Global value chains in agriculture

agriculture policy brief

Global value chains in agriculture

February 2020

gro-food trade is increasingly taking part in global value chains (GVCs), changing the impact of A domestic agriculture and trade policies on the food system. he negative impacts on sector growth and development from protective trade policies and T distorting forms of domestic support that directly reduce the competitiveness of a country’s own exports are compounded in the context of trade in agro-food GVC . xports of primary products offer similar overall economic returns and employment E opportunities in GVCs as downstream exporters, in particular thanks to the use of services.

What’s the issue?

Global value chains (GVCs) have changed the nature of production and specialisation around the world. Simply defined, GVCs represent activities spread over several countries that take place in transforming raw materials into the product delivered at its end use. While changes in the international production landscape have been most obvious in manufacturing and services, similar changes have also occurred in the agricultural and food (agrofood) sector, which are reflected in the rising trade in both intermediate and final goods.

that influence them. Patterns in trade in value added reveal a clear difference in regional engagement in agrofood GVCs, which are most developed in Asia and Europe compared with other regional groupings. Agro-food value chains are also increasingly centralised around hubs in China, the United States, and Germany. In recent years, there has also been a strong increase in emerging and developing country involvement in agro-food GVCs – particularly amongst countries in South America and Asia, increasingly trading among themselves (see figure).

New OECD research has begun to shed light on the extent of GVCs in a number of agro-food sectors, and the policies Growth in value added traded for use in the production of exports, 2004-2014 140%

120%

100%

80%

60%

40%

20%

0%

Asia

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Europe

Africa

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Americas

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Extra-regional

Total

Global value chains in agriculture Value-added from agriculture is exported in several ways. First, through a “primary pathway”, where raw agriculture products are exported directly, usually as intermediate inputs, and are then further processed by foreign processing industries. Another way is through a “processed pathway”, where agricultural value-added is embedded in exports of other sectors as raw agricultural products are used as inputs to produce other good – such as food products, clothing and other manufactured goods.

The evidence is beginning to show that both pathways offer similar economic returns, contrary to the classic arguments that domestic processing offers higher return than exports of primary products. Both the volume of exports and the use of other domestic inputs as part of primary production and export are the cause for similar returns. Akin to value-adding by downstream processing sectors, all the inputs used to produce agriculture exports such as fertilisers, research and development and the use of on-farm specialist are also a source of domestic value creation and value-adding.

OECD research has shown that beyond creating different forms of export opportunities for the agricultural sector, participation is also a driver of sector growth and employment. Past participation in agro-food GVCs is linked to stronger growth in both exports of value added and total sector value. On the employment side, past GVC participation has stronger links to growth in returns to labour than those of other value added inputs (capital and land). Overall, trade and GVC participation is responsible for a significant share of total agriculture labour force income. Globally, trade and agro-food GVCs generate on average between 20-26% of total agricultural labour force income, but with large differences between countries and sectors.

What should policy makers do?

The rise of GVCs in agricultural and food sectors means that policy makers must reconsider traditional views of the impact of trade and domestic support measures.

While GVC participation offers benefits, and stronger growth over time, participation in them and the benefits can be harmed by market distorting government policies.

Protective trade policies and distorting forms of domestic support can directly reduce the competitiveness of a country’s own exports, reducing participation and sector growth while compounding the already negative efficiency costs of such policies on the domestic economy. The benefits of more proactive policies that seek to enhance a country’s competitiveness through non-distorting forms of support to the agriculture sector are likely to have even higher payoffs. In addition, policy makers could support agro-food GVCs by: •

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Reducing domestic support policies that can limit the ability of agro-food sectors to participate in GVCs and reduce the domestic value added created.

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Avoiding or removing policies that seek to push the balance of exports towards down-stream processing, which are likely to be counterproductive to sector growth and development.

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Prioritising support for transport infrastructure, education and agricultural research and development.

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Ensuring market openness for trade in services, which can support competitiveness of the primary exports pathway.

Further reading • OECD (2020), “Global value chains in agriculture and food: A synthesis of OECD analysis”, OECD Food, Agriculture and Fisheries Papers, No. 139, OECD Publishing, Paris. https://doi.org/10.1787/6e3993fa-en • Greenville, J., K. Kawasaki and M. Jouanjean (2019), “Dynamic Changes and Effects of AgroFood GVCS”, OECD Food, Agriculture and Fisheries Papers, No. 119, OECD Publishing, Paris. https://doi.org/10.1787/43b7bcec-en • OECD (2019), “Value adding pathways in agriculture and food global value chains: the role of services”, by Greenville J., M-A Jouanjean and K. Kawasaki, OECD Food, Agriculture and Fisheries Papers, No. 123, OECD Publishing, Paris. https://doi.org/10.1787/bb8bb93d-en • OECD (2019), “Employment in global agriculture and food value chains”, by Greenville J., M-A Jouanjean and K. Kawasaki, OECD Food, Agriculture and Fisheries Papers, No. 124, OECD Publishing, Paris. https://doi.org/10.1787/5ed3b181-en • OECD (2017), “How policies shape global food and agriculture value chains”, by Greenville, J., K. Kawasaki and R. Beaujeu, OECD Food, Agriculture and Fisheries Papers, No. 100, OECD Publishing, Paris. http://dx.doi.org/10.1787/aaf0763a-en

Reducing the use of trade policies that ‘protect’ individual sectors. In a GVC world, tariffs and nontariff barriers that restrict imports act as a tax on a country’s exports by raising input costs. By contrast, inward and outward investment can positively influence engagement in agro-food GVCs.

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