Changing Political Chemistry? The Alchemy of Agriculture and Trade Liberalization / by Mark Langevin

Changing Political Chemistry? The Alchemy of Agriculture and Trade Liberalization

 Remarks Provided at:

X Symposium on International Trade

American University Washington School of Law

Washington, D.C.

October 14, 2014

Mark S. Langevin, Ph.D.

Director, BrazilWorks

Mark.brazilworks@gmail.com

Multilateral and plurilateral trade negotiations have not made much success during the Doha Round of the World Trade Organization (WTO) with respect to an Agreement on Agriculture that increases market access and reduces domestic support. National political stability remains as a pivotal factor in negotiations despite the relative fall in agriculture shares of Gross Domestic Product (GDP) in both developed and developing countries. Yet, trade in agriculture continues to unfold, including increasing trade flows and measureable trade liberalization among developing countries and aggregate reductions in domestic support among a growing list of developed and developing nations. Moreover, the rise of agricultural technology firms and the gradual development of cross-border trade in agricultural services make the alchemy of trade in agriculture more complex, but it may also lead to a changing chemistry that undermines traditional bases of domestic political support for protection and subsidies.

Market Access: Standards First?

The TransAtlantic Trade and Investment Partnership (TTIP) negotiations include treatment of the agri-food sector, including both tariffs and non-tariff-measures (NTMs). While European Union (EU) exports to the United States (US) are not largely affected by tariffs, US exports to the EU are impeded by tariffs. EU exports of processed agricultural goods have grown measurably since 1992, outpacing imports from the US and generating a EUR 6 billion trade surplus on the agricultural ledger in 2012. However, the relative importance of agricultural trade between the EU and US is modest with 8% of agricultural imposts produced in the US and 13% of EU exports destined for US markets.[1] On average, agricultural tariffs in the EU and US still surpass merchandise goods by substantial margins, but the US has made progress in lowering tariffs on EU agricultural goods and the EU to a much lesser degree. According to the European Parliament, EU exports to the US could expand by some 15%, largely concentrated in meat products, oilseeds, cereals, vegetables and fruits, sugar, and plant-based fibers while US exports could also substantially increase, with concentrations in dairy products (32.24%), meat (18.37%, meat products (24.07%) and sugar (19.82%).[2] The EU can probably expect more gains from the TTIP in the non-tariff area than from US tariff cuts, whereas the US can make gains from both tariff reductions and elimination of NTMs. Overall, the TTIP may provide real liberalization of NTMs and thereby set more transparent SPS and TBT standards that may lessen the burdens of market entry for emerging and developing market economies with comparative advantages in agricultural and food products, especially animal protein based products.

Domestic Support: Squeezing Subsidies out of Trade

Although most developed nations with generous agricultural support and subsidy programs have not agreed to eliminate export credit and domestic production subsidies as called for in the Doha Round and the Hong Kong Ministerial, aggregate governmental budgeting for such programs has fallen, in part because of domestic politics and fiscal crises. As percent of total farm receipts, developed nations with significant exports, including Canada, the EU, Mexico, and the US among others, have seen aggregate support drop in recent years. Between 2000 and 2013, the EU lowered support based on commodity output from 22.4% of total farm receipts to 8.5% and the US lessened support outlays from 12.2% to 1.0% of receipts.[iii] The Draft Modalities for Agriculture forwarded in 2008 confirmed the need to end export credit subsidies, but it also set out a progressive negotiating framework for reduction, including identifying consensus on the need to set maximum repayment terms and requirement that such programs be self-financing.[iv] While progress on eliminating distorting export credit subsidies is slow, the 2014 Bilateral Agreement between Brazil and the United States[v] to end the cotton dispute makes significant changes to the GSM-102 program that reflect both lowering the maximum repayment terms and strengthening the self-financing mechanisms. This agreement follows the elimination of prior export credit programs (Step 2 payments). Although the 2014 bilateral agreement does not eliminate the GSM-2012 it does take one more step toward squeezing domestic support programs.

The 2014 bilateral agreement to resolve the cotton dispute immediately follows the enactment of the U.S. Agricultural Act of 2014 (the Farm bill) that lowered the aggregate support for commodity programs, including cotton, and transformed the direct payment and counter-cyclical payment programs into government subsidized shallow income loss insurance. Indeed, according to the National Cotton Council (NCC) the STAX program for U.S. cotton producers was designed to comply with WTO domestic support disciplines. This new crop insurance program will not be implemented until 2015 and its measurable impacts on national production and world prices will not be clearly observed until the Farm bill’s reauthorization process begins in earnest sometime in 2017. However, the 2014 Farm bill’s emphasis on budgetary outlay reductions, risk management, and WTO compliance do signal that U.S. agricultural policymaking is capable of making further modifications to achieve greater compliance with WTO disciplines in the future.

Indeed, as commodity prices rose after 2004, U.S. domestic support for agriculture receded while the sector underwent a dramatic concentration of agricultural enterprises. In recent decades, this process of consolidation has eliminated 40% of farms with annual receipts of less that $250,000 USD while farms with sales of more than $ 1 million grew by 243%.[vi] In most higher value agricultural product categories, such as meatpacking, consolidation of the top four firms can be over 80% of total national production. This combination of consolidation coupled with lower aggregate support levels may change the political chemistry that has sustained domestic support programs for decades in the U.S. Moreover, as agricultural production firms consolidate, produce for global value chains, and integrate with agricultural technology firms, we may see a shift from the politics of domestic support to demands for greater liberalization in agricultural services.

Trade in Agriculture Services: A Liberalizing Synergy?

The drive to raise agricultural productivity and incorporate environmentally sustainable cultivation practices, and their measurable costs, have led to agricultural enterprise consolidation in many of the most productive countries as well as the consequent rise of agricultural biotechnology firms (seeds and agrochemicals) that delineate and manage global value chains for a host of agricultural and food products. Companies such as Bayer CropScience, BASF, Dow AgroSciences, Monsanto, and Syngenta hold majority market share in a host of agricultural inputs, from seeds to pesticides. These transnational firms are increasingly selling such inputs through contracts that include an ever-increasing set of “services” that are often delivered across borders. Monsanto’s Farm AgVisory Services (MFAS) features a host of services provided through Internet and telecommunication networks to approximately 800,000 small farmers in India.[vii] The growing nexus formed by transnational agricultural technology, crop management, and related business services firms will likely contribute toward domestic and international pressure for wider liberalization for trade in services and possibly unleash a liberalizing synergy across high valued added agriculture that promises to further erode the domestic support for traditional producer subsidies. Major companies such as Monsanto continue to “side” with producer support programs while advocating for greater trade liberalization and stronger IP protections, but the tipping point may come after further development of the trend toward greater trade in agricultural services across borders.

[1] European Parliament-Directorate-General For Internal Policies Policy Department B: Structural And Cohesion Policies. “Risks And Opportunities For The Eu Agri-Food Sector In A Possible Eu-Us Trade Agreement.” July 2014:19.

[2] Ibid, pp. 29.

[iii] OECD. Agriculture Policies and Support: Producer and Consumer Support Estimates database. Accessed at: http://www.oecd.org/tad/agriculturalpolicies/producerandconsumersupportestimatesdatabase.htm#tables

[iv] Coppens, Dominic. “WTO Disciplines on Export Credit Support for Agricultural Products in the Wake of the US-Upland Cotton Case and the Doha Round Negotiations.”Journal of World Trade. Vol. 44, No.2 2010:379.

[v] Memorandum of Understanding Related to the Cotton Dispute WT/DS267 and accessed at: http://www.ustr.gov/sites/default/files/20141001201606893.pdf

[vi] Lilliston, Ben and Karen Hansen-Kuhn. “From Dumping to Volatility: The Lessons of Trade Liberalization for Agriculture.” Trade and Environment Review 2013, UNCTAD. September 2013: 277.

[vii] Monstanto. “Monsanto Farm AgVisory Services (MFAS).” Accessed at: http://www.monsanto.com/improvingagriculture/pages/monsanto-farm-agvisory-services.aspx