Agricultural and Trade Policy

Abstract

The chapter describes the aims and content of agricultural and trade policy, and its impact on agriculture, the food industry and food markets. The starting point is that agricultural and trade policy plays and will probably continue to play a major role in the agricultural sector in the future. A significant proportion of the value of agricultural production is due to agricultural support—but there are large differences between countries. Furthermore, agricultural and trade policy also changes over time as both the goal and instruments of support change. In terms of agricultural support, some relatively clear global trends can be identified. However, the trends may vary between countries, which can largely be explained by differences in the countries’ level of development and the competitiveness and supply of the agricultural sectors.

6.1 Introduction

Agricultural and trade policy plays and will probably continue to play a major role in the agricultural sector in the future. A significant proportion of the value of agricultural production is due to agricultural support—but there are large differences between countries and products. Furthermore, agricultural and trade policy also changes over time as both the goal and instruments of support change. At the same time, several drivers that will determine the development in the future can be identified.

Agricultural and trade policy encompasses both goals and tools: The overall political goals relate to, e.g., the development of the agricultural sector, agriculture’s contribution to the economy, agriculture’s connection with environmental and rural development, etc. Once the goals have been determined, the instruments that will ensure that they are achieved and, at the same time, will not create unnecessary negative side effects and externalities in relation to trading partners, international agreements, the environment, climate, rural areas, etc., must be selected. The instruments may take the form of financial incentives, taxes, quotas, legal conditions, etc.

Agricultural policy and trade policy are often linked because trade policy in the form of import regulations, export support, import quotas, etc., is used to achieve the agricultural policy goals. If one of the goals of agricultural policy is to increase domestic production and secure a greater degree of self-sufficiency, farmers can be guaranteed higher prices by limiting imports and thus also limiting the supply on the domestic market.

Agricultural policy objectives change over time: when some objectives have been met, other objectives become more important. At the same time, both internal and external—national and international—conditions will create new demands and goals. In a less developed country, it is initially important to secure the food supply, stable deliveries and thus often a high degree of self-sufficiency. In a more developed and industrialized country, there will be a greater focus on protecting the environment, nature and encouraging rural development, which affects and creates other agricultural policy goals.

In general, agricultural policy involves several goals. Some goals may be contradictory, while others may be achieved by the same instruments. Often, both the goals and market trends will be interconnected. For example, if a country wants to limit emigration from agriculture to support rural development and at the same time wants to increase self-sufficiency, both goals can be achieved through financial incentives for farmers. Higher sales prices, improved training and advisory services, direct production support, etc., are tools that can be used to achieve these goals.

When a country moves further up Maslow’s pyramid of needs, several goals including the goals of agricultural policy will automatically change. In the same way, the instruments used will change.

Agricultural support may take many different forms, and its effects and consequences are driven by the overall goals that are set. In terms of agricultural support, some relatively clear global trends can be identified. However, the trends may vary between countries, which can largely be explained by differences in the countries’ level of development and the competitiveness and supply of the agricultural sectors.

6.2 The Goals of Agricultural Policy

The goals and targets of agricultural policy set the direction in which agriculture and the agricultural industry should develop in the future.

The goals will typically determine the future structure and competitiveness of agriculture and how the sector will contribute to the social economy and environmental and rural development, etc.

Several common features of the goals of agricultural policy in developed countries have been identified. In general, agricultural policy in developed countries aims to improve:

• Income in agriculture.

• The income distribution among farmers.

• Agricultural productivity.

• Efficiency of the processing and marketing chain.

• Supply and price stability.

• Rural development.

• The environment.

• Export, employment, production, added value, etc.

Many different types of instruments can be used to achieve the given goals, and it is a very complicated relationship: Some instruments can be used to achieve several goals, while others may contribute to the achievement of some goals, while at the same time hampering the achievement of others. Finally, important differences in terms of financing, impact on production and trade, transparency etc., can be observed.

In recent decades, international agricultural policy has moved toward greater liberalization and free trade and less support and regulation. This trend will continue in the future and its effects will vary between countries and industries.

While several decades ago, the goal of international agricultural policy was to increase production, productivity and competitiveness, more recently, there has been a shift toward a greater focus on sustainability, the environment, climate adaptation, the bioeconomy, etc. This trend may reduce the attractiveness of investing in agriculture and it may also lead to fragmentation and polarization, where agriculture becomes based on two different basic ideas, either business or nature.

Agricultural policy appears to develop in waves in line with socio-economic development, agricultural development and increasing economic prosperity. Some agricultural policy goals may be met, but changes in society may mean that new more urgent goals emerge. The various focal points of agricultural policy since the middle of the twentieth century are outlined in Fig. 6.1.

Fig. 6.1

(Source Own production)

Focal points during the long-term development of agricultural policy in the Western World

Figure 6.1 is a schematic representation of the most important focal areas based on a qualitative assessment of the agricultural policy agenda in the Western World.

Clearly, the duration, extent and importance of the waves cannot be determined unambiguously and it is not possible to quantify them in many cases. However, the implications of the agricultural policy objectives can be determined. For example, agricultural support fell significantly during and after the liberalization wave.

The change in the agricultural policy objectives highlights that an increasing emphasis is being placed on non-economic objectives. Production, productivity, and competitiveness are no longer the most important driving forces behind agricultural policy in the Western World.

Production was a major driver in the agricultural policy in the first half of the 1900s. Countries wanted to increase their self-sufficiency and be less dependent on food imports. This was in part due to the two world wars, when trade embargoes and a lack of food were serious problems. Therefore, price support and deficiency payments were introduced to stimulate agricultural production.

In the long run, price and income support were insufficient to ensure the international competitiveness of the agricultural industry, which meant that agricultural productivity had to be increased. However, this also resulted in more rapid structural development, fewer but larger agriculture units and increased migration. Furthermore, environmental problems began to occur as a direct result of the increase in productivity.

In the 1980s, there was an increasing focus on liberalization and decoupling within agricultural policy. Agricultural support was included in the GATT and subsequent WTO negotiations, and thus, a market orientation and a reduction in support became important issues on the agenda. Agricultural support was subsequently reduced, and increasingly decoupled from production as a part of liberalization.

As previously mentioned, environmental problems began to occur as a consequence of, among other things, increased productivity and more intensive farms. Therefore, especially since the 1970s, regulating agriculture in order to reduce its undesirable environmental impacts has been receiving much greater attention. The desire to protect or improve the quality of the environment still has a great influence on agricultural policy.

Multifunctional agriculture and related agricultural policy emerged at a time when the previous goals that were coupled with production had been met and then reduced, and when new goals for agricultural development had to be designed and legitimized.

The rise of the bioeconomy, which comprises the parts of the economy that use renewable biological resources to produce food, materials and energy, was initially driven by the development in the oil markets and the desire to develop alternatives to oil resources due to geopolitical and security of supply considerations. With reduced oil resources and with few large producers in the world, there was a latent risk of the emergence of a new oil crisis and oil price increases. At the same time, it became possible to use agricultural products such as cereals and sugar cane in the energy industry, which was useful and relevant at a time of liberalization and reduction in support. The bioeconomy subsequently gained in importance during the sustainability wave, which has received a high priority on the political agenda in recent decades.

Sustainability, i.e., meeting the needs of the present generation without compromising the ability of future generations to meet their own needs, was on the agenda in the 1990s as a result of the Brundtland report. However, the issue of sustainability became even more important when environmental policy became a focal point and the effects of climate change became more visible. Sustainability in relation to agriculture and agricultural policy can be achieved through reduced consumption of resources, lower or negative growth, conversion from animal to plant-based production, etc. Sustainability can also be achieved through technological solutions and more proactive transformations of agricultural production.

The Covid-19 pandemic represented a completely novel and potentially disruptive trend. The pandemic caused major declines in world production: Many countries’ industrial production was significantly reduced with particularly vulnerable industries such as tourism, air transport, restaurants, etc. experiencing a decline of up to 90 percent. Furthermore, the pandemic also led to a reduction in exports and international trade. However, international trade in agricultural and food products was less affected than, for example, exports of manufactured products. Nevertheless, the pandemic was an eye opener and increased awareness of the potential adverse effects of future pandemics on food security. As a result, a new agenda with a focus on shorter value chains, the protection of local or national production and food security was born.

Resilience and food security came on the agenda as a consequence of at least five major events in the early 2020s that had a significant influence on global politics and agricultural markets and policies:

• The Covid-19 pandemic: adapting to the pandemic and planning for future pandemics.

• The food crisis starting in mid-2020 led to large price increases throughout the world.

• Russia’s invasion of Ukraine created uncertainty regarding the rules of the game for the global community. Export bans and trade embargoes had a significant impact on agriculture.

• Climate policy: increasingly stringent climate policy and the regulation of agriculture in the form of taxes and quotas.

• Increasing geopolitical tension between large parts of the Western World and Russia and China. The role of international trade as a peace-making instrument came under increased scrutiny.

These changes meant that the issue of food security has become more important. Are countries or regions able to ensure a stable and cheap supply of food for the population in times of crisis? Is agriculture and the food system resilient under such conditions? Should alternative food systems be developed?

6.3 Protectionism in Developed Countries

Support for agriculture in the Western World has been significantly reduced since the mid-1980s. In recent decades, the OECD has published extensive studies of the size of agricultural subsidies in the OECD countries. The OECD region accounts for approx. 60 percent of the world’s total exports and imports of agricultural goods, so it is important in a global context.

Agricultural support calculated as Producer Support Estimate (PSE) in percent (transfers from consumers and taxpayers to agricultural producers as a share of gross farm receipts) was reduced by 50 percent in 1986–2022, cf. Figure 6.2.

Fig. 6.2

Source Own presentation based on statistical data from OECD)

Level of agricultural support in the OECD (1986–2022) (Notes PSE (%): Producer Support Estimate (PSE): The annual monetary value of gross transfers from consumers and taxpayers to agricultural producers, which is calculated at the farm gate level and arises from policy measures that support agriculture regardless of their nature, objectives or impacts on farm production or income. It includes market price support, budgetary payments and budget revenue foregone, i.e., gross transfers from consumers and taxpayers to agricultural producers arising from policy measures. PSE (%) illustrates transfers as a share of gross farm receipts. NAC (ratio): Producer Nominal Assistance Coefficient (producer NAC): The ratio between the value of gross farm receipts including support and gross farm receipts (at the farm gate) valued at border prices (measured at the farm gate). NPC (ratio): Producer Nominal Protection Coefficient (producer NPC): The ratio between the average price received by producers (at the farm gate), including payments per ton of current output and the border price (calculated at the farm gate).

The figure contains several methods of calculating the extent of agricultural support, which is explained in notes. The NPC, for example, is a measure of domestic prices (including direct payments) relative to the world market price. While domestic prices in the mid-1980s were 25–30 percent above world market prices, since 2007, they have remained stable at approx. 10 percent above the world market price.

As can be seen, there was a clear reduction in all three support measures during the time period, but since 2007, the level of support has stabilized and remained at a relatively constant level.

The level of the agricultural support can be compared to several different parameters, e.g.,

• Total production value in agriculture

• GDP

• Net income in agriculture

• The amount of agricultural land

• Total number of farmers

The basis for comparison depends on what you want to illustrate. Often, the level of support can be compared to several parameters. However, regardless of method and comparisons, trends and levels of support are fairly consistent.

If the level of agricultural support is compared to a country’s total GDP, a picture emerges of the level in relation to the total production value of the country, cf. Figure 6.3.

Fig. 6.3

(Source Own production based on statistical data from OECD)

Total support for agriculture (TSE) in the OECD as a percentage of GDP (Note Total Support Estimate (TSE): The annual monetary value of all gross transfers from taxpayers and consumers arising from policy measures that support agriculture, net of the associated budgetary receipts, regardless of their objectives or impact on farm production and income, or the consumption of farm products.

Agricultural subsidies can be calculated per hectare and per farmer. The OECD has published such comparisons in the past, but it no longer does so to the same extent. The level of agricultural support per farmer provides an indication of the intensity of the support, and the dependence of farmers on support. Calculating the level of support per hectare and per farmer can be problematic as the characteristics of a hectare of land may vary substantially between countries. The total number of farmers can also be difficult to calculate precisely as it will include full-time, part-time, subsistence, and family farmers, so counting farmers (labor input) will lead to uncertainties.

Taking these uncertainties into account, Fig. 6.4 presents the level of agricultural support per farmer, here defined as an individual employed in agriculture.

Fig. 6.4

(Source Own production based on statistical data from OECD)

Agricultural support (PSE) per farmer (employed in agriculture) in selected countries (2020)

The figure reveals a large spread that ranges from $58,000 per farmer in Switzerland to $–1,100 per farmer in Argentina.

Whereas overall, agricultural support is decreasing, the trend is toward increasing support per farmer as the total number of farmers is decreasing at a greater rate.

Calculating the level of support with the different methods reveals the same clear trend and pattern. The question is, of course, whether the level of support will continue to fall in the future. To answer this question, it is necessary to analyze the drivers behind the development. If they are clear and stable, it is more likely that the development will continue.

A number of factors and drivers will either stimulate or limit liberalization.

Factors that stimulate liberalization:

• GATT/WTO (General Agreement on Tariffs and Trade/World Trade Organization)

• Economic benefits from international specialization

• Globalization

• Cold war is over

• Bilateral trade agreements

• Declining importance of self-sufficiency as a goal

• Efficient infrastructure to facilitate trade

• Economic growth

• Pressure from consumers, taxpayers, trading partners and other stakeholders

Factors that limit liberalization

• Pandemics

• Geopolitical crises

• Food crises

The GATT/WTO was a major driver behind the liberalization of the international trade in agricultural products and the reduction and restructuring of agricultural subsidies.

Originally, trade in agricultural products was not part of the GATT-agreement. Agriculture was considered a special industry: Agriculture produces food, and food security and a certain degree of food self-sufficiency were important political goals. The agricultural sector was also experiencing to substantial structural change including the emigration of labor, which led to problems. The extensive emigration of labor was used as an argument to limit the structural development and the liberalization by means of support schemes and trade protection. In the seven rounds of GATT negotiations from 1947 to 1979, during which tangible results were achieved on freer international trade, agriculture was not on the agenda.

It was not until the Uruguay Round (1986–1994) that agriculture as an industry appeared on the agenda and was subject to partial liberalization. In 1995, the WTO was established, which led to more binding cooperation among the members than had been established in the GATT agreements. The number of members of the GATT/WTO increased, and an increasingly large share of the total export and import of agricultural goods was thus covered by the agreements, cf. Figures 6.5 and 6.6.

Fig. 6.5

Number of member countries of GATT/WTO (Source Own presentation based on information from WTO)

Fig. 6.6

(Source Own presentation based on statistical data from FAO and WTO)

Share of total global imports and exports of agricultural products from GATT/WTO member countries

The main function of the WTO is to ensure that trade flows as smoothly, predictably and freely as possible (WTO, n.d.), so if the principles and cooperation in the WTO can be maintained, the WTO will be an important guarantor or driver for the continued liberalization of trade in agricultural products.

The common understanding that economic welfare is increased by the free movement of goods is also a driving force behind liberalization. When several countries trade together without significant barriers, a win–win situation emerges. In general, agricultural subsidies will result in a financial loss for consumers and taxpayers, and the long-term resource allocation in a country and throughout the world will be negatively affected. Although consumer costs are relatively non-transparent, and food costs represent a declining and relatively small share of total consumption, a significant decline in economic welfare may occur.

Globalization has also been both a driving force behind—and a result of—liberalization. Globalization as increasing cooperation and integration across national borders will put political pressure on governments to open up to more free trade between countries.

The end of the Cold War has enabled increasing market-based international trade. The countries in the former Comecon cooperation, where state trade was extensive, today account for just under 10 percent of the total global exports and imports of agricultural goods. Comecon, Council for Mutual Economic Assistance, was an organization from 1949 to 1991. Members were the Soviet Union, Eastern European countries, Cuba and Vietnam. The purpose was to facilitate and coordinate the economic development of the member countries.

Bilateral agreements and regional trade agreements and trade blocs may be used to promote trade liberalization. A limited bilateral agreement with a neighboring country may be a step toward liberalization, and at the same time, experience can be gained, which can be used in subsequent more far-reaching trade agreements.

Security of supply and food security achieved through a high degree of self-sufficiency used to be a very important goal of agricultural policy in many countries. However, it is no longer as dominant as it was a few decades ago as other goals have become more important. Access to food does not need to be ensured exclusively through domestic production, and thus support and trade barriers to support domestic agricultural production are no longer as necessary.

A lack of infrastructure used to be a major international trade barrier. With the continued development of infrastructure within, e.g., shipping and aviation, the opportunities for transporting agricultural and food products over long distances have been significantly improved.

Economic growth is an important goal of many countries’ economic policy. Increasing trade liberalization can create increasing international trade, which can then contribute to greater economic growth.

Pressure to liberalize trade may grow both internally in individual countries and externally from other countries.

Agricultural support will incur consumer and taxpayer costs, and it will also affect its competitiveness in relation to other domestic industries. At the same time, agricultural support may also involve market interventions such as overproduction, storage, the destruction of food, dumping on the world market, etc., which may result in further pressure to reduce agricultural support.

External pressure from the most competitive and most export-oriented countries will also influence and strengthen liberalization. The inclusion of agriculture in the GATT negotiations in the 1980s was largely due to pressure from the USA, the so-called Cairns countries and a number of developing countries.

Historical trends and driving forces will not necessarily continue, and new scenarios, shocks and possible disruptions must also be considered.

New pandemics may cause increased protectionism in the agricultural sector in the future. The Covid-19 pandemic gave an indication of this. Although agricultural and food exports were relatively unaffected by the pandemic, increased protectionism and less international trade as a direct result of the pandemic were identified. The connection between the pandemic and protectionism and international trade has been analyzed in several sources, e.g., OECD (2020), Politi (2020), and Espitia et al. (2020).

There is a tendency for crises—be they political, economic, environmental, structural or health-related—to be used to support a protectionist agenda. Increased protectionism, selfishness and reduced trade are promoted as the solution. At a time when existing and new superpowers are fighting for power, and national interests appear to be the top priority, the emergence of serious global political crises in the future is not unthinkable. The question is probably: when will they occur, how serious will they be and what consequences will they have for international trade?

Prolonged food crises may also trigger new protectionism in agricultural and food markets. During the food crises of 2007–2008, 2011–2012 and 2020–2023, several cases of countries attempting to protect national markets were observed. Political arguments for increased trade protectionism were also espoused because dependence on imported food had become too great.

6.4 Protectionism in Developing Countries

As discussed in the previous section, agricultural support and agricultural protectionism have generally been decreasing in recent decades, albeit from a relatively high level. However, the opposite is the case for several countries with a relatively low level of economic development but rapid economic growth. A number of low-income countries follow the same pattern, whereby agricultural support is increasing, albeit from a very low level; indeed, the level of support is often negative.

Emerging countries—countries being in a transitional phase between developing and developed status—have been identified as Argentina, Brazil, China, Costa Rica, India, Indonesia, Kazakhstan, the Philippines, Russia, South Africa, Ukraine and Vietnam (where extensive and reliable data is available via the OECD). These 12 countries account for 50 percent of the world’s population, 35 percent of the total agricultural area, 51 percent of agricultural production and 54 percent of the world’s grain production, so it is an important group of countries in relation to agricultural production.

In the 12 emerging economies, total agricultural support (TSE) grew from $44 billion in 2000–2002 to $280 billion in 2018–2020, an increase that was driven by increasing rates of producer support in the largest emerging economies, especially China, India and Indonesia. The TSE (Total Support Estimate) for the emerging economies averaged 1.2 percent of GDP in 2018–2020, which reflects the importance of agricultural support in the largest emerging economies, which are home to large agricultural sectors with sizeable rural populations.

Total agricultural support in the 12 emerging countries was approx. $200 billion in 2020, which corresponds to 83 percent of the level of agricultural support in the OECD countries.

Total agricultural support in emerging countries has exhibited an increasing trend in recent decades, cf. Figure 6.7.

Fig. 6.7

Source Own production based on statistical data from OECD)

Change in total support (TSE) to agriculture in the OECD and in 12 emerging economies, 2000 to 2020 (Note Trend curve for emerging countries is plotted.

Other measures of agricultural support reveal the same trend with increasing agricultural support in emerging countries and declining support in the OECD, cf. Figure 6.8.

Fig. 6.8

(Source Own production based on statistical data from OECD)

Change in support (PSE and NPC) to agriculture in the OECD and 12 emerging economies, 2000 (1990) to 2022

China and Indonesia are mainly responsible for the increase in the overall agricultural support for the 12 emerging countries. In contrast, agricultural support in India and Argentina, for example, has been declining, cf. Figure 6.9.

Fig. 6.9

Source Own production based on statistical data from OECD)

Agricultural support (PSE) for selected emerging countries, 1995–2022 (Note Three-year moving average.

China accounts for 23 percent of the world’s total agricultural production in terms of value and is, therefore, a very important player.

The long-term trend in the goals and instruments of China’s agricultural policy reflects the changing role of agriculture as the country develops. Regarding China’s development, some important milestones can be identified. Firstly, in the 1950s and 1960s, the aim was to support industrial development, and therefore industry was subsidized at the expense of agriculture. In the late 1970s, China started to reform its centrally planned economy in order to transition to a market-based economy, which had a large influence on its agricultural sector.

Following the general liberalization of international trade in agricultural products and China’s accession to the WTO in 2001, China sharply reduced import duties on agricultural products.

In the 2000s, the focus was on improving farmers’ incomes and achieving self-sufficiency. In order to improve farmers’ incomes, minimum prices, a purchasing and storage system and subsidies to reduce farmers’ costs were introduced (OECD, 2022). Market price support became the most important instrument, and domestic prices were gradually increased until they were significantly above world market prices, and this level was maintained. Support for agriculture increased until 2015, when new reforms were introduced which reduced market price support.

Argentina differs in that its agricultural support is very negative, which is due to the fact that the country has a significant export tax, which increases the domestic supply and pushes domestic prices down below the world market price (OECD, 2022). For periods, the export of maize was banned. The negative and fluctuating agricultural support that has been occurring since the beginning of the 2000s is due to unstable macroeconomic conditions such as the depreciation of the Peso.

When it comes to agricultural support in low-income countries, the same pattern as the one in emerging countries can be identified: In general, agricultural support is low, but the trend is increasing—less negative—agricultural support, cf. Figure 6.10.

Fig. 6.10

Nominal rate of protection 2005–2018 (2022) (Note Trendlines for high and low countries respectively. Sources Own presentation based on statistical data from OECD and AgIncentives)

The figure presents agricultural support calculated as the nominal protection rate. The figures for the OECD and high-income countries come from two sources, but the trend is identical. The figures for low-income countries are based on data from a number of selected countries for which information is available.

This international pattern has been observed previously. World Bank (1986) concluded that developing countries clearly tend to tax agricultural commodities, while industrial countries tend to support domestic production and thereby inhibit imports and encourage exports.

6.5 Waves of Regional Trade Agreements

While previously, liberalization was primarily the result of multilateral negotiations, today regional trade agreements, i.e., two or more countries agreeing to engage in free trade together, are becoming increasingly important. On the one hand, such agreements may be a “second-best” alternative to further WTO liberalization, while on the other hand, they may be the first step toward a more general opening of the countries’ trade and economy to the outside world.

Regional trade agreements have both advantages and disadvantages as they can both favor and distort international trade. The net effect must be assessed in each individual case. However, significant examples of distortion as a result of regional trade agreements have been identified.

Regional trade agreements also have an important economic impact on international food markets, although food often has a special status in these agreements.

Regional trade agreements are becoming increasingly important, and they are growing in number with an increasing share of world trade taking place according to special terms included in regional trade agreements.

The recent development has had the following direction:

• Regional trade agreements are increasingly being used by countries that would otherwise prefer and rely on multilateral trade liberalization. Regional trade agreements are then given the same priority as, e.g., WTO negotiations.

• Regional trade agreements are becoming increasingly complex and non-transparent.

• Two or more trade agreement groups (and not single countries) are increasingly entering into regional trade agreements.

• Measures other than just trade access are included in the agreements such as foreign direct investments, cooperation on economic development, etc.

• Agriculture is increasingly being treated like other products in regional free trade agreements and agricultural products are less often exempt from such agreements than previously (OECD, 2019).

The trend in regional trade cooperation indicates that the development has occurred place in waves, although the sources disagree slightly in terms of the location and content of the waves (Gaulier et al., 2004; Mariano et al., 2021). Nevertheless, four significant waves or “eras” can be identified—as shown in Fig. 6.11.

Fig. 6.11

Waves in regional trade cooperation (Sources Own presentation based on Mariano et al. (2021), Gaulier, Jean and Ünal-Kesenci (2004), and WTO (2011))

The first wave was the result of the establishment of the two European regional trade agreements, the EC and EFTA (The European Community and The European Free Trade Association), which began the process of European integration inter alia in response to the Second World War.

The second wave started in the mid-1980s with the establishment of the EC’s internal market and free trade agreements between the USA and Canada and later also with Mexico. The EC’s internal market further strengthened free internal competition by including new dimensions of market integration.

The 3rd wave began at the end of the 1990s and the beginning of the twenty-first century. Several new agreements between developed and developing countries were concluded, and thus an attempt was made to stimulate the economic development and welfare of the developing countries through trade and by strengthening the conditions of the developing countries in terms of international trade and investment. Finally, the establishment of the WTO and the negotiation rounds also created a new generation of free trade agreements.

The 4th wave was a substitute for the WTO agreements that had not or had only partially been achieved. The mere expectation that a round of WTO negotiations would not achieve the desired results was the motivation for the creation of several regional trade agreements. For example, the setback in the Doha Round of negotiations in Cancún in 2003 was a reason behind the subsequent increased interest in establishing regional trade agreements (Crawford & Fiorentino, 2005).

New waves spurred by other drivers are likely to emerge in the future. Regional trade agreements may be more directly driven by political and strategic motives rather than trade interests.

A 5th wave could also be driven by anti-globalization, whereby trade with more local countries is supported.

6.6 Driver: Self-Sufficiency Rate and Economic Welfare

The level of agricultural support varies greatly between countries—even among the more developed countries in the world. Calculated as PSE, the agricultural support varies from approx. –20 percent to +55 percent, and TSE in percent of GDP varies from –2 percent to 2.5 percent cf. Figure 6.12.

Fig. 6.12

(Source Own presentation based on statistical data from OECD)

Agricultural support (2022)

However, a pattern in the level of agricultural support can be identified, and two factors can explain a very large part of the level of support:

Firstly, the amount of aid depends on the countries’ level of income. As a general rule, agricultural support is highest in the richest countries as only these countries can afford to support agriculture. In high-income countries, agriculture plays a relatively small role in the economy, which also makes it easier to support the industry.

Another explanation is that low-income countries will often get tax revenue via export duties as this is a relatively uncomplicated way of raising revenue. Taxing exports also creates an oversupply on the domestic market, which also results in cheaper food, which may also be a political goal. In low-income countries, access to cheap food is critical. The result, however, is that the farmers’ selling prices are kept artificially low in relation to the world market price, which means the agricultural support becomes very low or even negative.

Secondly, the countries’ net export of agricultural goods is also a factor that can explain the level of agricultural support among the countries: Countries with a large net import and thus a low degree of self-sufficiency can more easily support agriculture by using, e.g., trade regulations: An import tariff provides revenue for the government, and when exports are small or non-existent, the effect on public finances is positive and may be significant. In such cases, the costs are exclusively financed by consumers. If a country has a large net export, agricultural support will often necessitate export support, which will burden the public budget. The greater the net export, the greater the cost for the public budget.

The correlation between the level of agricultural support and the income level of the countries and net exports is presented in Figs. 6.13 and 6.14.

Fig. 6.13

Source Own presentation based on statistical data from FAO and OECD)

Income level and agricultural support (Note Agricultural support is calculated as PSE in percent.

Fig. 6.14

Self-sufficiency level and agricultural support

(Note Self-sufficiecy level is illustrated as net export per capita. Agricultural support is calculated as PSE in percent. Source Own presentation based on statistical data from FAO and OECD)

Income and net exports are not connected: Some countries are rich and are net importers (Norway, Japan, Switzerland), while other countries are rich and are net exporters (New Zealand, Australia and Denmark and the Netherlands, which are part of the EU in the figures).

The figures provide a snapshot based on cross-sectional data and cannot necessarily be interpreted as time series analyses. We cannot conclude that countries will increase agricultural subsidies if welfare and income increase or net exports decrease. From an economic point of view, however, it is clear that a country with a low level of self-sufficiency and a high level of income (relatively small agricultural sector and large public revenues) will typically have a relatively high level of agricultural support.

6.7 Market Support and Direct Support

In recent decades, agricultural support has changed significantly. The level of support has decreased—protectionism has weakened and liberalization has strengthened. At the same time, the composition of the agricultural support has also changed substantially. Consumer-financed market price support has decreased, and taxpayer-financed direct support has increased, cf. Figure 6.15.

Fig. 6.15

(Source Own presentation based on statistical data from OECD)

Taxpayers’ and consumers’ share of the financing of agricultural support in the OECD (1986–2022)

The figure illustrates who has financed the agricultural support in the OECD countries since 1986: Agricultural support can be financed either by consumers via artificially high prices for agriculture and food (high price system), or by taxpayers via direct payments to farmers (low-price system).

A system change or a paradigm shift occurred during the period. The EU, in particular, has moved away from a consumer-financed support system to a taxpayer-financed system. This is primarily because a high-price system is often more disruptive to trade and is, therefore, more exposed to criticism and restrictions in the WTO. In low-price systems, market prices are more or less unaffected, support can be decoupled from production, and farmers receive prices which in principle correspond to world market prices. Instead, market support payments are given directly to farmers.

Figure 6.16, which is based on actual market prices, illustrates how the market support for coarse grain and sugar was reduced during the 1990s.

Fig. 6.16

(Source Own presentation based on European Commission (several issues) and market data)

EU prices and world market prices

It does not make sense, a priori, to attempt to determine whether one system is superior to the other. The support level is independent of the support system, and both systems have advantages and disadvantages. However, in a high price system, trade discrimination is inevitable, and protection by means of trade barriers becomes increasingly difficult to maintain in an increasingly globalized world.

In the near future, the previous trend will probably continue: Support will change from high to low-price systems, decoupling and reduced impacts on markets, a general reduction in support, and freer competition on international agricultural and food markets.

6.8 Coupled and Distorting Support

Agricultural support can have many different forms, effects and consequences. In particular, the impact of agricultural support on production and international trade is important as it has a major influence on the design of agricultural policy—historically and in the future.

When it comes to the impact of agricultural support on agricultural production (coupled support), the instruments in agricultural policy can be divided into groups:

6.8.1 Price Support

Support in the form of higher market prices than, e.g., on the world market.

6.8.2 Deficiency Payments

Transfers from taxpayers to farmers which correspond to the production multiplied by the difference between the world market price and a given target price on the domestic market.

6.8.3 Support Coupled With Input Factors

• Area premiums

• Headage premiums

• Financial support

• Other support to reduce costs

6.8.4 Direct Support Coupled With Other Factors

• Extensification

• Protection of landscape

• Support to enhance structural change

• Economic development in rural areas

6.8.5 Support Fully Decoupled From Production

• Compensation caused by drought, etc.

• Income support, lump-sum payments

• Early retirement schemes

Furthermore, a number of additional instruments exist, which should not directly be used to achieve the objectives, but should be used to reduce supply and/or costs related to agricultural policy. Quotas and set-aside are examples of such instruments.

The choice of specific instruments is important for several reasons:

First, a clear connection between goals and instruments (means) is important. Instruments must be chosen so that they best contribute to achieving the desired goals.

Second, instruments may have very different implications for the markets and stakeholders. If price support is chosen, domestic production will be stimulated, imports will be limited, markets will be “disrupted” and competitors—both within and outside the agricultural sector—will be discriminated. Alternatively, if income support, set-aside support, extensification support or the like is given—decoupled and independent of how much or whether production occurs—far less disruption will result.

As Fig. 6.17 illustrates, recent decades exhibit a clear trend toward a decreasing proportion of agricultural support being based on commodity output, i.e., linked and coupled to agricultural production.

Fig. 6.17

(Source Own presentation based on statistical data from OECD)

Share of support in the OECD based on commodity output, in total PSE (percent).

Countries have substantially altered their agricultural trade and domestic support policies during the past two decades (OECD, 2022). In general, support provided to farmers has become more decoupled from production, which means that many farmers no longer receive payments for producing a specific commodity, and instead it is increasingly being targeted at environmental improvements, farmer income, landscape protection, etc. In the WTO and in the international negotiation rounds, the focus has been on making the support less trade-distorting. However, in some developed countries, support remains high and linked to production, while some emerging economies have also significantly increased policy interventions that distort production.

The most distorting instruments—market price support, payments based on output and payments based on variable inputs without constraints—still represent more than half of all transfers to and from producers in many countries, although some countries have implemented reforms that have decoupled support from production levels.

Figure 6.18 presents the level of and change in the share of distorting support as a percent of PSE in the OECD countries on average and in some selected countries.

Fig. 6.18

(Source Own presentation based on statistical data from OECD)

Share of distorting support as percent of PSE in selected countries

The figure shows that the OECD countries on average have almost halved the proportion of distorting support (from 85 percent to 44 in the period 1986–2022). The EU has reduced the most (from 92 to 24 percent), while Japan and Korea, which already had high levels of agricultural support, have only reduced the distorting support slightly.

6.9 Agricultural and Environmental Policies

As discussed in the previous sections, the environment has been given increasingly high priority on the agricultural policy agenda. A trend has emerged whereby agricultural and environmental policy merge, or where the environment becomes an explicit part of agricultural policy. This agri-environmental policy includes payments for environmental services that pay farmers to reduce the negative externalities of agricultural production, while serving as an instrument to transfer public funds to farmers.

The reduction of externalities is not a clearly defined concept, and it may be the result of many different interventions. The change from coupled to decoupled support, which mostly had a trade policy purpose, has basically also led to less intensive production and thus fewer negative externalities and thereby an improvement in the quality of the environment—ceteris paribus.

In some cases, support schemes are made conditional on the fulfillment of specific environmental conditions, while in other cases, an environmental improvement is the primary or only goal.

Agricultural policy has both direct and indirect effects on the environment, which makes it difficult to identify or quantify the development of agri-environmental policy. Agricultural and environmental policy seem to merge in several ways, which makes it difficult to separate goals, means and consequences.

However, it is possible to identify the agricultural policy instruments which limit negative externalities, although the environmental effects may differ between instruments.

The OECD prepares a comprehensive mapping of agricultural policy and agricultural support in which the support schemes are grouped based on, e.g., commodity output, input use, production required/not required, non-commodity criteria.

One criterion is With or without input constraints, which stipulates whether there are specific requirements concerning farming practices related to the program in terms of a reduction, replacement or withdrawal of inputs or a restriction on certain farming practices. The payments with input constraints are further broken down into:

• Payments conditional on compliance with basic requirements that are mandatory.

• Payments requiring specific practices that go beyond basic requirements and voluntary.

• Specific practices related to environmental issues.

• Specific practices related to animal welfare.

• Other specific practices.

Support under this scheme will typically have direct or indirect positive effects on the environment. This type of support has increased in importance significantly in the OECD countries in recent decades, cf. Figure 6.19.

Fig. 6.19

Source Own presentation based on statistical data from OECD)

Proportion of support with input constraints for selected countries (Note Three-year moving average.

The figure illustrates that almost 45 percent of agricultural support in the OECD is now connected with input constraints, while the share is over 60 percent in the EU. In both cases, there has been a significant increase in recent decades. The proportion is relatively small but increasing in countries such as Korea and Japan, while it is now decreasing and low in China.

6.10 New Balances in the Agricultural Policy

As discussed in Sect. 6.2, agricultural policy develops in waves. Some agricultural policy goals are met, while new challenges and new goals become more urgent. Both challenges and solutions may be very diverse, which makes agricultural policy complicated: it will often be difficult to define and implement new objectives, as there may be conflicting considerations. For this reason, new balances must be secured in agricultural policy, so that as many objectives as possible are met in the best possible way at the lowest cost.

New goals for agriculture will certainly emerge in the future. The aim of agriculture and agricultural policy is to meet the triple challenge of:

• Ensuring food security and nutrition for a growing population.

• Providing livelihoods for farmers and others in the food chain.

• Improving the environmental sustainability of the sector (OECD, 2021).

These three goals, which everyone would probably agree with, are clear, and agricultural policy instruments are obvious to use. However, internal contradictions and paradoxes in the three goals make implementation difficult. For example, a focus on sustainability will often lead to less intensive agricultural production and thus less agricultural production. This may then result in worse living conditions for farmers and reduced food security.

New serious challenges in terms of sustainability, climate adaptation, the bioeconomy, etc., will definitely also set new agendas for agricultural policy. Parallel to this, hunger is a major global problem, while food security and food supply are significant ongoing challenges. Agricultural policy must thus embrace many diverse objectives. In a global perspective, at least five parallel goals, challenges and balances must be dealt with, cf. Figure 6.20.

Fig. 6.20

(Source Own production)

Goals, challenges and balances in international agricultural policy

6.10.1 Sustainability: (Considerations for the Environment, Climate, Nature, Animal Welfare, etc.)

The broad definition of the term sustainable development is “development that meets the needs of the present without compromising the ability of future generations to meet their own needs” (UN, 1987). The definition includes a number of biological and technical conditions. In this context, other considerations such as animal welfare, access to nature, etc., are also included as they are increasing in importance in a number of countries.

6.10.2 Ensuring Fair Living Conditions In Agriculture

Ensuring fair living conditions for farmers is also an important goal in many countries.

On the one hand, from a socio-economic perspective, continuing to support or protect a business sector is not rational. Every business sector must adapt to market conditions and competition. Every business follows a dynamic development and must take advantage of technological advantages and compete with other businesses domestically and internationally. The agricultural treadmill (Sect. 9.6) will continue and pressure on emigration and income will be persistent. Decoupling market forces to ensure fair conditions is not a sustainable long-term solution.

On the other hand, the agricultural industry is already undergoing drastic change, emigration and structural development, which is being driven by rather poor earnings in agriculture. From an economic or political perspective, a controlled development and emigration may be advantageous. In addition, other considerations may also justify maintaining a certain level of local and domestic food production.

6.10.3 Securing Effective Instruments, Resource Optimization and Cost–Benefit

Applying effective measures without an unnecessary waste of resources is an important goal. The potential advantages and disadvantages and the cost–benefit must be assessed in context, so that very costly measures which will have little effect in the short or long term are not introduced.

Agricultural policy initiatives imply costs, which are paid by taxpayers, consumers, companies, etc. It is important that these costs are transparent, and that they are compared with the potential effects and that impact assessments are carried out.

6.10.4 Enable Trade, Avoid Protectionism and Exploit Comparative Advantages

A country or region can seek to manage the triple challenges mentioned above by introducing trade protection (import barriers). In this way, the country or region can support agriculture, become self-sufficient and possibly also export food, and sustainability can be ensured through support schemes, legislation and other regulations. However, trade protection undermines other goals, and it does not solve the common challenges, which are largely global in nature.

6.10.5 Food Supply: Ensuring Sufficient, Good Quality Affordable Food Globally

The world’s population is expected to increase year by year. The increasing population alone necessitates an annual increase in agricultural and food production. Agricultural policy is an important tool for ensuring an adequate food supply that can meet the increasing demand.

Food supply is not just a matter of large agricultural production. Agricultural and food products must also be available and affordable for consumers, so infrastructure, competitiveness, efficiency, market formation, waste reduction, etc., are also important parameters.

The dilemma in agricultural policy can be defined as follows: How to ensure efficient agriculture that can create an increasing and affordable food supply, while also ensuring more qualitative values such as animal welfare, organic production, biodiversity, etc.

The dilemma means that trade-offs between, e.g., efficiency and animal welfare are inevitable—as illustrated and exemplified in Fig. 6.21.

Fig. 6.21

(Source Own production)

Example of a trade-off in agricultural policy

As the figure illustrates, the various interests and forces will pull the development in different directions.

The five goals, challenges and balances in Fig. 6.21 can probably be supplemented with the more general goals, which are found in agricultural policy in developed countries, cf. Section 6.2. As a result, an agricultural political complex is constructed, which encompasses many diverse and often opposing directions and considerations. When business priorities have to be in line with sustainability, environment and climate goals, selecting the instruments that will most effectively ensure the desired results becomes challenging. Complexity is likely to increase in the future, when new and completely different goals such as energy supply, biodiversity, resilience and geopolitics are likely to become an increasingly large part of agricultural policy.

6.11 Non-Tariff Barriers and Food Safety

While custom and tariff barriers and directly coupled support are being reduced, non-tariff barriers are becoming increasingly important. As previously discussed, custom and tariff barriers and directly coupled support are relatively transparent, measurable and distorting. Therefore, their decreasing importance is natural. The increasing non-tariff barriers, which are sometimes called technical trade barriers, are more opaque, but their importance has increased. The development of the two types of barrier is shown schematically in Fig. 6.22.

Fig. 6.22

(Source Own production)

Schematic illustration of the development in non-tariff barriers and tariff barriers

Non-tariff measures encompass a diverse set of instruments in terms of their purpose. One group includes regulations, standards, testing, certification and phytosanitary (SPS) measures. Food safety plays a key role in this group, as it is a primary objective in many cases.

Countries are becoming increasingly concerned about the quality and safety of imported products. With increasing international trade and globalization, food security risks are growing.

Also, the WTO recognizes that import restrictions are sometimes required in order to ensure that food is traded safely, and that animal and plant pests or diseases are not spread through trade.

The Agreement on the Application of Sanitary and Phytosanitary Measures (the “SPS Agreement”) aims to ensure that WTO members’ health protection measures in the area of food safety, animal and plant health do not restrict international trade more than is necessary (WTO, 2021c). However, it is always a difficult balance between legitimate targeted measures to protect public health and creative import barriers for which the primary aim is to protect domestic production.

The SPS Agreement seeks to strike a balance between the right of WTO members to protect health and the need to allow the smooth flow of goods across international borders. The Agreement recognizes the right of WTO members to adopt legitimate measures to protect food safety and animal and plant health while ensuring these measures are not applied in an unnecessary manner for protectionist purposes (WTO, 2021a).

The SPS Agreement requires WTO members to notify the WTO Secretariat whenever they intend to impose any new requirements or make any changes that may affect trade. These notifications give trading partners the opportunity to comment on the planned regulations before they are adopted and allow producers to adapt to the new requirements. The number of notifications, therefore, gives an indication of the importance of such regulations.

To this end, Fig. 6.23 presents the number of regular and emergency notifications (including addenda and corrigenda) submitted per year since 1995.

Fig. 6.23

(Source Own presentation based on WTO (2021a, 2021b, 2021c)

Number of SPS notifications submitted to the WTO 1995–2020

The figure illustrates a significant increase in the number of SPS notifications. Almost half (47 percent) of all the notifications from 1 January 1995 to 31 December 2020 had food safety as the primary objective.

The trend is likely to continue: international trade in agricultural and food products will increase and become more important, and thus the risk of a global spread of plant and livestock diseases will increase. This development creates stronger incentives to limit imports. In addition, especially livestock diseases (African Swine Fever, Foot and Mouth Disease, Avian influenza, etc.) are likely to become greater risk factors with increasing and more intensive livestock production in large parts of the world.