, and Where We Are Now, available from http://www.wto.org/english/tratop_e/agric_e/negs_bkgrnd00_contents_e.htm WWF (1999) Sustainable Trade for a Living Planet: Reforming the World Trade Organisation, WWF, Gland. UNCTAD (1999), Investment Policy Review: Ethiopia, UNCTAD Geneva. UNIDO (2002), Industrial Development Report 2002/2003: Competing through Innovation and Learning, UNIDO, Vienna.


ANNEX 1: TERMS OF REFERENCE FOR THE AGRICULTURE STUDY General Description of issues The study should examine key cross-cutting impacts associated with trade opening of agricultural products as a whole, illuminated by, but not restricted to, in-depth assessment of major food and cash crops, livestock and interactions between them. The study should recognise the major distinctions between temperate and tropical agricultural commodities. Issues and impacts to be assessed include:

• Impact of the WTO negotiations on world and regional market prices; • Impacts on terms of trade and on competitiveness of exporting countries • Impacts on production and trade patterns of agricultural commodities and transformed

products • Impacts on food security in developing and least developed countries, especially net food

importing countries; • Impacts on income distribution and poverty in developing and least developed countries, with

emphasis on gender effects, rural livelihoods, rural development and rural-urban migration; • Impact of negotiations on small economies, in particular LDCs, whose economies rely on a

few agricultural commodities. Attention will be paid to the specific impact of the potential reduction of tariff preferences on key products from these countries.

• Impact of negotiations on larger agricultural economies paying particular attention to potential reduction of tariff escalation on key transformed products from these countries;

• Interactions with the impacts on employment of market access negotiations in non-agricultural sectors;

• Impacts on land use, land conversion, soil quality and erosion, water quality and quantity, landscape and biodiversity, deforestation and reforestation in both developed and developing countries;

The multifunctional role of agriculture and associated social and environmental impacts, including animal welfare will be addressed as a cross cutting issue. Country grouping and case studies Country groupings will be definitely specified at after the preliminary assessment. The relationships between macro and micro effects should be illuminated by detailed case studies from which general lessons may be learned. These may include one case in the EU, one case in Latin America (recognising the differential impact on Brazil and the more agriculturally dependant countries), one in South Asia and possibly two contrasting cases in ACPs and a small economy country. Scenarios The number of liberalisation scenarios will be definitely specified at after the preliminary assessment. Nevertheless for any scenario, the causal links should be specified clearly enough for the effects of a greater or lesser liberalisation to be estimated. Past studies showed that assessing more than two scenarios requires considerable data and assessment results.


inception report for the agriculture sector study · the inception report provides the results of...

Documents