The liberalization of world trade in agricultural goods is the key agenda of the so-called 'Cairns Group' of agricultural exporting countries (Argentina, Australia, Brazil, Canada, Chile, Columbia, Fiji, Hungary, Indonesia, Malaysia, New Zealand, Philippines, Thailand and Uruguay). The Cairns Group grew out of the GATT meeting in Punta del Esta in 1986. These countries were able to agree on a combined agenda for freeing up trade in agriculture in the Uruguay Round.
The essence of their proposals was to suggest a staggered approach to reform. The first phase, spread over two years, would be a freeze on import barriers and subsidies affecting trade, sanitary and phytosanitary regulations. The second phase would involve adjustments over a 10-year period to reduce both overall levels of support and the use of most trade-distorting measures. Overall levels of support should be based on producer subsidy equivalents. It was accepted in the Cairns Group proposal that some forms of assistance, such as decoupled income support and aids for structural adjustment, could be exempted from the proposed reductions.
At the other extreme, the EU, representing the agricultural protectionist countries, argued for a much less radical approach. While agreeing that reform was still desirable, albeit in a limited way, they wished to continue certain direct payments to farmers, such as the area and headage payments for crops and livestock respectively, to make the phasing-out period longer, and to establish a base year for the aggregate measure of support (AMS) rather than some level based on marketdetermined prices.
In the event, agreement was reached at Blair House in 1992 that the overall reduction in agricultural export subsidies would be 21 % (as opposed to the 36% initially suggested); the base period for the reductions would be fixed at the average for 1986-90; the phase-in period would be six years; and the headage payments would remain outside the reduction programme. As in all compromises, the outcome adopted attributes from both extremes, and probably satisfied very few. From the Cairns Group point of view, the base year decision was a major setback.
Lying behind the negotiations in the Uruguay Round of the GATT is the fact that agricultural resources are rather unevenly distributed around the world, and not necessarily associated with the major centres of population. Since time immemorial, agricultural products have moved across national boundaries as cheaper production areas became available and suitable land became scarce. Even without the benefit of Adam Smith's observations about specialization and trade, production would have moved to where it was cheapest to produce, and if big enough, these production advantages would have been able to overcome any disadvantage that distance from markets might have induced.
With the repeal of the Corn Laws, grain production was transferred from Europe to N. America, and, with the advent of refrigeration, livestock production was relocated in S. America, Australia and New Zealand. Some countries did not open their borders to foreign imports of food and maintained larger farm sectors than simple economics would have dictated. Further, dependence on foreign food became a liability in two world wars in Europe during the first half of the twentieth century, and many countries were anxious to maintain control over essential food supplies after the Second World War.
Thus trade in agricultural products in the twentieth century has been beset with man-made barriers to free importation and consumption of food products. These barriers have been exacerbated by restrictions based on artificially high health standards. The cost of these restrictions has either fallen on consumers in the form of increased prices, or on taxpayers who have funded deficiency payments. Restrictions on imports and excessive price supports in some cases have led to production levels in excess of national food requirements. When this happens, some countries then seek to dispose of their surpluses in third country markets. At this point, traditional suppliers, like the Cairns Group of countries, start to feel aggrieved as prices in third markets fall and everyone is worse off.
Not widely appreciated, but also important from this point of view, over-supply in third countries prevents new entrants from entering the market and thus slows down the process of widening the supply base.
There is broad agreement that international specialization in trade in agriculture makes everyone better off. The economics textbooks are full of examples. Yet the strategic position taken by many countries indicates that decision makers do not see these advantages applying to their own situation. In particular, they tend to bundle the agricultural problem in with a number of other social and economic issues. As well as the argument for security of supply in wartime, agricultural support has come to incorporate rural welfare, rural population drift, and safety-net programmes, not to mention political disturbances. In recent years, rural improvement measures associated with countryside values and the landscape have also been drawn into the debate.
The Uruguay Round of multilateral trade negotiations included a wide-ranging discussion of these issues. The results of the Round, incorporated in the new WTO agreement, were again a compromise between the opposing viewpoints. Concessions were made on both sides and world trade in agricultural products was able to continue on a slightly more liberal basis.
It was agreed at the end of the negotiations that a review of the agricultural agreement would start in 1999. But at the WTO meeting in Seattle in November 1999, members of the WTO could not agree on the way forward. Disturbances in the streets about concerns for human rights, environmental damage, and the increased power of multinational firms drew the attention of the international news media. But various countries also expressed sympathy with this unease.
This shift in opinion appears to have made trade negotiators more cautious about looking at reform in multilateral trade in isolation. It is fairly clear that in the past international negotiations have taken place in a rarefied atmosphere of diplomatic double-speak without much direct input from consumers, taxpayers or the environmental pressure groups. The shift in opinion represented at Seattle may well mean that future negotiations will have to be conducted amongst a wider representation, and will consequently be slower and less effective.
From a Cairns Group point of view this is most unfortunate. There are economic gains to be reaped from further rationalization of international trade in agriculture. It is not just low-cost producers who gain from such reforms, but also consumers in all importing countries. The removal of present barriers to trade would allow further redistribution of international food production to countries with a natural comparative advantage. Movements in this direction will make everyone better off.
There is, therefore, a case to be made in many countries for an evolutionary programme of restructuring of agricultural support. In my book, I have discussed the steps that New Zealand undertook in the 1980s to dispose of its price support system.1 After the removal of deficiency payments, a financial restructuring package was introduced, which enabled heavily indebted farmers to be assessed for debt relief.
The holders of the debt were refinanced by government. The farmers, on their part, made rapid adjustments to the changing opportunities that were available and, by themselves, evolved towards different systems of land use and labour availability. As a result, there was no wholesale movement of owners out of farming, even though there was a serious loss of incomes in the short term.
What I am arguing for is a new assistance programme for farming, which uses government funding not to favour larger farms, particularly in the arable counties, but to make adjustments for change and not to support old structures. In the EU, this could be funded by the present headage and acreage payments. I am sure that many arable farmers would find another level of inputs and outputs that would permit them to stay in farming without such heavy subsidization. This process could be aided by using CAP funds to explore alternative opportunities, and assist in the preservation of countryside values without encouraging increased production.
It seems to me that such a programme is within the capabilities of national governments and does not necessarily depend on multilateral agreement for everyone to act in a phased manner. But it would certainly be helped by international agreement to prevent impacts on third countries from trade in subsidized products.
Robin Johnson PhD (London), Formerly Policy Director New Zealand Ministry of Agriculture and Fisheries Wellington, New Zealand
1) R W M Johnson, Reforming EU Farm Policy: Lessons from New Zealand, Institute of Economic Affairs, London, 2000.