|
|
Distr. GENERAL UNCTAD/DITC/TNCD/
. Original
English |
Sink or
Swim?
Helping
Small Island Developing States survive further agricultural trade
liberalization
Note
This study was prepared by Luca Monge-Roffarello and
Michael Swidinsky of the Trade Negotiations and Commercial Diplomacy Branch and
David Vanzetti of the Trade Analysis Branch, Division on International Trade in
Goods and Services, and Commodities, UNCTAD. The opinions expressed in this
study are those of the authors and do not necessarily reflect the views of the
UNCTAD secretariat.
Acknowledgements
Wojciech Stawowy provided helpful assistance in converting specific rates to ad volorem equivalents.
A.
Agricultural liberalization A two-edged sword. 3
B. Export
dependent SIDS fear preference erosion. 5
Agricultural production and trade patterns of
SIDS. 5
Preferential market access for SIDS. 7
Liberalization and the erosion of
preferences. 11
C.
Surviving agricultural liberalization: a quantitative
assessment 14
The ATPSM modelling framework. 15
Current protection levels and rents. 18
Five alternative scenarios. 19
Annex 1. Some technical details concerning
ATPSM... 29
Figures
..41
A. Agricultural liberalization A two-edged sword
Small Island Developing States (SIDS)[1] face a number of structural problems that make them less competitive in agricultural trade than many other developing countries. The United Nations, and in particular UNCTAD, has been studying the specific problems of island developing countries since the 1970s with a view to sensitizing the international community to the distinctive needs of these countries, and more recently, to their specific vulnerability (Encontre 1999)[2]. To a greater extent than in most other developing countries, and notably as a result of acute limitations in the resource base and domestic market opportunities available to SIDS, the magnitude, structure and variability of trade constitutes the most important factors affecting the socio-economic performance and development capacity of SIDS. On average, the ratio of merchandise imports to GDP is 47 per cent higher in SIDS than in other small economies while the ratio of their agricultural trade (exports and imports combined) to GDP is the highest among all countries. Whilst larger countries can count on both their domestic and international markets to foster economic growth, SIDS have to rely on their export markets as the only avenue for reaping the benefits of economies of scale and capital accumulation (Streeten, 1993).
The constraints faced by SIDS countries hampering their competitiveness in international markets are well documented[3]. Factors such as small size, insularity and remoteness, and problems associated with the local environment all impose a burden on SIDS in achieving efficiency in production (Briguglio 1995). Because of their small land base and population, SIDS have limited ability to exploit economies of scale in agricultural production. Land scarcity, in particular, is a binding constraint on agricultural production making SIDS highly dependent on food imports. SIDS are net agricultural importers and depend on a small number of agricultural exports to pay for their food import bill.
Similarly, small size restricts SIDS capacity to diversify exports, and the need to secure certain scale economies in production, distribution and other economic activities, together with the possibility to take advantage of some export market opportunities have, to varying degree, led SIDS to specialize in a narrow range of agricultural products, exposing the country to instabilities of world markets.
Insularity and remoteness also give rise to problems associated with transportation of agricultural imports and exports. SIDS tend to import and export fragmented cargoes of agricultural products leading to high per unit shipping cost because SIDS do not have the flexibility of road transport in handling small shipments.
Additional costs might arise in some instances with the need to provide indivisible and expensive public goods to support agricultural production, which is bound to be particularly expensive given the limited production involved. Higher costs means loosing competitiveness and in turn frustrating diversification.
Finally, environmental degradation (as well as proneness to natural disasters) and resource depletion may have serious implications for SIDS agriculture. Due to their small size the depletion of arable land from economic development has had a disproportional effect on agricultural production for SIDS. Limited freshwater, poor water management along with population pressures and an expanding tourism industry have led to water scarcity, jeopardizing SIDS agricultural production.
Offsetting these inherent disadvantages to some extent are various preferential market access arrangement enjoyed by many SIDS. These provide duty free access into specific developed country markets. The EU market for sugar is of greatest significance in this regard.
Liberalization is a two edged sword for SIDS. Maintaining and obtaining market access is very important for trade dependent economies. On the other hand, liberalization also provides additional competition, particularly if preferential access may be eroded. While some SIDS will swim with the tide of liberalization, others will need help to adjust. Against this background, the objective of this study is two-fold: first, to examine the pattern of SIDS' agricultural trade in the world market; and second, to provide a quantitative assessment of likely impacts of continued multilateral agricultural liberalization on SIDS, using UNCTADs Agricultural Trade Policy Simulation Model (ATPSM). Liberalization may erode the preferential access currently provided to SIDS.
In Section I the paper looks at the main characteristics of the SIDS agricultural sector, focusing on trade flows and constraints hampering SIDS competitiveness in agriculture. An overview of the preferential trading arrangements available to SIDS in their main markets and the actual importance of these schemes for SIDS exports are also provided.
Section II is dedicated to a quantitative assessment, through the use of the ATPSM model, of a number of scenarios derived from "modalities" as being discussed in the ongoing WTO negotiations on agriculture. The simulations show the potential impact of liberalization on prices, exports, government revenues, quota rents and overall welfare. While SIDS as a whole may be worse off under certain assumptions, policies to improve their position are examined.
B. Export dependent SIDS fear preference erosion
Agricultural
production and trade patterns of SIDS
The agricultural sector remains the backbone of the economies of many SIDS. It is characterized by a combination of large-scale commercial production of cash crops and a relatively small sector that produces food crops primarily for local consumption. The most important food crops grown are starchy staples, mostly root and tuber crops. Rapid urbanization has lead to starchy staples being replaced by imported cereals (FAO, 1999a).
Table 2 provides the top 5 agricultural import/export products by the degree of product concentration of SIDS in agricultural trade.
SIDS import a wide
variety of agricultural products, particularly cereals, meats, dairy products,
animal and vegetable fats. These agricultural imports consume 20 per cent of
SIDS total export earnings. For some SIDS their agricultural import bill exceeds
total export revenue for example
Table 3 compares the relative importance of agricultural trade of SIDS with that in other country groups (developed, developing, and LDCs). As exporters, SIDS' agricultural exports are concentrated on a number of products, including raw cane sugar, coffee, cocoa and coconut. In many SIDS, these few agricultural products are the main source of export earnings. On average, agricultural exports (imports) by SIDS account for 24 per cent (14 per cent) of their total merchandise exports (imports), showing a considerably higher dependence of their trade on the agricultural sector than the developing country average. In fact, this trade pattern of SIDS is remarkably similar that in least-developed countries (LDCs). In the case of Sao Tome Principe over 90 per cent of agricultural export earnings are derived from cocoa alone.
Apart from the
concentration of the type of exported products, SIDS' agricultural exports also
show a concentration of the destinations, further increasing SIDS' exposure to
external shocks. As shown in Table
4, the European Union receives more than half of the total SIDS agricultural
exports, and it is the most important market for African SIDS accounting for 87
per cent of their agricultural exports.
The Pacific SIDS export around 65 per cent of their agricultural products
(largely from
Similarly, the
Preferential
market access for SIDS
The high
geographical concentration of SIDS exports in the European Union and the
Preferential market access, in terms of tariff advantages and/or preferential quota, are important for SIDS agricultural exporters for two reasons. First, a preferential margin may provide substantial "quota rents" to SIDS exporters. Second, preferential margins, where substantial, can compensate for a general lack of price competitiveness of agricultural exports from SIDS vis-ΰ-vis low-cost exporters competing in the same markets.
This section provides an overview of preferential market access granted by the Quad countries to SIDS agricultural exports, and the values of such preferences.
European
Union
Being the largest market for the SIDS agricultural exports, the European Union grants two preferential trading arrangements that are particularly important for SIDS: (i) the EU/ACP Cotonou Partnership Agreement,[4] signed in 2000 between the European Union and 77 African, Caribbean and Pacific (ACP) States (31 of the 77 ACP countries are SIDS[5]); and (ii) the "Everything But Arms" (EBA) initiative in favour of products originating in LDCs (10 of the 49 LDCs are SIDS) under the aegis of the EU scheme of Generalized System of Preferences (GSP).
The Cotonou
Partnership Agreement, which provides for an eight-year rollover of the previous
trade preferences granted under Lomι (with minor improvements), grants SIDS
beneficiaries with duty-free access for most of their agricultural products[6],
except for a limited number of agricultural products to which only a tariff
reduction is granted. For SIDS,
particularly important are the three protocols on bananas (affecting mostly the
The Cotonou Agreement creates a considerable level of preferential tariff margin not only over applied MFN rates but also over most GSP rates (excluding the EBA). Table 5 shows that, for those products whose average MFN rates are above 20 per cent (accounting for almost a half of SIDS exports[7] - largely sugar and bananas), SIDS agricultural exports to the European Union receive preferential margins of 25 percentage points against MFN rates and 15 percentage points against GSP rates.
The EBA provides LDCs with a duty-free treatment to all agricultural products (except bananas, rice and sugar until 2007), including very sensitive products such as beef, dairy products, fruit and vegetables (fresh as well as processed), cereals, starch, vegetable oils, confectionary, pasta and alcoholic beverages.[8]
For those
LDC-SIDS, the EBA has now made the EU GSP a more favourable scheme than the
The
United
States
The US recently renewed its GSP programme (applicable until 2006), which provides duty-free access for 5000 tariff line items to over 100 beneficiary countries and territories. The GSP programme covers agricultural and fishery products that are not otherwise duty-free or are subject to tariff quotas/ceilings. An additional 1783 lines are added to the list of eligible products for LDC recipients.
The recently
approved USA Trade and Development Act of 2000 has expanded the preferences
granted to Sub-Saharan Africa under the African Growth and Opportunity Act
(AGOA),[9]
as well as to the
The AGOA
beneficiary countries (including SIDS such as
To 24 beneficiary
countries of the Caribbean Basin Initiative,[12]
most of which are SIDS, the CBTPA provides trade preferences similar to those
given under the AGOA. It also
provides NAFTA-equivalent tariff treatment for certain items previously excluded
from duty-free treatment under the CBI program (e.g. canned tuna). The NAFTA-parity is provided with a view
to partly offsetting the negative effects in term of trade and investments
diversion experienced by these countries since the entry of
Under these preferential schemes, approximately 60 per cent of SIDS exports (which include products such as cigars, beer, alcohol and certain food preparations) enjoy preferential margins of on average 4.2 percentage points over corresponding MFN rates. Preferential tariff margin increases up to average 35 percentage points - as MFN tariff increases. However, these large tariff margins apply only to a small share (6 per cent) of the total SIDS agricultural exports. It was not possible to calculate preferential margins for some 14per cent of SIDS exports to the US, largely sugar, as MFN tariffs are given in non-ad-valorem technical rates and whose ad-valorem equivalents (AVEs) could not be calculated.[14].
Canada
The CARIBCAN
provides most Caribbean SIDS[16]
with duty-free market access for a large number of products, including all
agricultural products. However,
preferential tariff margins on those products is generally low as corresponding
MFN tariffs are already low - MFN duties on more than 53 per cent of SIDS
agricultural exports are already zero. As these exports consist mainly of fresh
fruits and vegetables, the
Japan
Finally, trade
preferences for SIDS (as for other developing countries) are made available
under the Japanese GSP scheme, which was recently reviewed and extended for a
new decade, until
Preferential GSP tariffs applicable to developing countries range from dutyfree to 20 per cent reduction in MFN duties. LDCs beneficiaries enjoy duty-free entry for all products covered under the GSP scheme plus an additional list of products. Preferences to LDCs has been improved by increasing the number of tariff items for duty-free and quota-free access specifically available to all 49 LDC exports as long as they request them.[18]
Despite the
existence of the GSP scheme, the overwhelming majority of SIDS
agricultural exports enter the Japanese market on a MFN basis - 66.3per cent of
SIDS exports, most importantly coffee and copra, enter
Liberalization
and the erosion of preferences
Further liberalization in agriculture will
affect the value of preferential market access currently provided to SIDS. The
impact of liberalization will depend on a number of factors. First, the impact
of the erosion of preferences depends on the initial insurability provided by
the preferential treatment vis-ΰ-vis competitions with other exporters. In terms of a geographical grouping,
further MFN tariff cuts may result in a much faster erosion, if not elimination,
of preferential tariff margins available to the
Second, whether preferential tariffs are
"linked" or "de-linked" to MFN rates may result in different impacts upon the
values of preferences after MFN tariff cut. In the case of the ACP-EU preferences,
there are still a number of products whose preferences are expressed as a
percentage of MFN rate (and thus linked to MFN rates). If the initial MFN rates are
sufficiently high, further MFN cuts would reduce the nominal preferential
margins of the ACP preference only marginally. Beneficiaries of such preferences are
more likely to retain tariff advantages not only over MFN tariffs but also over
other preferences providing less extensive degree of market access treatment.
This might be the case of various products from palm, cigars, fruits and
vegetables (e.g. oranges, onion, garlic, carrots, peaches, and cabbages),
although SIDS' exports of the latter items are currently limited. Where
preferences to SIDS are de-linked from the corresponding MFN rates as in the
case of the GSP scheme of the
Third, the recent initiatives undertaken to provide better market access for LDCs and countries in the Sub-Saharan African Region have yet to fully materialize. As they are creating additional and substantial preferential margins for certain SIDS and for certain products, the negative impact in terms of preferential margins coming from further trade liberalization might be somehow mitigated.
Finally, although wide, current preferences could be still expanded. For example in the case of the European Union, the ACP-EU preferences are quite limited for agricultural and processed products that are subject to the Common Organization of the Market (listed in the "Joint Declaration concerning agricultural products")[20] and for products that are subject to specific rules under the Common Agricultural Policy. Many of those sensitive products (namely meat and diary products, cheese, tomatoes, mandarins and some cereals) are subject to a combined tariff which is made up with an ad-valorem component and a specific-rate component. Preferential market access for those products normally takes the form of an elimination of the ad-valorem component and a reduced level of a specific-rate component, whose ad-valorem equivalent can go up as high as 80 per cent.
Similarly, for certain categories of processed agricultural products of HS chapter 4 (milk and milk products), 17 (sugar and sugar confectionery), 18 (cocoa and cocoa preparations), 19 (processed foodstuffs), 20 (beverages) and 21 (miscellaneous edible preparations), the European Union maintains a system of a technical tariff which includes the so-called agricultural component: i.e. a combination of ad valorem and specific duties that may vary according to the presence in different percentages or quantities of certain ingredients such as sugar, starches or glucose and milk fat or proteins contained in the final products. However, it is largely the specific component that constitutes the bulk of the protection and not the ad valorem part.
In addition, around 15 products, mainly fruits and vegetables as well as some processed products like fruit juices, are subject to the entry price system (EPS).[21] Neither ACP nor GSP beneficiary countries are granted special preferences for the products subject to the EPS.[22] The Cotonou Agreement foresees to ameliorate ACP preferences[23] during the transitional period, and the European Commission has already tabled a proposal for improving the current market access conditions given to the ACP countries.[24]
C. Surviving agricultural liberalization: a quantitative assessment
It is anticipated
that the ongoing WTO negotiations on agriculture will result in further
reductions, if not an elimination, of tariffs and trade-distorting subsidies
provided to agricultural products in the world. A recent UNCTAD study estimates that a
worldwide reduction of 50 per cent in all agricultural tariffs brings about an
aggregate welfare gain of $21.5 billion to the world.[25] However, the distribution of the welfare
gains is likely to be uneven among regions. The same study suggests that welfare
gains to some group of developing countries, particularly those in Sub-Saharan
African and
Insignificant welfare gains, or indeed losses, of multilateral agricultural liberalization to SIDS may be due to (i) a rise in agricultural prices induced by liberalization, and (ii) the erosion of preferences.
It is thought that
agricultural liberalization would raise world prices of temperate agricultural
products more relative to prices of tropical products, leading to an increase in
food import bills for SIDS which import temperate products and export a narrow
range of tropical products. At the same time, as MFN tariff cuts reduce the
margin of preferences, importers are likely to take supplies from low cost
countries. For example, assuming exporters of sugar to the European Union are
receiving EU prices, any lowering of those prices will make other exporters,
e.g.
This section examines likely impacts of agricultural trade liberalization on SIDS under different liberalization "scenarios", with a view to identifying liberalization "modalities" that would at least "compensate" for possible negative impacts from liberalization, if not creating welfare gains.
The ATPSM
modelling framework
To assess the potential impacts of agricultural liberalization on SIDS, UNCTADs Agricultural Trade Policy Simulation Model (ATPSM) Version 1.1 is used in this study.