The landscape of agricultural support policies has evolved

Alongside developments in domestic and international agricultural markets, the extent and nature of government involvement in the sector has also changed since 2000. Increasingly, there appears to be a convergence in the use of producer policies of developed and developing countries - in particular those that directly support individual farmers. Since 1995, income transfers to individual farmers by emerging and developing countries have been increasing, driven in part by rising levels of development and incomes within these countries, and for some, a push towards policies aimed at achieving self-sufficiency in particular agricultural products.

Producer support estimates (PSE) measured by the OECD show the contrasting developments between developed and emerging economies. In 1995, the seven emerging economies for which the OECD collects information on agricultural policies accounted for just under 4% of the total measured PSE (OECD and emerging economies). By 2012, these seven countries accounted for over 45% of the total (Figure 1.5). This rising share is made up of stable nominal expenditures by OECD countries (therefore falling real expenditures) and growing expenditures in emerging countries.

The makeup of the PSE within emerging countries shows a move to greater use of policies that are most distortionary in terms of their impact on trade - those of market price support, output-based payments and input subsidies. In contrast, for most OECD countries, the share of the PSE made up of most distortionary policies has fallen since 2000. Emerging countries’ use of such payments exceeds the OECD average, and for some, the share of transfers due to these policies has increased since 2000.

Along with changes in domestic support, on average, market access for agricultural products has increased. Average applied tariffs have continued to fall globally, including amongst OECD and BRIICS countries (Figure 1.6).

However, despite improvements in market access, tariff barriers for several agricultural commodities remain very high. In many cases the maximum duty for any agricultural tariff line is significant above the average tariff level, often as high as several hundred percent and, in the cases of Norway and Switzerland, more than 1 000%. Further, potential tariff levels remain high. Many countries, developed and developing, have bound tariff levels that significantly exceed their applied levels.

Figure 1.5. Trends in PSE: OECD and emerging economies

Nominal PSE spending 1995 to 2012 (USD billions)

Source: OECD Stat.

Figure 1.6. Applied agricultural tariff rates

Weighted average 2000 to 2013

Source: WITS (2014).

Tariffs, however, constitute only one category of the host of “traditional” border measures. Many countries continue to make use of other forms of protections, including tariff-rate-quotas (TRQs). Across all WTO members, 1 094 TRQs for agricultural products were in use in 2011 (WTO, 2013). While the number of TRQs in use has fallen, from 1 430 in 2002, their use has remained nearly unchanged since 2007. Fill rates of these TRQs vary across countries, products and methods of administration. On average (unweighted), the fill rate over the 2002-2011 period was 61%.

Actual use of export subsidies has also declined notably in recent years, in part as a result of high prices on international markets, but in part also due to policy reforms. Of the 18 WTO members (counting all EU member countries as one) that had agreed non-zero export subsidy commitments in the Uruguay Round, 10 countries have not used export subsidies in all years notified since the beginning of the Doha Round in 2001. Of the remaining, three have reported continued use, and one, the United States, has only made limited use of export subsidies.

Changes in other areas related to export competition that have similar effects on world trade, however, are less clear. There is a lack of data on the subsidy element of provisions relating to export financing, food aid and state trading enterprises making assessments of changes difficult. Despite this, the WTO Secretariat has suggested that overall, since the launch of the Doha round, there have been positive developments in the export competition pillar (WTO, 2014).

Emergence of “defensive” trade policy measures

The 2007-08 food price crisis also initiated a number of changes to governments’ agricultural trade policy stances. In the short term, a number of governments imposed export restrictions and varied import duties in an attempt to insulate domestic consumers from rapidly rising international prices. For larger exporting countries, these interventions helped moderate the price increases faced by domestic consumers.

However, the use of defensive trade policy measures came at a cost. During the period of rapidly rising food prices, Anderson, Ivanic and Martin (2013) found that such policies exaggerated overall price movements. Similarly, Headey (2011) suggests that trade policy-related decisions were a major driver of the observed price spikes. For rice, wheat, maize and soybeans, trade actions by countries related to export restrictions, buying to increase stockholdings, and removal of import restrictions or import subsidies all contributed to the price spikes.

The effects of these policies were particularly felt by net food importing countries that already had low trade barriers. The exaggerated price movements created by the application of insulation policies in other countries created worse outcomes than would have otherwise occurred. From a global perspective, the various individual country interventions targeted at improving food security lessened it. Anderson, Ivanic and Martin (2013) found that the trade based food price insulation policies implemented in 2007-08 could have actually increased the number of people living in poverty around the world.5

In the period since, many countries have maintained a more defensive stance towards international markets. Many have begun to pursue food self-sufficiency policies, often with reference to a desire to improve food security. The policy levers employed have varied, and many employ a raft of measures that range from market price support provided by trade barriers to input subsidies, and for some, the use of public stockholding programmes (Box 1.1). Many have also made use of less distortionary policies with significant investments in agricultural infrastructure and research and development.

Box 1.1. Increasing use of public stockholding policies

The 2007-08 food price hike led to a renewed interest in stockholding policies as a way to deal with price volatility and food shortages. Public stocks have grown significantly since 2007 and many developing countries intend to continue expanding their public stocks in the future.

Public stockholding programmes that influence prices can have significant impacts on the domestic economy and can have spillover effects on neighbouring countries and international markets. There are two types of public stocks that can influence prices, namely buffer stocks and social safety net stocks (dependent on their size and operation). Emergency stocks have no impact on prices since they are only released to respond to humanitarian emergencies and the stocks held are usually not sufficiently large so that acquisition or disposal of stocks has any significant price effects on markets. Buffer stock programmes influence prices directly as they aim to stabilise prices and/or alter the level of producer and consumer prices. Social safety net stock schemes aim to assist the impoverished and chronically food insecure by distributing food at subsidised prices.

The different types of stockholding programmes are not easily distinguishable in practice. Often one agency is in charge of different types of stocks, each potentially with multiple purposes. The purpose of a stock can also change over time. For example, a stock that was acquired to serve as a buffer stock can be released through a regular distribution programme. Finally, there are no uniformly used definitions to differentiate between the different types of stocks. As a result, it is not straightforward to associate certain effects to one particular type of stock.

Past experiences with buffer stocks are not encouraging. In developed countries, they have resulted from unsustainable levels of price support and have led to the accumulation of huge stocks which were dumped or sold at a loss. They also generated negative spillover effects in international markets as they often triggered the creation of trade barriers such as import tariffs, and at the same time export subsidies to guarantee the functioning of the programme. These trade measures protected domestic markets but depressed international prices.

Currently, buffer stocks are mostly held in countries in Africa and Asia. They are often operated by agencies that also manage social safety net stocks. The performance of buffer stocks can be evaluated by analysing whether they were able to achieve their objective(s) of reducing overall volatility, increasing producer prices and/or stabilising consumer prices. The effectiveness of social safety net stocks can be analysed by examining food security indicators. Of importance to both is a consideration of the opportunity costs of these policies and their relative performance compared with policy alternatives.

Research has found that inefficient targeting and conflicting objectives prevent stockholding programmes from achieving their objectives. Inefficient targeting can increase inequality when higher producer prices or subsidised cereals are not received by the intended beneficiaries. Buffer stock programmes that pair producer price support objectives with the objective of providing lower prices to consumers often achieve only one goal at the expense of the other. Schemes that raise prices for producers frequently lead to higher consumer prices, which is in conflict with the food security objective of the scheme.

Even though public stockholding policies are designed as domestic policies, they can create unwanted international spillover effects. When large amounts of grains are acquired to build or replenish public stocks, world supplies can be decreased and hence world market prices potentially increased. Conversely, releasing large amounts of grains from public stocks may depress world market prices. In addition, the import tariffs and export restrictions that are required to ensure the working of buffer stocks can have detrimental effects on the economies of neighbouring countries.

Source: Deuss (2014).

However, despite the shifts by some countries towards increased levels of domestic support and more defensive agricultural trade policies, most comply with current and proposed WTO commitments. Analysis of 19 significant agricultural producing and internationally trading countries suggests that most current policy settings would comply with potential commitments that could be made under the 2008 draft WTO modalities on agricultural trade (Box 1.2).

Box 1.2. Current trade policies and Doha draft modalities

Given the raft of changes in international agricultural markets and in policy settings, it is useful to understand where major agricultural traders sit relative to their potential WTO commitments as set out in the set of negotiated, but not agreed, modalities - the Revised Draft Modalities for Agriculture TN/AG/W/4/Rev.4 (hereafter Rev.4). With assumptions over possible implementation decisions (as the necessary steps to transform the draft modalities into a legally binding agreement have not yet taken place and it is unknown what options countries would pursue with respect to the flexibilities that exist within the modalities) the policy settings of 19 countries (12 developing and 7 developed) were assessed with respect to the Rev.4 modalities as if they were agreed and fully implemented in 2014.

The Rev.4 provisions provide for cuts to support across the three pillars of the GATT Agreement on Agriculture: market access, export competition and domestic support. Regarding market access, many bound tariffs would be reduced and tariff rate quotas introduced or expanded. There are, however, many exclusions. Special and sensitive products and other provisions limit the extent of the possible improvements in market access. In export competition, export subsidies are to be phased out (including those which result from the intervention of state trading enterprises), along with some changes to the conditions placed on export financing support programmes.

In relation to domestic support, the draft changes are more complex. Rev.4 would reduce the Bound Total AMS for most countries that have one. The de minimis percentage would be reduced for most countries with a Bound Total AMS, but not for others. Caps on product-specific AMSs would be introduced. Rev.4 would see an expansion in the set of blue box payments, but also place a cap on the total support in this box and product-specific caps on such payments. There would also be the addition of a bound ceiling on what may be termed Current Overall Trade-Distorting Support.

Overall, the examination of current policy settings suggests that few countries would need to change their policy settings to conform to the rules and commitments under Rev.4. There is, however, some variation across the pillars and countries.

Regarding market access, the reductions in bound tariffs would in many cases not affect, or would affect only minimally, countries' applied tariff levels. However, a handful of developed countries could see their average applied tariff reduced by several percentage points, and particular tariff lines for some countries would face larger reductions. Regarding export competition, the elimination of export subsidies would today require only little policy change for most, although there are a few specific sectors in some countries where the elimination would imply considerable policy change. Likewise, implementing Rev.4 rules in the other areas of export competition would generally require little policy change, although there are specific instances where ongoing reforms have not yet brought policy in line with the requirements of Rev.4.

As the modalities surrounding domestic support are more complex, so is the analysis of what might need to be done to meet the potential commitments as laid out in Rev.4. On the AMS and Total AMS front, in general most countries currently meet the Rev.4 limits, with some variation for individual products in a few countries. The reduction in the de minimis percentage for some countries would make a difference under current policy settings for very few products and countries. For the future, the values of production of many products will grow in nominal terms and thus increase the associated de minimis thresholds and limits, which can result in complicated interactions with other limits that are fixed in nominal terms.

Limits placed on blue box and current overall trade distorting support are also not likely to bind most countries under current policy settings. However, for some a caveat applies. If subsidies provided under the “development box” (Article 6.2) were to be included in current overall trade distorting support, some countries may exceed their cap.

Source: Brink (2014).

 
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