Food Security in the Post-GATT World

Professor Matthews lectures in agricultural trade policy and development at Trinity College, Dublin.

Since the signing of the Final Agreement of the Uruguay Round of GATT negotiations in Morocco in early 1995, there has been a growing interest in evaluating the impact which the new world trade regulations will have on the ability of countries, and particularly developing countries, to meet specific national objectives. Questions have been raised about the compatibility of the new trade regime with environmental sustainability objectives and the achievement of food security.

This contribution addresses the question whether the changing international environment, and particularly the emerging framework for international trade embodied in the Uruguay Round Agreement and the establishment of the World Trade Organisation, is likely to lead to a more or less food-secure world. Specifically, we focus on the links between trade and food security given the major changes now underway in the international trade environment.

Both for developing and developed countries, the amount of reliance to be placed on trade is a key element in their food security strategies. Trade contributes to food security in a number of ways. For example, it enables countries to consume more food than they produce; it can help to even out supply variability, which would otherwise cause significant price fluctuations; it enables faster income growth and thus holds out the potential for higher food consumption; and it permits global food production to take place in those regions most suited to it, thus minimising the likelihood of adverse environmental effects.

But reliance on trade also brings risks for a country’s food security. These include the risks of deteriorating terms of exchange on world markets (falling prices for agricultural exports, higher prices for food imports); of unreliable suppliers; of importing price instability if world markets are more unstable than domestic food markets, of widening domestic consumption inequalities; of exacerbating domestic hunger by increasing competition for available food supplies; and of increasing environmental stress. Trade is not always and for everyone a positive factor promoting food security. The question is whether the emerging global system of trade regulation increases more the risks or the benefits.

From the food security perspective, the agricultural agreement in the Uruguay Round is the most significant element, although the overall impact of the general agreement on trade and economic growth will also be significant. The agricultural agreement covers market access, disciplines on domestic support and export subsidies, as well as regulations governing the use of sanitary and phytosanitary standards.

The quantitative results of the Round fell short of what some participants, including the major Latin American food exporters, had hoped for, but are still considerable. Aggregate domestic support for global agriculture will be cut from $198 billion to $162 billion (mainly in developed countries) and export subsidies will be cut from $21.3 billion to $13.8 billion. Agricultural tariffs have been reduced by around one-third on average and, more important, non-tariff barriers have been converted to tariffs. Non-tariff barriers, including quotas, variable import levies and seasonal import restrictions, have always been more important instruments of protection in agricultural trade compared to trade in manufactures. Virtually all agricultural tariffs will be bound in future, i.e. ceiling rates have been established, which adds greater security to trade. A modest amount of new market access has been provided. The quantitative limits on export subsidies mean that market growth in future will be met by low-cost agricultural producers.

The changing policy environment has implications for the size and stability of world food markets and for the likely future level of world food prices. A number of developing country participants in the Uruguay Round feared it would lead to higher prices for food imports. Developing country agricultural exporters will benefit from these increases, while agricultural importers will tend to lose from higher world food prices. This loss can be minimised if importing countries fully pass through the change in world prices to their own domestic markets, thus encouraging their own producers and consumers to adjust to the new market conditions.

These adjustments, however, are not easy to make. On the consumer side, the high share of total income spent on food in low-income developing countries means that increasing food prices has a very significant welfare impact in these countries. On the producer side, the ability to increase production may be relatively inflexible. Generating a response to higher food prices requires complementary public investment, in roads, irrigation, research and extension. Unfortunately, in many developing countries, public investment in agriculture has been falling as part of the fiscal retrenchment encouraged by structural adjustment programmes.

A detailed examination of the outcome of the Round indicates that the initial fears were overstated. The lack of ‘bite’ in many of the disciplines which have been introduced (for example, many countries exaggerated the tariff levels from which the reductions are calculated so that their practical effect is much smaller than anticipated) means that the expected increases in world prices after the full implementation of the Round will be smaller than earlier projected, perhaps of the order of 0-5 per cent rather than the 5-10 per cent which some had foreseen. In real terms (i.e. relative to an index of manufactured goods prices) both FAO and World Bank projections indicate that food prices will continue to fall, even after the implementation of the Uruguay Round. This is not to argue that world agricultural prices cannot increase in future (witness, for example, the rise in world wheat prices over the past two years well before the Uruguay Round could have an impact). However, the Agreement itself is unlikely to put much upward pressure on food grain prices to the end of this decade.

An important consequence of the Agreement for food-insecure countries which rely heavily on food aid deliveries is its likely effect on food aid flows. Under the Agreement, bona fide food aid is exempt from the prohibition on export subsidies, so the possible consequences for food aid flows are indirect. Because food aid has been related to the disposal of surplus production in food exporting countries in the past, reduced government stock-holding in exporting countries might be expected to lead to a reduced willingness of donor countries to provide food aid. A counter-incentive, however, is that food aid may become a more attractive outlet for countries with surplus disposal problems now that tight limits on the volume of subsidised exports are in place. On balance, future food aid deliveries will be more influenced by public perceptions of its usefulness and value than by the GATT agreement itself.

Some developing countries have been concerned that the restrictions imposed by the Agreement on the range of policy instruments they can use to pursue their agricultural policy objectives will make it more difficult for them to achieve their agricultural growth and food security objectives in the future. While direct subsidisation of producers will be increasingly restricted, there are no restraints on the use of public investment measures for agricultural and rural development purposes. Investment and input subsidies, both frequently used measures in developing countries to promote increased production, continue to be permitted in developing countries under the Agreement. In this respect, disciplines imposed by structural adjustment programmes often go much further than the policy constraints imposed by the GATT Agreement.

A major concern of food-insecure countries is the disruption of domestic markets by imported world price instability. Changes introduced by the Uruguay Round agreement should contribute to the stabilising of world markets, though, in the case of grains, these positive links may be outweighed by reductions in the level of stocks held by the main exporters as the extent of policy support is reduced. Smaller global stocks mean that the world is less able to smooth adjustments in consumption to changes in production.

Some mechanism to ensure that the necessary minimum of stocks are held and rules for their use in times of shortfalls is urgently required. It was the skewed distribution of the costs of stock-holding, largely borne by the US and the EU, not their absolute size, which was problematic in the past. Negotiating a burden-sharing agreement will not be easy, but there is a precedent in GATT’s sponsorship of food aid burden-sharing under the 1967 Food Aid Convention. The global community may be more willing to contribute to the costs of maintaining a global reserve given that the threat of subsidised competition from existing stock-holders is now contained.

Finally, from a food security perspective, the impact of the Agreement on incomes and purchasing power, particularly among the poor, is of crucial importance. While the likely income effects of the Uruguay Round, and particularly their distribution within and across developing countries, is controversial, there is good evidence to suggest that, on balance, the Uruguay Round will lead to a reduction in absolute poverty. As around half of the world’s absolute poor live in China and India, if these two countries increase substantially their share of world markets in clothing and other labour-intensive export manufactures as a result of the Agreement as is likely, then these gains will swamp all other effects on poverty in other developing countries.

There are thus good reasons to be optimistic about the consequences of the emerging trading order for food security in developing countries.