Must the Good Guys Always Lose?
by David Trebeck
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Multilateral progress on agricultural trade reform has stalled, leaving barriers to agricultural trade ten time higher than industrial tariffs. What's to be done?

Farmers the world over are exposed to a number of fundamental trends and truths which no amount of gravity-defying intervention can negate. These relate to the inexorable march of technology, and the incredible inventiveness and capacity of farmers to keep improving their productivity. They combine to produce what is widely referred to as the Ôprogressive adverse movement in farmersÕ terms of tradeÕ, which, in turn, leads to pressure for adjustment.

The agricultural trade battleground is a contest to decide the rate at which this inevitable adjustment takes placeÑand especially its global distribution. Domestic farming constituencies understandably advocate a slow rate of changeÑbecause anything fast will, they are convinced, bring civilisation as they know it to an end. Politicians and their advisers are in the business of judging how far to believe these dire predictionsÑand what the political consequences will be for them if the farmersÕ lobbying is ignored.

Even though they may be a relatively small percentage of the electorates in developed countries these days, farmers can still wield considerably political powerÑas witnessed by numerous tractor blockades involving French farmers, for example, or by the United States in violating World Trade Organisation (WTO) commitments in respect of lamb imports. Against the concentrated advocacy of vested interest, the wider and longer term interest is frequently swamped within the political processÑespecially if elections are looming. Changing this dynamic is the key to making progress in agricultural trade reform.

The problem is that there is a third party with a vital interest in the outcome, but little say in determining it. This party is the agricultural exporting countriesÑfor example, those represented by the Cairns GroupÑwhose economic well-being can be disproportionately affected by decisions taken by the major producing countries of the United States and Europe. To the extent that adjustment pressures internally are cushioned by intervention in the United States and Europe, they are intensified elsewhere: the total adjustment burden remains, more or less, unchanged; only its distribution is up for grabs.

Living with adjustment pressures

Many peopleÑincluding many farmersÑfail to understand that farmersÕ ability to improve productivity and increase supply faster than demand, plus changing consumer patterns, are what constrain commodity prices. Aided by their own ingenuity and the results of research and development expenditure, farmers are continually improving their capacity to produce food. In the process they are keeping the gloomy 17th century forecasts of the Rev Dr Malthus at bay.

One beneficiary is the environment. Had India, for example, continued to use traditional low yielding farming techniques during the 1960s and 1970s, another 36 million hectares would have to have been cleared to grow the same amount of wheat. Globally, between 1960 and 1992, the amount of cropped land increased by just 3.5%, but higher yielding seeds, smarter use of fertilizers and better management practices allowed farmers to produce twice the grain and oilseeds to feed 80% more people.1

As for changing consumer patterns, we observe every day what is happening, but rarely pause to draw the broader implications. For example, consumers demand far more by way of food services than they previously didÑsuch as packaged meat, pre-prepared meals, take-away food and eating at restaurants. These shiftsÑwhich reflect tightening time pressures, two income families, increasing incomes and the likeÑmean that the percentage of the consumerÕs dollar finding its way back to the farmer falls. Similarly, when consumers are spending a higher proportion of their discretionary income on overseas holidays, mobile phones and computers, rather than food, it is logical that farm commodity prices tend to fall over time in real terms.

The key is whether productivity increases are more than sufficient to offset commodity price falls. If they are, incomes can be maintained. If they are not, pressure for adjustment arises. Even if past productivity may have been sufficient for most farmersÕ incomes to be maintained at acceptable levels, many sceptics doubt that it is sustainable. But they thought this 30 years ago as well. In my view there is every reason to expect that productivity improvement can be maintained, especially if governments keep out of the way:

¥ there is still massive capacity for higher yielding, more disease resistant and better quality plants, and improved animal genetics;

¥ the potential of biotechnology to improve production, solve dietary deficiencies and reduce insecticide use is only now becoming apparent;

¥ agricultural machinery continues to become bigger, more sophisticated and more precise, now aided by satellite technology;

¥ satellite technology is also enabling AustraliaÕs rangeland farmers to predict feed availability for up to six months ahead, and to monitor remote watering facilities, thus greatly improving labour productivity;

¥ farmersÕ increasing use of the internet is breaking down the tyranny of distanceÑfacilitating input purchasing, financial transactions and giving farmers access to a wide range of highly relevant technical literature; and

¥ reducing transport costsÑsuch as shippingÑenhances international competitiveness; for example, a Chilean economist once commented that improved labour market practices on that countryÕs wharves was the equivalent of moving Chile 7,500 kms closer to its overseas markets.

Not all farmers, however, are keeping ahead of the game. There is enormous variation between farmers, variability which is concealed merely by reference to average statistics. Scale is part of the explanation and some of todayÕs larger family farms dwarf those of just a generation ago. But the quality of management provides an even bigger explanation for performance differences. Better managers achieve better rates of return on investment year after year. They are too busy getting on with their lives to lobby governments. As a result, the public debate and the political lobbying is often dominated by those doing it tough. Policymakers need to be skilful in judging the representativeness of the tales of woe they routinely hear.

The Australian dairy industry

As an example of the extent of the adjustment which can occur, the Australian dairy industry has been a standout. Thirty years ago, it was small scale, low tech, inward-looking and producing a narrow range of low valued products. In the export arena, it was geared to supplying bulk commodity lines to the United Kingdom under longstanding preferential trade arrangements. Farm and retail milk prices were set by highly artificial formulae, direct subsidies were provided for butter production, and competitive margarine was all but locked out of the domestic market by regulation. Yet farm incomes remained lamentable and pockets of regional poverty were quite acute.

Since then, the interventions have been progressively removed, albeit gradually and not without a vigorously contested domestic political debate. The transformation has been dramatic. More than 80% of AustraliaÕs dairy farmers have left the industry, but those that remain produce much more milk per cow, run many more cows and produce considerably more milk in total than their predecessors did. The range of products has exploded and Australian dairy exports have been a huge success storyÑin terms of countries serviced, range and value of products and total export returns.

TodayÕs dairy farmers are at the cutting edge of pasture and genetics technology. The industry has gone from near basket case to star performer. One of the reasons why the adjustment process was relatively smooth was that there was strong demand for dairy farmland for those selling outÑfor higher valued farm enterprises such as specialist horticultural production, hobby farms or for coastal tourism development.

The two important lessons for overseas countries from this experience are that (i) the policy liberalisation changes in Australia were made unilaterally; although (ii) second, they were made in the context of AustraliaÕs free trade agreement with New Zealand, hitherto easily the most efficient dairy producing country. Knowing that competition from New Zealand had the potential to penetrate AustraliaÕs dairy markets certainly acted as a spur to efficiency.

Enter the Cairns Group

Australia and New Zealand are both active members of the Cairns Group, the 14 Ôfair tradingÕ agricultural exporting nations that came together in 1986 (the name deriving from the city on the north Queensland coast in Australia where they held their first meeting). Representing both developed and developing countries, they were fed up with high levels of protection in farming and a global system that had made agriculture the most distorted sector of world trade. They were also frustrated with lack of progress on agricultural trade liberalisation in the General Agreement on Tariffs and Trade (GATT).

Today the Cairns Group has 18 members.2 Five of the Cairns Group countries (Canada, Australia, Brazil, Thailand and Argentina) are among the worldÕs top 15 agricultural exporters, accounting in total for over 16% of global agricultural exports in 2000 (although this percentage would be far higher if intra-EU trade were not included).

The Cairns Group effectively put agriculture on the multilateral trade agenda with the Uruguay Round of the GATT in 1994, and has kept it there. But every evidence suggests that the position is deteriorating. Negotiations come within a whisker of failure before a scarcely acceptable compromise is cobbled together. There is backsliding on commitments, virtually from the moment the ink is dry on the agreement. And it is clear that many of the participants in negotiations or agreements have no vested interested in achieving successÑif, by success is meant substantial and durable trade liberalisation. The major offenders remain the United States and the European Union, with its highly distortionary and grossly inefficient Common Agricultural Policy (CAP).

European twists and turns

The costs of agricultural protection within OECD countries rose to the obscene figure of around $US300 billion by 2000,3 involving average tariff levels of 43%, and up to 300% for some dairy items. This figure is equivalent to the combined GDPs of Egypt, Indonesia, Pakistan, Peru, the Philippines and Bangladesh, countries with a population of 540 million compared with the 15 million (full time equivalent) farmers in the OECD region. Even worse, OECD analysis has shown that as little as one fifth of such transfers actually result in additional income to farm households, the rest being, for example, capitalised into land values and higher profits for input suppliers.4

Yet the full extent of damage done to the economies of the subsidising countries goes well beyond even this massive fiscal burden. Protection of agriculture amounts to taxation imposed on output, income and employment elsewhere. Jobs are lost, not created, by the subsidies. Damage to the environment as a consequence of high input European agriculture is a well-documented consequence of the Common Agricultural Policy (CAP). And so it goes on.

Initially, the CAP was designed to encourage food self-sufficiency. While countries in the Cairns Group thought this a nonsenseÑnot to mention a very costly policy in an open trade eraÑthey did accept that some European countries had experienced real food shortages within living memory and that this was a powerful influence on policy. But when self-sufficiency began routinely to exceed 100%Ñreaching 140% in some situationsÑits absurdity became clear. Not only were food mountains and lakes created, but the surpluses were then dumped on third markets at massive costs to all concerned.

Then the CAP was re-badged and became a mechanism to protect farm incomes. This claim never had credibility because most assistance was paid not by taxpayers but via prices, so that the larger producersÑwith the least income worriesÑreceived the bulk of the subsidies. In fact 85% of the subsidies went to 10% of the EUÕs richest farmers. Then the CAP was extolled as a policy to protect jobs. This claim too was heroic, given that one job in European agriculture was lost nearly every minute for over 20 years.

This is the context in which the EU introduced the concept of Ômulti-functionalityÕ in the lead-up to the debacle that was the December 1999 ministerial meeting of the WTO in Seattle. At the time, the EU was also negotiating expanded membership with a range of former Eastern bloc countries, many of whom have significant agricultural sectors and hence the capacity to add further to the financial drain resulting from the CAP.

To an Australian, Ômulti-functionalityÕ is yet another attempt by EU officials and policymakers at best to avoid facing up to agricultural reform realities and at worst to hoodwink its own general public and other WTO countries. Multi-functionality is truly a justification for all seasons, legitimising any possible negotiating position. It purports to comprise elements of culture, way of life, social cohesion, stewardship of land, food security, health and safety standards, animal welfare, biotechnology, and product labelling. The various elements included within the multi-functionality concept are obviously importantÑand, moreover, they are important in all countries, not just the EU. But they should not be used dishonestly as a Trojan Horse to stop trade liberalisation, and their effects on other countries should merit equal concern.

Now the Europeans have won the argument that environmental issues should come to the fore in a future agricultural agreement. The EU wants the precautionary principle applied to the WTOÑthat is, Ôno riskÕ decisions, not Ômanaged riskÕ decisions. The real concern for Cairns Group countries is: who will make such decisions and on what basis? Will it be a quarantine official following scientific guidelines, or an environmental official applying political guidelines?

If the EU were a low cost agricultural producer, its concern for the environment could be respected. If it asked its own taxpayers to meet the cost of its environmental policies, that would be fine. But when it appears that those who will be asked to meet the costs are the efficient agricultural exporting countriesÑcountries which already have their own environmental problems to tackleÑthen this is the height of hypocrisy and is completely unacceptable.

What happens in multilateral trade negotiations over the next two and a half years will reflect the strength and focus of negotiators. Probably the key determinant of success will be the extent to which the United States lives up to its high-minded trade liberalisation rhetoric. On current trends, this does not look promising.

The US Farm Bill

The US Farm Bill represents massive backsliding from previous policy stances, suggesting that the United States will not be a major force for reform, and that the United States is trying to outbid even the EU in terms of policy madness.

Our assessment is that it will lead to greatly increased agricultural support payments, from an average of about US$10 billion per year in the 1990s to an average of US$17 billion. Meanwhile, a major Australian review of the Farm Bill recently had this to say:

The protective and support measures are bound to . . . depress and destabilise world agricultural prices, reduce aggregate US and world incomes and harm overseas producers. They will continue to favour the richer farmers and further entrench the dependence of farmers on government subsidies, maintaining future political pressures to continue support . . .

The contents of the new US farm bill are likely to markedly influence the course of the current WTO negotiations . . . The United StatesÕ credibility will be compromised if it provides massive market distorting subsidies to its own producers and tightly restricts access to its own market for ÔsensitiveÕ products including dairy products and sugar.5

This is a sombre assessment by a respected research organisation about a country which until recently championed the cause of agricultural trade reform. Its conclusions are ominous for the future economic health of Cairns Group countriesÕ agricultural sectors and their entire economies.

What about other markets?

Japan (and Korea) have approaches to their agricultural sectors which in many ways are even more unrealistic than those of the United States and the EU. JapanÕs farms are tiny in scale and completely inefficient by world standards. They have survived solely because of the skewed political system which has favoured the Liberal Democratic Party so heavily over the years. None of this is likely to change quickly, just as JapanÕs apparent inability to face up to wider economic reform is seeing it reverse many of its economic achievements of the post-war period.

What is working in favour of agricultural exporters, however, is the inexorable impact of Japanese demographics. Put simply, its ageing agricultural workforce means that in future it will not have the capacity to maintain its production capacity, virtually no matter what subsidy regimes are in place. So, despite, rather than because of, multilateral trade reform outcomes, JapanÕs markets are beginning to open upÑfor example, beef, grains, dairy and rice. It seems inevitable that this process will continue, with the benefits going most to those countries and companies who can successfully develop long term trusting relationships and deliver to the exacting quality standards demanded by Japanese consumers.

ChinaÕs accession to the WTO occurred at the 2001 Doha talks, and its presence will increasingly be felt in future years. Its sheer size, as a producer and as a potential importer and exporter, means that it will need to be carefully monitored by all trading partners. Already there are concerns as to whether China will fully adhere to its WTO commitments, given the strains that will arise for traditional approaches and institutions. The rapid reform occurring domestically within China is an advantage, as many powerful fiefdoms are being threatenedÑincidentally once again demonstrating the value of unilateral reform.

Learning from New Zealand

New Zealand is at the opposite end of the spectrum to Japan. In 1984, the highly reform-oriented Labour Government removed most agricultural subsidies overnight.6 These subsidies had mainly been provided to help New Zealand cope with the shock of the termination of a traditionally advantaged trading position, which occurred when the United Kingdom joined the European Economic Community. They included subsidies for land development, production grants, supplementary product payments, fertiliser subsidies, concessional loans, other taxation concessions, and supplementary minimum prices.

Official predictions were that 8,000 farms would fail; other predictions of huge numbers of farmers walking off their land were not borne out. In the end, around 800 farms, or 1% of the total number, faced forced sales. Admittedly, many more faced considerable hardship, with farmers or their spouses needing to find alternative work, farms diversifying into tourism and so on. But for the most part, farmers reduced their costs and waited for an upturn in market conditions. Financiers realised that, although land values had fallen, there was little to be gained by forcing farmers to sell. They too were patient, although some loans were restructured, involving some capital write downs for the lender.

The benefits were immediate and significant. For example, with fertiliser subsidies, there was considerable wastage. That all stopped. Investment decisions became subject to strict commercial and good farming disciplines. The benefits of many of the subsidies had been appropriated by off-farm input suppliers and contractors. These firms suddenly found a new capacity to reduce costs and become more efficientÑjust as economics textbooks would predict.

Similarly, farmers benefited from the reforms being implemented by the Government elsewhere in the economyÑfor example, transport, labour markets and import duties. In fact the farmersÕ main concern quickly became not that their subsidies were being removed, but that they not be singled out for special attention.

Nearly 20 years later, New Zealand farming is efficient, competitive, provides a sound return on capital and a good standard of living. Significantly, New Zealand has also gained environmental benefits. Water quality has improved as wasteful practices fuelled by subsidies have stopped. Farming of marginal land has declined.

The GovernmentÕs role through the transition period was fairly minimal. One-off exit grants were provided to those farmers leaving the land and some additional short-term welfare support was also made available.

The general view now among New Zealand farmers is unquestionably that the changes were desirable and, moreover, that they were more effective for having been implemented rapidly rather than gradually.

Perhaps the most constructive initiative the Cairns Group could take would be to fund a three month study tour to New Zealand for all relevant EU and United States officials, or even better, to relocate the WTO head office from Geneva to Hamilton or Christchurch.

Conclusion: Where to from here?

A way has to be found to change the policy debate within protectionist countriesÑand that means within the United States and the EU. These countries have to be convinced that, like New Zealand, agricultural trade liberalisation will be good for them.

The problems endemic within the WTO system also need to be recognised.7 Opening world markets involves both negotiations between governments, as part of external policy, and negotiations within individual countries about the domestic adjustment required to meet the international agreements. When these countries come under domestic pressure to backslideÑas they inevitably doÑthe WTO relies on international rules, external surveillance and dispute settlement procedures to enforce compliance.

This approach cannot be successful for three reasons. First, it operates only after the event. Second, the scope for subverting WTO agreements (by replacing the forms of protection now in use with others) is endless. Finally, and of greatest importance, it does not address the underlying problemÑpressure at home to avoid the domestic adjustment involved in liberalising domestic markets.

The solution involves building into decision-making, in countries participating in the WTO, the domestic disciplines and policy logic which operate when countries liberalise unilaterally. In that caseÑNew Zealand being the clearest recent exampleÑthe reason for liberalising is unambiguously to secure gains in national wealth. The domestic trade-offs are resolved as a matter of course. The decision to reduce protection is made in the knowledge that it will involve adjustment. Domestic adjustment is the once-only price paid to secure the continuing gains from liberalising.

It is the positive or negative perceptions held at home about the domestic consequences of liberalising that ultimately determine how much change takes place. WTO processes should begin with domestic decisions which resolve the domestic trade-offs, and culminate in international negotiations, not the other way around. This way, acceptance of domestic adjustment would result from a conscious choice, not an accidental outcome of a balancing actÑin the international arenaÑbetween the requests of foreigners and the demands of domestic pressure groups. The domestic trade-offs would be taken into accountÑvia a domestic transparency agendaÑwhen establishing a negotiating agenda for each multilateral round.

Ironically enough, an approach along these lines was proposed during the Uruguay Round by none other than Mike Moore, then New ZealandÕs Minister for Trade, but now, of course, the WTOÕs Director-General. It has not been taken forward since. It needs to be progressed, ideally by the Cairns Group, by developing countries who are also liberalising domestically and who would therefore benefit from its wider adoption, and by those interests in the United States and the EU who are also frustrated by the glacial WTO pace of reform. Given that the export dependence of most agricultural commoditiesÑand their processed food derivativesÑin most Cairns Group countries is between 70 and 90%, the effective liberalisation of agricultural trade barriers, above all else, determines the viability or otherwise of Cairns Group farmers.

The United States and the EU hold the key to our future. If they act as we would like them to do, it will also be in their own interestÑdifficult though it has been to get this message across to date.

Endnotes
1 Ernest S. Micek, ÔGlobal Agriculture: Working Towards a Sustainable Food SystemÕ (Seattle: 1 December 1999).
2 These can be grouped into three broad categoriesÑdeveloped countries: Canada, New Zealand, South Africa and Australia; a block of south and central American countries: Argentina, Bolivia, Brazil, Chile, Columbia, Paraguay, Uruguay, Costa Rica and Guatemala; and a group of Asian/Pacific countries: Indonesia, Malaysia, Philippines, Thailand and Fiji.
3 These measures are in terms of the producer subsidy equivalents involved.
4 Hon. John Anderson, ÔStrategies for the FutureÕ, Address to meeting of Cairns Group Farm Leaders, published in International Trade Strategies Pty Ltd, ÔLiberalising World Trade in AgricultureÕ, Report for the (Australian) Rural Industries Research and Development Corporation (1998).
5 Ivan Roberts and Frank Jotzo, Ô2002 US Support and Agricultural TradeÕ, ABARE Research Report 01.13 (2001), 1-9.
6 This section draws on an address by Malcolm Bailey (then President of Federated Farmers of New Zealand) given to the Cairns Group farm leadersÕ conference in Sydney in 1998 and published in International Trade Strategies Pty Ltd, ÔLiberalising World Trade in AgricultureÕ.
7 I am grateful in this section for numerous discussions with eminent Australian economic and trade policy authority, Bill Carmichael, who has devoted many years of study to attempt to resolve the roadblocks that defeat conventional approaches to trade policy reform.

Author
David Trebeck is Managing Director of ACIL Consulting, in Canberra. This is an edited version of an addressÑÔMust the Good Guys Always Lose? An Australian/Cairns Group Perspective on the Future of AgricultureÕÑdelivered to the Rabobank International 2002 North American Agribusiness Advisory Board Meeting, Amsterdam, 2 May. The full version may be found at www.acil.com.au.

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