D+C Development and Cooperation (No. 6, November/December 2002, p. 31-34)

Industrial countries are still blocking exports of farm produce from developing countries on a large scale. On the other hand, they themselves have become the world's greatest exporters of agricultural products. In order to hinder agricultural imports of developing countries they use tariffs and quotas and, above all, discriminate against processed products. The developing countries are forced to remain suppliers of raw materials. Michael Windfuhr examines the role which various world trade agreements play in this game.

The problem is familiar from many debates on development policy over past decades, and hardly anything has changed in recent times. The export earnings of developing countries, especially of the poorer among them, are still dependent to a great degree on raw materials. For some of the least developed countries (LDCs), agricultural exports make up more than 90 per cent of their total exports. The proportion for all LDCs combined is 14.7 per cent, and 26.8 per cent for all countries in sub-Saharan Africa.

If exports of minerals are included, the dependence on raw materials exports is even more marked. The OECD estimates that raw materials account for 75 per cent of the total exports of the LDCs as a whole. Agricultural and forest products make up about half of that percentage (OECD 1997). Most of the LDCs' exports (64 per cent) go to the industrialised nations which still process most of the raw materials. A look at the practice of trade policy can help to identify significant reasons why this situation is continuing.

The realities of trade policy

The discrimination in trade policy which affect the developing countries' exports are found in three areas: 1) the generally high level of the industrialised nations' import tariffs; 2) the escalation of the tariffs which increase with each processing stage; and 3) the great number of non-tariff barriers to trade which impede imports, particularly of processed products. What has happened in recent years with regard to these three areas? What trends can be identified following the Uruguay Round?

Tariffs. Until the conclusion of the Uruguay Round with the Marrakech Agreement in April 1994, the agricultural sector was a exemption area and not subject to the general principles of liberalisation and non-discrimination of foreign suppliers, as provided for in rules system of the General Agreement on Tariffs and Trade (GATT). Inclusion of the agricultural sector since 1994 has in fact reduced some distortions on the world agricultural produce markets, but the situation is still far from being a qualitative breakthrough. The average tariff on agricultural products following the Uruguay Round is 40 per cent, while on industrial products it is slightly less than 4 per cent. This comparison alone makes clear the extent to which the problem still exists.

Before the Uruguay Round the markets for many agricultural products were affected by disparate obstacles such as import and tariff quotas and many other non-tariff barriers to trade. For example, the European Community had in place a variable price-adjusting import levy system for all products subject to European market control regulations which made imports virtually impossible.

An initial success of the Uruguay Round was that all WTO members committed themselves to convert the non-tariff barriers to trade (NTB) into tariffs whose level is to correspond to about the same as that of the previous NTB protection (tariff equivalents). For products for which there were no NTB, the tariff rate during the Uruguay Round's reference period of 1986-88 is to be taken as the basic tariff. Besides the commitment to convert the NTB into tariff equivalents, the industrialised nations also undertook to reduce the equivalents and the basic tariffs by 36 per cent until 2000. Developing countries must reduce their tariffs by 24 per cent until 2004, although LDCs are exempt from this obligation.

“Dirty tariffication”
makes mocliery
of trade round

But in reality there has been little success in putting these provisions into practice. In converting their NTB into tariffs, the industrialised nations have often fixed them at a high level. Experts estimate that “dirty tariffication” was involved in 60 per cent of all EU tariff equivalents, and in 45 per cent of the USA's. That means the tariffs were set so high that even after the promised 36 per cent reduction the effective protection is still as great as before or even greater. In addition, since the basic tariffs were very high due to the selection of the reference period of 1986-88 this favoured the trend to higher tariffs in the agricultural sector.

In general, many tricks and a great lack of transparency can be noted in the implementation of the Agreement on Agriculture, meaning that the total burden of tariffs was scarcely reduced in substantial terms. The commitment to cut tariffs by 36 per cent applies to the average tariff on all products; in the case of some individual products a reduction of only 15 per cent is permitted. That is why in the case of highly-sensitive products, such as wheat, sugar, beef, maize and barley, the industrialised nations often have reduced the tariff rate by the minimum of only 15 per cent. At the same time, in the case of products with an anyway low tariff rate of 3-4 per cent they have frequently cut tariffs by 100 per cent, which helps them to show a total reduction of 36 per cent when working out the average.

This led to a situation where tariffs have not been reduced to a relatively uniform degree. Rather, especially in the case of sensitive products, peak tariff rates have arisen, such as 56.5 per cent for wheat, 87.8 per cent for beef and 86.1 per cent for maize. Peak tariffs are defined as all tariff rates above 12 per cent (up to 300 per cent). According to a UNCTAD statement in 1999, the EU has a total of 1,273 peak tariffs on agricultural products, which is 96.8 per cent of all such EU tariffs in its overall foreign trade.

In addition, the Agriculture Agreement's 'special protection clause' permits the levying of extra taxes on sensitive goods when the import quantity exceeds a certain threshold or the import price is below a certain level. This rule applies to products which must be 'tariffied'. Whereas in all other areas the GATT protection clause may fundamentally be applied only if the importing country can prove that otherwise the imports would cause 'serious harm' to individual national economic sectors, this is not required under the Agriculture Agreement. In line with the WTO members' usual system of fixing tariff rates (called 'bindings'), importing countries must merely identify goods to which the special protection clause may be applied. A total of 38 WTO member countries has reserved this right for no fewer than 6,072 agricultural goods. The EU alone has identified 539 products in this way.

Besides pledging tariff reduction, the WTO members committed themselves in the Agriculture Agreement of 1994 to putting in place a minimum level of market access alongside their tariffs because these sometimes resulted in prohibitively high duties. All WTO countries must continue to guarantee the existing access of other exporters. In addition, they must enable a minimum access of 5 per cent (3 per cent for developing countries) for all products until the end of the implementation phase in 2004. Experience with quotas to date makes clear they should be used for products for which otherwise there are such high tariffs that importing them is impossible. At first sight that appears to be helpful. But many quotas are 'underfilled' because of tricks that hamper this. For instance, licences are granted to suppliers that are unable to fill their entire quota.

In general, it can be noted that following the Uruguay Round all tariffs on agricultural produce are 'bound', but according to a World Bank study this has resulted in a reduction of just about one-quarter of all tariffs at most. In the case of 'tariffied' products the reduction rate is in fact only 14 per cent.

Tariff escalation. The instrument of tariff escalation, by which tariffs rise in line with processing stages, is particularly detrimental to the goal of building up processing industries in developing countries. Here, too, a change in the trend is not in sight.

The latest WTO overview shows, for example, that within the EU raw cocoa has a tariff of zero per cent. At its first processing stage (cocoa butter) it is charged 9 per cent, and at its second stage (cocoa paste) it attracts 21 per cent. The figures for coffee are 4 per cent for the raw product and 11 per cent for its second processing stage, and for soy beans zero per cent and 6 per cent respectively. Japan and the USA apply comparable scales.

Thomas Fritz of the German NGO 'Forum Environment and Development' cites a study which found that the proportion of processed products to the LDCs' total agricultural produce exports dropped from 27 per cent to 16.9 per cent from 1964 to 1994, while that of the developing countries as a whole during the same period increased from 41.7 per cent to 54.1 per cent. This, however, covers mostly only first-stage processing. If a further processing stage is taken into account, the proportions are much lower at 8.4 per cent and 16.6 per cent respectively.

Therefore it is not surprising that the world's biggest exporting nations are the industrialised states. They process the developing countries' raw materials and export them as processed products. Among the five leading exporters of agricultural products in terms of value besides the USA, France, Canada and the Netherlands is Germany, which has a world market share of 5 per cent, while Brazil, the giant of the agricultural exporting developing countries, is at 12th place with a 2.8 per cent global market share (WTO 2002).

Non-tariff barriers to trade. With regard to NTB, there has been progress to some extent due to the Uruguay Round's constraints on tariff setting, when many previous NTB such as variable import levies, import quotas and tariff rate quotas were converted to tariffs, but with the limits described above. Many other foreign trade regulations also have the effect of NTB, and their significance has not been reduced comparably. The lack of transparency in the tariff structure and the tariff quota distribution examined above are as similar to NTB as the many health and hygiene standards, which are particularly important in the case of agricultural products. However, it should be noted that as a rule these standards are laid down to protect consumers in importing countries. They can, of course, deliberately or unintentionally, also have protectionist impacts or at least make it difficult for developing country exporters to supply markets in Europe or Japan if they demand expensive inspections, and so on. But it would be wrong to analyse these standards solely from the angle of their function in restricting trade because in the first place they serve other purposes.

In this area, which is regulated by two special WTO agreements, the Agreement on Sanitary and Phytosanitary Measures (SPS) and the Agreement on Technical Barriers to Trade (TBT), there arise highly-complicated dispute settlement procedures, such as on the question of whether certain hygiene standards are scientifically necessary or are decreed solely from precautionary aspects. For developing countries' products, every tightening and raising of standards can have the effect that adjustments are made more difficult, especially when the standards vary from one industrialised nation to another. A tightening of standards, such as that involved in Germany's promotion of ecological farming, should therefore be accompanied by corresponding advisory services and initial and advanced training of exporters, particularly those in poorer developing countries.

Low benefits
of preferential agreements

Preferential tariff agreements have long been used to improve market access for developing countries by giving them favoured treatment. In the case of the Generalised System of Tariff Preferences (GSP) established under GATT, the WTO's forerunner institution, they have been secured since 1979. But in the case of special preferential agreements, such as the former Lomé-ACP treaties, they must be approved by a special waiver within the framework of the WTO. Such a waiver was granted for the Lomé successor agreement, the Cotonou Agreement, at the last WTO ministerial conference in Doha.

The ACP agreement has its greatest importance in the context of the EU's foreign trade relations, because in this area tariff exemption for more than 90 per cent of all products has been achieved since 1975. In the case of the African, Caribbean, and Pacific (ACP) countries, exemption also covers processed products. Important exceptions are in turn the agricultural products for which the EU has a market regime, where production is subsidised and capped. In these cases even the ACP countries are granted only tariff reductions. When import tariffs are prohibitively high, however, reduction margins of 10-16 per cent often are of no help.

The EU announced a further trade liberalisation for all LDCs under the slogan “Everything but arms” at the Brussels conference on LDCs in May 2001. This met an old demand from developing countries and NGOs in development cooperation. But since the EU immediately lost its courage again, exceptions were made for the three most important products - sugar, bananas and rice - and transition periods of several years were agreed. The British aid organisation Oxfam therefore assesses the liberalisation impact of the “Everything but arms” initiative as very slight. Only a few goods traded between the LDCs and the EU are affected at all.

Besides the preferences for the ACP countries and the new and additional initiative for LDCs that are not members of the ACP group, the EU has, like all other OECD countries, a third preference system, the GPS, in place for all other developing nations. This generalised system was pushed through in protracted negotiations during the 1960s and 1970s and codified with the conclusion of the Tokyo Round in 1979.

Most writers rate the system's success as modest. Additional trade has seldom been initiated by it. Often, there was only a rechannelling from non-preferential to preferential trade. Only a few countries were in a position to exploit the preferences. Twelve countries use more than 80 per cent of the EU preferences, and six countries avail themselves of 84 per cent of those of the USA. The reasons for this limited use are mainly the complexity of the procedure, which contributes to the fact that in the case of agricultural products frequently only half of the exports actually entitled to GPS treatment also enjoy its reduction margins, and the restriction of the product range. In turn, the exclusion of many agricultural products makes using the system difficult for many countries which produce mostly agricultural goods. In addition, since in the Uruguay Round tariffs were lowered again there was also an erosion of the level of the tariffs offered (which, however, is of more significance for tariffs on industrial goods).

At the beginning of 2002 the EU renewed its GPS and at the same time attempted to improve the management of the offers and the clarity of the rules. By raising preferences the EU also sought to balance their erosion due to the general lowering of tariffs by the Uruguay Round. It remains to be seen if these steps will fundamentally improve the use and impacts of the GPS.

In general, it can be noted that the preferential agreements have had little success in boosting the developing countries' exports. The ACP countries have not been able to increase their share of EU imports over the last 20 years. They have also been unsuccessful in diversifying their product range to any appreciable degree. Too many exceptions, especially in the agricultural sector which is so central for developing countries, strict rules on the origin of products, the exclusion of certain 'sensitive' products, and preference erosion have had a negative impact on the agreements.

Another important factor is that favourable trade rules alone do not guarantee that the poorest countries can use their market opportunities. In those countries, industries must also be built up that can process raw materials and export finished products. The countries must promote such industries, such as by tax relief or assistance with their infrastructure. But pointing out these home-made solutions is not to diminish the importance of the preferential agreement, especially for the poorer developing countries.

The market power of
agricultural exporters

Besides the aspects of foreign trade regulation already mentioned, the growing market power of private sector companies in agricultural trade should also be looked at. In the case of most agricultural products only three to six companies are now involved in their worldwide trade. The companies' importance is in fact increasing because many developing countries have in the meantime privatised the state enterprises that earlier handled their export business in the agricultural sector, which often meant selling them to transnational corporations. This was due to the pressure put on these countries by political recommendations in the context of structural adjustment programmes or in connection with the WTO debate. Therefore for developing countries, agricultural trade is increasingly also becoming a question of access to the trade and sales opportunities of the transnational companies.

At the same time, the market clout of major retail companies in the OECD countries is also growing. Particularly in the fruit and vegetable trade the big retailers have gained ever greater market share to the cost of wholesalers. To ensure continuous sufficient supply at calculable prices quite a few retail companies have turned to 'locking in' suppliers by means of vertical cooperation agreements which bypass the wholesale trade.

Besides the concentration in sales channels, farmers are also exposed to massive consolidation in the supplier industry. This has long been the case in terms of agricultural chemicals, and now the same applies to seed. Therefore the question of establishing appropriate rules on competition is becoming ever more important for the agricultural market. Integrating competition policy in both the WTO rules and the Agriculture Agreement is urgently called for.

The general conditions of the world economy still have many disadvantages for poorer developing countries in particular. True, the objection always put forward at this stage of the argument - that the developing countries themselves are mainly responsible for their economic plight because they fail to improve their domestic framework conditions - as well as pointing to the success of some of them, are justified. But they should not lead one to underestimate the significance of the framework conditions of the world economy.

The self-interests of the industrialised nations in trade policy still hinder further reform steps. Whereas many developing countries in recent years have opened their markets, including in the agricultural sector, under the pressure of the WTO negotiations and structural adjustment programmes, the North still keeps its markets closed and distorts the market even more by huge subsidies to promote its own agricultural sectors.

It is true that the WTO Agriculture Agreement also contains the commitment to reduce national agricultural subsidies by 20 per cent, but that leaves an 80 per cent opportunity for support. Due to the Uruguay Round the developing countries suffered losses of their agricultural policy instruments, which consisted mainly of trade regulating interventions. For the permitted instruments, meaning especially that of subsidising agriculture, they have no money. The industrialised nations had to make much fewer adjustments following the Uruguay Round.

These points of criticism of the concrete trade policy disadvantages of developing countries have long been known, and it is worthwhile checking time and again whether announced reforms have led to real changes in the hampering framework conditions. Our review finds that this is so only to an extremely limited extent.

The slowness of the changes, the continuity of the disadvantages and the growing economic gap between rich and poor countries has given rise to a number of reform ideas which go far beyond the usual criticism and should be given serious examination. Developing countries at the WTO conference in Doha demanded special ideas on the integration of developmental concerns in the WTO rules (in a “development box”), and that they should be put on the agenda of the new ministerial round. Unfortunately they were unsuccessful. Despite all the rhetoric on a development round, the industrialised nations apparently quickly lose courage when more far-reaching changes in favour of developing countries are to be discussed.

Intellectuals in developing countries also a demand a rethinking on raw materials agreements because the trend of prices for these countries' raw materials exports is ruinously bad. Within United Nations organisations such as the Environment and Development Programmes (UNEP and UNDP) there is also talk of coupling raw materials agreements with price stabilisation, possibly with conditionality to ensure sustainable raw material extraction. Agreements on raw materials, however, are always questionable because on the one hand they involve the risk of solidifying the developing countries' dependence on them, and on the other hand because prices cannot be supported when at the same time the World Bank calls for greater production in all corners of the world. This policy has caused the most recent collapse in cocoa and coffee prices.

All these ideas are at the proposal stage. In view of the global scale of the economic inequalities and their strong growth, a new curiosity and a fresh examination of proposals is needed urgently. As trade policy promises, solely pointing to a limited further market opening (Everything but arms), and the rhetoric about a development round without real steps towards it, are not enough.