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Global agricultural trade and Bangladesh

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Published: Tuesday, Dec 27, 2016

FE-PRI EAU

Posted : 27 Dec, 2016 00:00:00

 

 

Global agricultural trade and Bangladesh

Muhammad Mahmood

Agricultural trade has always been a problematic issue because of the agriculture sector's importance in producing food and also its vulnerability to weather conditions. For these reasons the agriculture sector holds a special position within the economy regardless of its share in total output which tends to decline with industrialization of the economy. As such, it might not be realistic to fully expose agricultural trade to unbridled international competition; that may lead to adverse consequences for the economy and its people with serious political and social implications. No wonder that almost every country seems to have some reason why its own agriculture protection measures should be excluded from the multilateral trade disciplines while finger pointing at agricultural protectionist measures by other countries

Trade in agricultural commodities has also always been marked by wide fluctuations in international prices resulting from wide variations in supply and demand conditions. This is quite often mirrored in domestic markets, further reinforcing protectionist attitudes in individual countries. Historically, agriculture, perhaps more than any other sector of the economy, has been the scene of political ferment, the focus of public attention and the object of government policy. This phenomenon is not limited to poor countries alone.

For decades, agriculture has been viewed as a special case in developed countries as well. Furthermore, agricultural policies are most often influenced by the powerful special interest groups within the country rather than by national interests.  In recent decades the sector has also been the focus of issues relating to environmental protection and sustainability of production and trade. A related but non-trade issue like food-security in the context of agricultural trade has also compounded the problem.

The link between trade and output is well recognised and the long-term growth rate of trade in agricultural products appears to be significantly greater than growth in agricultural output. Trade in agricultural products  enables countries to access wider variety and better quality of food, stabilises year round food supply and temper food price increases. The share of agriculture in world trade, while declining relative to manufactures, does not mean the volume of trade in agriculture is declining.

True, the rate of growth in manufactures' trade has been much faster than that in agricultural products. In 2015 agriculture accounted for 9.5 per cent of world merchandise trade (compared to about 25 per cent in the early 1960s) as against to 66.2 per cent for manufactures.  Food alone accounted for 84 per cent of total trade in agricultural commodities in the same year. This is indicative of how crucial trade in agriculture is in accessing food for countries that are net importers of food-such as Bangladesh. Trade in agricultural products is now closely related to food security which now also encompasses nutrition and food safety.

The issues that have been central to agricultural trade reform include export subsidies, export finance, food aid and exports undertaken by state trading enterprises - collectively known as "export competition issues".  Under the auspices of the General Agreement on Trade and Tariff (GATT), there were eight rounds of trade negotiations but all of them focused on the tariff reductions for manufactures except in the last round, known as the Uruguay Round (1986-94). The first multilateral agreement on agriculture was adopted there but with a very limited scope. By the end of the seventh round of GATT trade negotiations, the Tokyo Round (1973-79), tariffs for trade in manufactures had been significantly reduced resulting in increased volumes of trade in manufactures.

Export subsidies for manufactures have been prohibited for over 50 years but the same for agriculture has been subject to limited discipline. Trade in agricultural commodities remained highly distorted with the use of non-tariff barriers such as import quotas and subsidies.  Trade in agriculture products is also beset with a wide range of regulatory barriers in the form of Sanitary and Phytosanitary (SPS) and technical barriers to trade (TBT). All in all, these factors largely contributed to slower growth in trade in agricultural commodities relative to manufactured goods.

In international trade negotiations, agriculture has always been treated as a special issue (hence the exclusion of agricultural commodities from the provisions of GATT). The Uruguay Round (1986-94) which led to establishment the World Trade Organisation (WTO) was able to produce the first multilateral agreement on agriculture (the Agreement on Agriculture - AOA) with limited scope.

Critics, however, point out that the AOA fundamentally reflects the shared agenda of the USA and grain-exporting countries to liberalise agricultural trade as far as it could be pushed. However, the agreement could be considered as the first step towards a less distorted agricultural trade. The agreement included a commitment to continue the reform process through future negotiations.

The new rules and commitments under the AOA apply to three broad areas (i) market access (ii) domestic support and (iii) export subsidies. The Doha Round of WTO trade negotiations (also known as the Doha Development Agenda-DDA) was launched in 2001 and included 20 areas of trade including agriculture. As is well known, after 15 years of back and forth, the DDA remains inconclusive. The most contentious topic in the Doha round has been agriculture with a number of issues such as export subsidies, export finance, domestic support, public food stockholding, safeguard mechanisms and involvement of state trading entities in food exports. In the end, reaching consensus among the 180 or so member countries proved an impossible task.

Bangladesh predominantly remains an agrarian economy despite the fact that agriculture now accounts for merely 15% of its gross domestic product (GDP). The sector is responsible for providing employment to 48 per cent of the labour force while two thirds of the population live in rural areas. It appears that despite increasing shares of manufacturing and services sectors in the economy; the country for the foreseeable future will be dependent on a productive agriculture sector for growth and poverty alleviation, given its share of employment and the fact that a large proportion of the poor live in rural areas. In export trade, primary products accounted for only 4.5 per cent of total exports from Bangladesh in 2014-15 of which close to a half is composed of frozen food.

One unique feature of the sector is that it is dominated by crop production, with rice being the single most important crop. This is because cereals remain the staple food of the people in Bangladesh. But there are problems associated with trade in cereals. Due to the strong impact of weather conditions, the levels of cereal output tends to fluctuate from year to year both in importing and exporting countries.

For a net food importing country like Bangladesh access to supply to ensure food security remains a major trade issue. In this context, Bangladesh along with other least developed countries (LDCs) are asking for a ban on export restrictions by non-LDC countries if the exporting country is a net exporter of foodstuff. While the issue of food security technically can be described as a non-trade issue, widespread governmental interventions in the agriculture sector as well as trade in agricultural products make it an important a trade issue.

The multilateral trading system that has evolved under the auspices of the WTO also now recognises that the issue of food security is an essential component of trade in agricultural products.  Article 20 of the Agreement on Agriculture (AOA) refers to non-trade concerns and accords special and differential treatment to developing countries within a fair and market-oriented agricultural trading system.

The AOA remains focused on substantial progressive reductions in support and protection for agriculture. The issue of food security is considered the most important non-trade concern in this context. This means that the AOA is also to be oriented towards ensuring trade flows in a way that will enhance food security. Bangladesh being a net food importing country, measures taken under the AOA are of significant importance to the country.

After the Bali ministerial in 2013 nearly collapsed on the alter of public stockholding of food grains by India, the Tenth Ministerial Conference of the WTO held in Nairobi in December, 2015, adopted a series of decisions regarding trade in agricultural products(part of the Nairobi Package) that addressed this critical issue, though not conclusively.  The decisions included removal of export subsidies by developed countries immediately except for a very limited number of agricultural products.

As for the developing countries, they will do so by 2018, with a longer timeframe in limited cases. Developing countries will also be allowed the flexibility to cover marketing and transport costs for agricultural exports until 2023.The poorest food-importing developing countries will have additional time to cut export subsidies by 2030. As LDCs, Bangladesh now faces very few restrictions under the AOA including on export subsidies. The border line between export and domestic subsidies is very thin. In effect an export subsidy can be repackaged in various ways to make it look like a domestic subsidy. But the Nairobi meeting did not resolve this issue and that still remains active on the agenda.

However, of special interest to Bangladesh is the decision on Public Stockholding for Food Security. By February in fiscal year (FY) 2014-15, Bangladesh's capacity to stockpile food grain reached 2.0 million tons relative to 1.94 million tons in the previous fiscal. This indicates increased support for domestic procurement at administered prices by the government of Bangladesh.   The support, provided for the Public Stockholding programs at administered prices, is a trade-distorting domestic support measure. While the ministers asked member countries to find a permanent solution to this issue, such programs may meanwhile continue in line with the decision of the 2013 Bali ministerial conference where such actions are protected from any legal challenges.

Two issues in agricultural trade reform - domestic support and market access - have encountered very deep division among member countries at the conference. There is very little likelihood that the issue of the domestic support program will be satisfactorily resolved in the near future. The bottom line is that the WTO cannot liberalise trade if member countries do not want to do so. Increasing attempts at forming regional trading arrangements are further contributing to distorting trade in agricultural commodities as exemplified by the Common Agricultural Policy (CAP) of the European Union (EU).  Furthermore, the development of these regional trading arrangements has raised issues related to their position within the multilateral trading system and their openness to non-member countries.

The regionalised attempts at liberalising trade may have political value; their economic benefits are very limited. It is not surprising that North American Free Trade Agreement (NAFTA), Trans-Pacific Partnership (TPP) (which is primarily designed as the economic containment of China strategy of the USA masquerading as a regional trading arrangement) and other similar regional arrangements including the EU are now under serious threat with growing sentiments of economic nationalism. In essence most regional trading arrangements are political projects with a trade agenda attached to it. No wonder the trade part of it does not work well, quite often resulting in bitter recriminations between member countries.  The only way forward is multilateral trade liberalisation which benefits all member countries without any discrimination.

Over the last 30 years or so, subsistence agriculture in Bangladesh has been giving way to more commercially-oriented agriculture.  This makes the sector increasingly dependent on markets, outsourced inputs, credit and a variety of public support schemes. The government's objective to attain food self-sufficiency (i.e. food security) obviously calls for significant public intervention.  This intervention may result in providing both input subsidies and tariffs.  The average total tariff incidence (TTI) for agricultural products now stands at 60.2 per cent while the average nominal protective tariff (NPR) is 36.4 per cent. Furthermore, tariff bindings on agricultural products have been capped at an unprecedented 200% for 90% of agricultural tariff lines.  

This indicates the sector is not only protected by tariffs but also with a host of para-tariffs, besides leaving the option of raising tariffs sky-high if so desired. Such a very high level of tariffs (and potential tariffs) along with prevailing subsidies on agricultural inputs will only lead to further distorting the domestic market with significant misallocation of resources. Such a distortion is already clearly reflected in Bangladesh exporting 25,000 tons of rice to Sri Lanka in FY 2014-15. This export of rice is an example of Bangladeshi consumers and tax taxpayers effectively subsidising Sri Lankan rice consumers, reminiscent of the EU agricultural exports except that in this case it was done by a least developed country.

Nevertheless, the AOA remains focused on substantial and progressive reductions in support and protection in agriculture. To circumvent that objective countries, both developed and developing, are now increasingly using technical barriers to agriculture trade in the form of sanitary and phytosanitary regulations and rules relating to  quality and labelling. There is no suggestion here that these regulations are not necessary, but there is very strong likelihood that these measures could be used as instruments of protection.

The regulatory compliance and enforcement definitely increase the transaction costs. While the AOA must take appropriate policy measures to deal with non-trade issues such as food security and rural development for the LDCs, it has to be done without disrupting or limiting trade flows. There is growing consensus that a departure from production with specialisation according to comparative advantage should only be undertaken when there are clear benefits to justify such departures. In practice, this can be a very difficult task to achieve.  Only a more open trading regime can ensure a well-functioning food security system for countries like Bangladesh.

(Dr. Mahmood is a Senior Fellow of Policy Research Institute and can be reached at Muhammad.mahmood47@gmail.com)

http://print.thefinancialexpress-bd.com/2016/12/27/160388

 

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