Agriculture: the Dog that Didn’t Bark?

Trade Implications of Policy Responses to the Crisis
Joint World Bank – CEPR Conference

Brussels, 26-27 May 2009

Agriculture: the Dog that Didn’t Bark?

Tim Josling

Thanks a lot for the invitation to CEPR and the World Bank. Also, one of the reasons, from my point of view, why it's been so pleasant to be involved in this is that it's given me an opportunity to co-author a paper with Stefan again after several years of inaction, as he's had more important things to do.

The motivation for the paper is that agriculture has been known as a sector that has enjoyed high levels of support. The odd thing - "The Dog that Didn't Bark" - in the title, is that there's been no major protectionist measures announced in the agricultural area as a result of the economic crisis. So, our task in the paper is to explain why this has not been the case.

Is it a case of the agricultural policies having shifted? Have the circumstances not been such as to warrant any protectionist measures, or have there been protectionist responses, but they've been relatively mild and been drowned out by other events?

Well, what we did was to start off with the evidence. Basically, we divided the evidence into four obvious categories.

The new border measures that might have been taken. The interesting one for agriculture is a lot of the protectionist measures actually are dependent on the level of price, so that they're in a sense counter-cyclical. If the world price goes down, then the level of protection goes up. So, we needed to look at that.

New action to shield consumers, or, in many cases, the users of farm products, and then of course, financial stimulus to the extent to which that was dedicated to rural, as opposed to more general, activities.

So, we took the World Bank list, the Trade Policy Review Board Report of Lamy of April 20, and then supplemented it with the World Bank evidence that we were kindly provided by Richard and others. So, what I'm going to do very quickly is to go through the actions as noted in the WTO report as amended.

We, first of all, looked at new border measures, and there are about 43 measures totally, of which 19 were new border measures. These are measures that are in favour of producers: in other words, this is more protection given at the border.

There were about 9 cases where import taxes were raised. I, myself, think that's rather surprising that there haven't been more. Ecuador, Turkey, and Russia increased their taxes on a wide range of goods. China took off a temporary interim tariff reduction on soy products, and India imposed a duty on soybean oil. But, that's about all. That, to my mind, is a rather surprising lack of action on the part of the governments.

With respect to the anti-dumping countervail measures that we heard about yesterday that Chad had listed, I was actually trying to figure out from Chad's slides whether he had got the same numbers as we had. It was roughly the same for agriculture, but here, this was basically the EU anti-dumping duties on fruits from China, and the ongoing anti-dumping countervail issues that the EU had with respect to biodiesel from the US.

The SPS measures - basically China and Russia both banned some pork. China banned Irish pork, and Russia banned US pork from certain facilities. Whether that was anything to do with swine flu, I don't know. I won't speculate on that.

The elimination of export taxes this is really sort of moving off the period of high world prices. Basically, the exporter is trying to restore some sort of credibility to their export position. Argentina removed some export taxes, as did India on basmati rice. It had already reduced the taxes on non-basmati rice earlier. Then Vietnam reduced its taxes on rice, and Indonesia on palm oil. So, these are not really responses to the economic crisis so much as rolling back some rather unfortunate policies that they had had in place the year earlier.

Increases in export subsidies - not very significant. Vietnam, perhaps having read Dani Rodrik, increased export subsidies rather generally. Otherwise, it was just some Indian export subsidies.

So, basically 15 countries - mostly developing countries - took some action at the border. Most involved only a few commodities, and some of them, the anti-dumping countervail and the SPS, had little to do with the economic stimulus.

With respect to counter-cyclical measures, this actually is a little bit more difficult to track because there's no new legislation; the legislation that's there is just the implementation. I have to add one that occurred this week so there's actually three in this category now the EU reintroducing import duties on cereals because of the world price being high, and they abolished them. And also reintroducing export subsidies on dairy products, much to the annoyance of the traditional dairy exporters. The US, this week, also moved in the area of dairy because the dairy prices are low at the moment, and introduced the DEIP Program again. It was always on the books, but started to pay under the Dairy Export Incentive Program for 120,000 tons of dairy products. You could hear the objections of New Zealand all the way across the world.

Other counter-cyclical policies are a little less easy to pin down, but clearly the US has a counter-cyclical program. Again, Richard's and Eliza's paper estimates that there are probably another almost $2 billion being spent this year on counter-cyclicals, and that pretty well corresponds to the estimate that David Blandford and David Orden had done on a project on domestic support.

With respect to consumer protection measures, there have actually been quite a number of countries that have rolled back import taxes. Ecuador, which I mentioned before, reduced taxes on raw materials. So, they're doing a sort of value-added protection type thing where they put up the protection on the finished goods and reduced the protection on the raw materials.

India took off its soy oil duty after a couple of months that cancels out one of the elements two slides ago - but also reduced taxes on sugar. The Philippines actually also reduced taxes on a range of agricultural imports, as did Tunisia. So, there have been one or two cases of general tariff reduction in agriculture.

With respect to the removal of SPS measures, that was basically Japan lifting its ban on Chilean pork and South Korea agreeing to buy some US beef. Neither of those really have any link with the economic crisis.

With respect to introduction of export taxes to protect consumers, Russia and India are the only two cases, and in both cases, these had to do with leather and textiles. For those who are following closely, you remember that India introduced export subsidies for leather. So, what they were doing, essentially, was the old trick they did with cotton, in other words, banning the raw material export and subsidizing the export of the finished product, the value-added product.

So, basically, with respect to these activities, mainly a response to the high prices in the 2007-8 period, but not really a reaction to the recession. I hope I'm getting through these quick enough, because I want to get to the conclusions. With response to the farm stimulus package - this is actually rather interesting to my mind. Apart from the fact that there wasn't as much activity as the import protection side, I think this is where we would have expected a little bit more action. But, there have been cases of stimulus. With respect to funds for rural development, the EU introduced a € billion increase in funds under its economic recovery package. Many of you here will be more familiar with that than I. Relatively few increases in support prices. China increased a price or two. India increased a cotton price.

Indonesia is the only country that we found that actually introduced new, relatively comprehensive protection measures for agriculture. It's a little bit of an embarrassment to my colleagues at the former Food Research Institute, many of whom spent 30 years in Indonesia trying to correct their agricultural policies. They presumably have reverted to some more old-style agricultural policies, with a national action program which introduces price support for various commodities and so on.

Input subsidies are something that are quite common when input prices stay up and when commodity prices go down. And indeed, Indonesia and Sri Lanka are introducing fertilizer subsidies. Again, not quite as widespread as I would have expected.

Income support: interesting; this is actually more a rich country thing, for obvious reasons, I suppose. They have money to go around. Within the EU, France introduced income support for its farmers of €250 million. There's some support in the Flemish region of Belgium for dairy farmers. In Canada, Saskatchewan introduced $71 million support for hog and cattle producers. And then Stefan told me last evening that Germany has announced €300 million for income support in Germany. So, there are some smallish, but nevertheless significant income support packages within the stimulus concept.

Rural credit an obvious one when credit's short. And Brazil, Poland, Russia and Spain all introduced rural credit schemes. But, the major item in this category is the rural stimulus package from China. Basically, it's still within WTO limits, but they increased agricultural support from $18 billion to $106 billion over a two-year period. This is a fairly significant amount of money going to the rural sector. A lot of it, I'm told, is for rural infrastructure and rural schools and so on, so it's not direct farm aid, but some of it goes directly to the farm sector. And they're building up stockpiles - $2 million for building up stockpiles. So, that's significant.

So, in summary, several small changes in trade policy, limited in scope, posing no great trade problems. Modest inclusions of agriculture and stimulus packages, except China, which I think we should watch out for and take note of. No major trade actions by the developed countries. Most of the action was in the developing countries, and no action at all in the least-developed countries, as one might expect. Several actions which would have probably taken place under other circumstances.

So, why did the dog not bark? Well, one possible reason is the political significance to agriculture has diminished enough, so the dog has changed its behavior. Another is that there's been little adverse effect on agriculture. In other words, the dog had no reason to bark. And then, thirdly, there have been many small actions. In other words, the dog was barking, but no one heard it, because it was drowned out by other sectors.

So, let's look at the change in behavior hypothesis. Agriculture has been losing out in political influence, certainly in the US, Europe and Japan. The change to direct payments away from price support weakens the commodity lobbies of the agricultural groups. Increased involvement of other actors - environmentalists, nutritionists, and then more recently, the energy people. Climate change, of course, is coming down the road rather fast. Trade rules are becoming increasingly constraining, both the WTO, thanks to Patrick, and also the regional trade agreements, which are increasingly including agriculture.

The second hypothesis is that there's nothing to bark at. Agriculture enjoyed high prices in 2007-8 and record farm incomes. Demand is fairly income inelastic for agriculture goods, and therefore, a drop in income doesn't have that much of an effect on certain basic types of food, although obviously, high value-added, high-cost food can be affected. The big impact, I think, is the on the reduction in the growth rate in the emerging countries. That obviously led to some of the depression in prices, although prices are still above where they were two or three years ago. And then, of course, I think the biggest answer in this case is that existing agricultural policies are there to absorb much of the impact of falling prices.

What about the third hypothesis the barking itself is not very loud? Well, agricultural actions are small in effect, but on the other hand, if the recession goes on for very much longer, we could see this picking up. The Uruguay Round agreement on agriculture certainly restricted some of these protectionist responses, but we need a tighter framework for limiting government response in ways that distort trade.

So, very quickly, lessons. Well, I think the first lesson is that the Uruguay Round agreement on agriculture has actually stood up quite well to the strain. We haven't seen any violations of this. And developed country responses in particular have been sensitive to trade implications. Therefore, the need is to tighten up discipline on trade-related actions.

In this case, our recommendation, so to speak, is a rather obvious one, that I've noted for almost every speaker so far. Namely, that the completion of the Doha Round would add some of the necessary disciplines. In other words, the instrument is at hand. It just takes some high-level agreement to implement it. Export subsidies would go entirely. Trade distorting domestic support would be decimated.

Actually, and this is probably a bit strong, what would happen is - Lars Brink from Canada has been doing some work on this, and we found this in the IFPRI study as well. Basically, if you look forward, if the Doha Round takes place, then almost all the flexibility for increasing protection in the US, EU and Japan disappears. What you get is a lot of opportunities or possibilities for developing countries - China, India, and others - to increase their level of spending on domestic support. That has to do with the fact that the de minimus provisions allow them to have support that's not restricted; and given the size of their agricultural sectors, that actually would be a, or rather the major part of agricultural support in ten or twenty years' time if, in fact, the Doha Round was implemented.

Bound tariffs, of course, would come down significantly even with the opt out, so to speak, from sensitive and special products. And I think the other thing which is relevant in the present context is that if you had a special safeguard mechanism for developing countries, then that would help. But, something that I've felt for a long time, for several years now, and proposed - I think there should be much firmer limits on export taxes and export restrictions. I think that's the balance that you have to get between asking developing countries to open up and assuring them that the exporting countries can't cut them off from their supplies.

Thank you very much for your attention.