4:21 PM Mar 28, 1995


Geneva 27 Mar (Chakravarthi Raghavan) -- The trade liberalization effects of the Uruguay Round on agriculture will have a positive effect on value of world trade -- both by a small boost in volume and on prices -- but will not arrest or reverse slowdown in growth rates for commodities, according to the Food and Agriculture Organization (FAO).

The FAO report for next week's Committee on Commodity Problems (CCP), shows that the trade gains of the Uruguay Round Agriculture Agreement, are mainly for North America, Australia and New Zealand and, in some temperate zone products, for some of the Latin American countries.

Europe loses in the trade, while Africa will be worse off on its trade account, "unless it expands food production, diversifies export crops and increases intra-regional commodity trading," the FAO's Chief of Commodity Policy and Projections Service, James Greenfield says.

The FAO study negatives also one of the important anticipated benefits of the Uruguay Round trade liberalization benefits -- reduction in price instability -- be increasing the number of countries open to world price signals and the 'shocks' (of unexpected production shortfalls) absorbed in a greater number of markets, thus cushioning the shock effects on world markets.

The trade liberalization, the FAO says, has however almost no effects on price stability of cereals.

The FAO advice to the African countries to expand their food production would in fact be a reversal of the policy advice thrust on them (and forced via the Fund/Bank structural adjustment programmes of the 80s) when they were asked (on economic efficiency grounds) to focus on export cash crops, rather than aim at food production and self-sufficiency.

This advice (in which the fallacy of composition was ignored) brought about both the collapse of prices of their major commodity export crops and increase in their food dependency, as well as their debts and debt service to the international financial institutions.

The African countries are also advised by FAO to improve the quality and competitiveness of products for which new market opportunities "may open up" -- such as in horticultural products, oilseed products and hides and skins.

FAO suggests that developing countries should re-examine:

* modifications in national food security and nutrition enhancement policies and strategies, including consumer price policies for food, due to the expected increase in food and agricultural prices in international markets;

* evolve targeted and decoupled (Green Box) forms of assistance to their agricultural sector, that can be implemented at low budgetary costs (but does not say how this can be done in the face of the Fund/Bank imposed restraints on them on government budgets)

* reconsideration of producer price policies and modifications in "price bands" or other instruments to prevent excessive instability likely to arise from tariffication that may introduce greater instability in domestic prices;

* assess carefully the extent to which countervailing measures may be needed to offset the internal price depressing effects of gradually declining but continuing high levels of protectionism elsewhere, and use the financial resources captured to increase the food production and enhance food security in accord with their comparative advantages in a protectionism-free world.

FAO also says there may be increased scope for intra-regional and sub-regional trading arrangements, based on tariff concessions, among developing countries as a result of tariffication and elimination of the non-tariff barriers.

FAO estimates of gains and benefits are based on trade growth due to tariff cuts, and cuts in domestic support and export subsidies and demand growths attributed to the income growth.

The weakest point of its exercise is in its assumptions about the total trade and income gains from the Round as a whole -- with the net effect of over-estimating the benefits for the developing countries and under-estimating the losses.

FAO notes the estimations of the GATT ranging from a low $109 billion to a high $510 billion (according to GATT economists the higher figure is based on a scenario of monopolistic competition) and the World Bank/OECD's $213 billion estimate (of 1993, even before the Round was concluded), and makes its own estimations based on the World Bank $213 billion income gains for its main scenario and double that figure for higher income assumption.

But other economists have found fault with both the GATT and World Bank/OECD estimations and their questionable assumptions.

FAO adds however that the main thrust of its report is the revised outlook for world agricultural markets in year 2000, and the assumed effect of the world income gains is "well below one year's growth in world incomes".

For commodity markets as a whole, FAO says that even after all the ongoing trade liberalization efforts (and its positive effect on trade growth for rice, fats and oils and bovine meat) the outlook is still for a slowdown in growth rates compared with the eighties.

It is "possible", FAO adds, that commodities not covered in the study (including cotton and some horticultural products), accounting for 41% of value of agricultural trade, will enjoy greater benefits.

The Uruguay Round is estimated to have a positive effect on the value of trade as the small boost to volumes is coupled with a positive effect on prices, but it will not overturn the slowdown caused by decreased import growth in the main developed country markets.

Overall, the value of world trade of the principal agricultural commodities is expected to rise by $53 billion between 1987-89 and 2000, of which $14 billion may be attributed to the Uruguay Round.

Among the developed economies, there will be large increases in net imports of principal commodities by Western Europe and Japan, a decline in the deficit of Eastern Europe and the area of former USSR. There will be large export gains for North America and Oceania.

World agricultural market prices are generally expected to be higher than in the 1987-89 base period -- due significantly to the effects of the Uruguay Round.

The growth rate for global consumption of agricultural commodities covered by the study is also projected to decrease -- with the exception of tea and bananas.

Allowing for an annual 1.7% population growth, the per capita consumption after the Uruguay Round is expected to decrease for dairy products, feedstuffs and coffee, while cereal use for food is expected to stay constant. "On balance, the Agreement will slightly slow consumption growth in the low-income and food-deficit countries".

As for developing countries, their overall agricultural export earnings are expected to keep pace with rise in import bills.

But the gap between value of imports and exports will widen substantially for the Near East, while in Africa it is projected to go from a small surplus to a small deficit. Net exports are expected to improve for Latin America and the Caribbean region and for the Far East.

The Uruguay Round, while accounting only for a part of these changes, will affect the agricultural import bills of all developing regions adversely and boost their exports to a lesser extent.

Apart from higher prices and shifts in market shares towards the more efficient exporting countries, the Uruguay Round will raise food import bills because of the reduction in export subsidies on these products and will lead to a sizeable fall in the value of the preferential trading arrangements.

The potential value of the preferences given by the EU, Japan and the US in the agricultural sector in 1992, FAO says, was $1.9 billion -- of which one-third went to Africa, 40% to Latin America and the Caribbean, and the rest mainly to the developing countries in the Far East and Oceania. The Near East benefited very little.

After the Uruguay Round reduction in MFN rates, the potential value of preferences is estimated to fall by 0.8 billion with losses of $200 million for Africa, $300 million for Latin America and Caribbean, $200 million for Far East and $100 million for Oceania.

For developing countries as a whole, import growth rate is expected to decline for cereals, the oilseed sector, dairy and most tropical products. But the growth rate of their meat and banana imports are seen as accelerating. Their exports are expected to expand more rapidly than in the 80s for cereals, meat, dairy, sugar and bananas.

Their slight, one billion dollar, surplus in 1987-89 for commodities is unlikely to change in 2000.

For developed countries, growth rates of both imports and exports are expected to weaken. There is expected to be a sharp decrease in growth of all the main temperate zone products, but export growth is also expected to fade. Overall they would be small net exporters of these commodities in 2000, but with some countries gaining and others losing.

Region-wise, with or without the UR, a sharp slowdown in growth in production and consumption of main agricultural commodities is foreseen in the ICs, with an even sharper slowdown in trade.

In Western Europe, in the main agricultural commodities the net import level (fob) of $5.5 billion in 1987-89 is projected to rise to $15.3 billion. The region will be a smaller exporter of cereals, oilseeds, milk and sugar, while imports will grow for cereals, fats and oils, some meat and tropical products.$

Major beneficiaries among the ICs are North America whose net exports will rise from $15.1 billion to $22.2 billion and Oceania from $11.2 billion to $17.9 billion. Both gain from higher exports of cereals, fats and oils, meat and milk.

Most African countries are importers of food (particularly wheat, rice and dairy products) and exporters of tropical products like cocoa, coffee, fruits and some raw materials. Most of them, 28 out of 50, are least developed and 43 of them are low-income food deficit countries. They enjoy preferential access for their exports via GSP and Lome Convention schemes.

The price rise in temperate zone food commodities means they will face a substantial rise in import bills -- with their agricultural import bills rising from a $8.4 billion in 1987-88 to $14.0 billion in 2000. Some 15% of this rise may be attributable to the UR agreements, while the rest are due to others -- mainly population growth.

The effect on production is only marginally positive, but consumption will fall slightly. The small decline in volume of food imports is outweighed by the price rises and loss of export subsidies on their imports. The African import bills could thus be boosted by about $100 million.

"The per capita consumption levels of basic food stuffs by year 2000," FAO says, "would remain precarious, with increases in rice, maize, oilseeds and poultry and reductions in other coarse grains, beef, sheepmeat and milk. The UR would hardly change this pessimistic scenario." The net result for the African developing counties is rise in import bills of their main agricultural commodities by year 2000 -- from their levels in late 80s -- by $5.5 billion plus a $0-1 billion loss due to reduced export subsidies, while their export earnings from main agricultural commodities could rise by $3.2 billion less a potential $0.2 billion loss on account of preferences.

The African developing countries will move from an export surplus of $1 billion in 1987-89 (fob basis) to a deficit of $500 million in year 2000, including as a result of the UR effects.

In Latin America and Caribbean, the region as a whole is a net importer of cereals, though several, particularly Argentina and Uruguay are exporters. For the region as a whole, the UR will boost imports by $0.9 billion, almost entirely due to higher prices. But reflecting a relative rapid growth of per capita incomes, consumption per capita is expected to rise for a broad range of commodities particularly poultry, fats and oils, some other meat and feed-use of grains. The effects on consumption in the region is small: higher incomes and higher prices will have offsetting effects.

Export earnings for the region will grow substantially by year 2000 -- with total value of exports for the region amounting to $48 billion in that year compared to $31 billion in 1987-89. Significant gains are expected for exports of grains, oilseeds, oilmeals and some livestock products by Argentina, Brazil and Uruguay.

Within the region, Central America will face higher prices for imported cereals, dairy products and meats -- with adverse impacts on consumption and nutritional status.

The Caribbean will face rise in prices of food imports, and has only a rather limited range of agricultural exports (mainly sugar, fruit, tobacco and beverages -- a significant part of which are exported through preferential arrangements facing erosion).

The Near East, a predominantly net importer of food imports, and with only a minority of GATT/WTO members, will face rise in prices of basic foodstuffs. But it will give all these countries a chance of passing on higher prices to their farmers, thus giving a fillip to output.

The cost of agricultural imports for the region is expected to rise substantially from $18 billion in 1987-89 to $27 billion -- with increase particularly large in basic foodstuffs where the bill will rise by $5.5 billion or 47%.

In the Far East, overall agricultural imports are projected to expand by 60% to $48 billion, with the UR agreement boosting import bill by $3.3 billion. The generally rapid economic growth in the region is expected to be boosted by the UR accords, with per capital consumption of agricultural commodities projected to grow.

In South Asia there is a self-sufficiency in basic cereals (with net exports in rice and net imports of wheat), a net importer of oilseeds and dairy products, but major exporter of other agricultural commodities (tea, spices, cotton, jute, tobacco and fruit).

On balance the region may be a small loser in net trade in basic food stuffs except for some possible gains in the rice sector, though the concentration of gains in rice would favour Japonica rice exporters more than Indica rice exporters.

But bigger gains may be expected from textiles under the MFA liberalization, FAO says.

(However, other reports that in the period to 2000, the period in the FAO projection, there will be no or little liberalization in the two major importing markets of US and EU).

South East and East Asia may lose from higher world prices of wheat and coarse grains, but this could be more than offset from higher export prices for rice. Most countries of the region, with some significant exceptions, will be relatively close to food self-sufficiency and the main result of the UR will reinforce this tendency.