Measuring Distortions in International Markets: The Agriculture Sector

agriculture policy brief

Measuring distortions in international markets: the agriculture sector

June 2020

Many agricultural policies today are not well-aligned with stated government objectives to increase agriculture productivity growth, enhance environmental performance, and improve farm household resilience and well-being. By adopting new policy approaches, governments have an opportunity to achieve their objectives more effectively while at the same time reducing international market distortions.

Of the USD 536 billion provided annually in public support to farmers, about two-thirds is provided through measures that strongly distort farm business decisions - thereby distorting global agricultural production and trade. At the same time, some countries implicitly tax their farmers an estimated USD 89 billion a year.

Policies that keep domestic agriculture prices above international price levels impose a high burden on less well-off consumers, reduce the competitiveness of the domestic food industry, and increase the income gap between large and small farmers.

While agricultural productivity continues to grow, the environmental performance of the sector is mixed and greenhouse gas emissions per hectare are growing in most countries.

In the midst of the COVID-19 pandemic, many countries are responding with measures to ensure that food supply chains can operate effectively and that temporary assistance is provided to the most vulnerable. As the pandemic spreads to less developed parts of the world, international cooperation will be needed to help avoid an increase in global hunger and malnutrition.

Looking ahead, governments can re-direct much of the current policy effort towards highreturn investments in innovation systems, in hard and soft infrastructure, in climate and environmental measures, and in enabling more resilient food systems – including by ensuring that input and output markets can operate effectively.

What’s the issue?

In a context of global trade tensions and new pressures on food supply chains arising from the COVID-19 pandemic, there is an urgent need to begin updating the international trade rule-book to better address concerns about unfair competition in the global economy. Updating these rules requires comprehensive information on the nature, scope and likely impact of current and alternative policies that can distort markets and detract from a level international playing field.

The OECD has longstanding work measuring government support in agriculture, fossil fuels, and fisheries and has recently estimated support and related market distortions in the aluminium value chain. In addition, the OECD maintains up to date regulatory information

www.oecd.org/agriculture

tad.contact@oecd.org

and indicators on trade facilitation, non-tariff measures, export restrictions in the raw materials sector, and trade restrictions in services sectors. All of these evidence gathering exercises cover, at a minimum, OECD countries and key emerging economies.

Within this overall context, this note describes the main features of government support and related market distortions affecting the agriculture sector. The sector is facing huge challenges globally: to feed a growing and more affluent population; to contribute to inclusive growth and prosperity, in particular in rural and less developed regions; to provide a decent livelihood for the hundreds of millions of families who depend on it; to adapt to climate change and contribute to mitigation; to

@OECDagriculture

Measuring distortions in international markets: the agriculture sector Figure 1. Many countries continue to support their producers with measures that strongly distort trade (%PSE, 2017-2019) Positive MPS

Negative MPS

Other potentially most distorting support 1

Other support

Producer Support Estimate

% 70 60 50 40 30 20 10 0 -10 -20 -30 -40

Source: OECD (2020), “Producer and Consumer Support Estimates”, OECD Agriculture statistics (database), http://dx.doi.org/10.1787/agr-pcse-data-en.

Notes: Producer support as percentage of gross farm receipts, for 2017-19 average. Countries are ranked according to the %PSE levels. (1) Support based on output and on the unconstrained use of variable inputs. (2) EU28. (3) The OECD total does not include the non-OECD EU Member States, nor Colombia which joined the OECD in April 2020. (4) The 13 Emerging Economies include Argentina, Brazil, China, Costa Rica, India, Kazakhstan, the Philippines, Russian Federation, South Africa, Ukraine and Viet Nam, as well as Colombia. (5) The All countries total includes all OECD countries, non-OECD EU Member States, and the Emerging Economies. The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.

reverse environmental damage and preserve and restore biodiversity; and, overall, to build food security on a global basis. Current policy settings in many countries are not well targeted to addressing these challenges and, in many cases, are contributing to distortions on international markets and potentially to exacerbating environmental damage, climate change and resource depletion.

The COVID-19 pandemic is a global health crisis that continues to have devastating impacts on the world economy – and important impacts on the food and agriculture sector. Many governments are responding with short-term measures, including support to actors along the food chain, initiatives to expedite cross border shipments and keep food supply chains moving, and assistance for vulnerable consumers. While many countries have taken action to facilitate trade, some have imposed temporary trade restrictions.

Agriculture policy reforms are underway, but trade distorting support remains prevalent Total support to agriculture (including support to farmers, general services to the sector, and consumer subsidies) across the 54 countries covered by the latest OECD Agricultural Policy Monitoring and Evaluation report averaged USD 708 billion per year during 2017-2019 (Figure 1). Some three-quarters of this support – USD 536 billion – was transferred to individual producers.

Six countries taxed their agricultural producers using measures that depressed the domestic prices of some commodities. These implicit taxes amounted to USD 89 billion per year in that period. While lowering the level of aggregate support, these implicit taxes also increase overall market distortions. In total, more than half of all transfers are directly linked to farm production decision and contributes to distortions in international markets.

www.oecd.org/agriculture

tad.contact@oecd.org

For the OECD area as a whole (excluding Colombia which became a member in 2020), support to farmers averaged 17.6% of their gross receipts, down significantly from 37% during 1986-88 and 29% during 2000-02, but largely unchanged since the beginning of this decade. The %PSE is made up of measures with widely differing potential to distort production and trade (Figure 1). The share of the most distorting production-linked types of support was 85% of producer support in 1986-88, and had fallen to 50% by 2010-12 and has stayed close to this level since.

In monetary terms, average annual support to farmers across the OECD area in 2017-19 was USD 231 billion, of which USD 111 billion resulted from highly distorting interventions in output and input markets, the balance representing payments more or less de-linked from agricultural production. In turn, USD 43 billion per year were spent for various public services to the sector, from R&D support to inspection services.

For the 13 emerging economies for which comparable support estimates are prepared by OECD (including Colombia), average support to farmers was lower at 8.5% of gross receipts, or USD 210 billion per year in 2017-19. However, this figure includes both higher transfers to producers (USD 299 billion per year) and implicit taxation of producers as a result of policies that lower market prices in some countries. Transfers among these emerging economies are dominated by the most distorting production-linked policies, estimated at 83% of all producer transfers in 2017-19.

These averages mask wide variations across countries.

Competitive, exporting countries tend to intervene less in the sector, and to concentrate on strengthening the enabling environment through investments in innovation, infrastructure, and inspection services, for example. Many importing countries where less globally competitive farms @OECDagriculture

dominate tend to provide higher levels of productionlinked support and in some cases direct income payments.

A group of countries comprising Australia, Brazil, Chile, New Zealand and South Africa currently provide low levels of support to their farm sectors, 5% of farm receipts or less, and focus on investments promoting market functioning, productivity, sustainability and resilience.

Kazakhstan and Ukraine show similar overall support levels, but these hide both positive and negative market price support across different commodities.

Another group comprising Canada, Mexico, and the United States have levels of support closer to 10%, provided generally through relatively less market distorting channels. Nevertheless, in each country there are examples of sectors which continue to be shielded from competition, or of widespread use of specific highly distorting policy instruments. Colombia, Costa Rica and the Russian Federation report similar support levels but are dominated by more distortive measures which, in Costa Rica, focus on a single commodity.

Policy interventions among a group of countries including China, Israel and Turkey result in support in the 13-18% range, with trade and market distortions dominating in each case. Reforms in China have begun to change the ways in which support is delivered, away from the most distorting and environmentally damaging instruments, to less distorting ones.

At 19% the European Union’s PSE remains above the OECD average; however, support has fallen by half since the mid 1980s and the share of support delivered through the most distorting policy instruments has been reduced even more. Indonesia and the Philippines report higher levels of support in recent years – in the range of 24-28% PSE, almost all of which arises from market and trade distorting interventions.

Another group of countries, comprising Argentina, India and Viet Nam implicitly or explicitly tax their agricultural sectors, resulting in negative support overall.

These negative aggregates mask the fact that while some

commodities are taxed, others receive support; in some countries there are large expenditures on input subsidies.

As a result, interventions in these countries tend to be heavily market distorting.

Finally, a group comprising Iceland, Japan, Korea, Norway and Switzerland report the highest level of support at more than 40% of farm receipts. While each of these countries had begun to reduce the overall level of support, moving towards measures that are more targeted to improving environmental outcomes, this earlier progress has now largely stalled.

Tariffs on agriculture products are relatively high, imposing costs on firms and consumers Despite extensive tariff reductions since the Uruguay Round higher tariffs continue to be applied to trade in agricultural and food products than to other goods (Table 1). Looking beyond the averages, tariff peaks and escalation further distort international markets; while many tariff lines are at zero, others are quite high (even exceeding 100%) and there are many instances where tariff rates increase with higher levels of processing. For many countries, the gap between applied tariffs and WTO bound rates is large, and the possibility that countries can, legally, increase tariffs to these higher bound rates adds uncertainty for businesses and dampens much needed investment in the sector.

Non-tariff measures (NTMs) also increase costs but can bring larger consumer benefits Domestic regulations and the costs of complying with them also impact on international trade. NTMs may facilitate the free flow of trade or, conversely, generate unnecessarily high costs that impede trade. The price increasing effect of non-tariff-measures arise mainly in relation to SPS and TBT measures and tend to be higher for agricultural and food products than for many other sectors.

While adding to trade costs overall, many NTMs are found to enhance trade because of the role they play in reassuring

Table 1. Average tariffs on agriculture are higher than tariffs on industrial goods (in percent) 1996

2001

2006

2011

2015

2018

Agricultural - applied rates

12.9

13.2

10.1

9.6

7.9

7.8

Agricultural - WTO bound rates

56.4

58.0

56.5

56.4

52.6

48.9

9.4

8.7

6.5

5.9

5.0

4.6

30.2

29.0

30.6

29.3

26.2

27.1

Agricultural - applied rates

11.5

8.2

5.9

6.6

5.6

5.7

Agricultural - WTO bound rates

23.2

28.0

28.0

28.5

28.8

23.7

5.9

4.5

2.9

2.5

2.3

1.9

11.4

11.2

11.2

11.3

11.2

11.8

All countries, percentage of ad valorem tariffs

Industrial - applied rates Industrial - WTO bound rates OECD countries, percentage of ad valorem tariffs

Industrial - applied rates Industrial - WTO bound rates Note: Does not include AVEs for specific and mixed tariffs. Source: WITS-TRAINS (2020).

www.oecd.org/agriculture

tad.contact@oecd.org

@OECDagriculture

Measuring distortions in international markets: the agriculture sector Figure 2. Non-tariff measures, mainly SPS and TBT, can create significant trade costs but can also enhance trade SPS

35%

TBT

BCM

QRs

30% 25% 20% 15% 10%

consumers about the safety and quality of the product they are purchasing. There are fundamental principles of regulatory design that can help ensure that NTMs facilitate trade rather than constrain it, without impeding a country’s right to regulate. These principles include transparency and predictability, non-discrimination, and proportionality (for example, regulations that are science-based and consistent with agreed international standards).

What next?

In the midst of the COVID-19 pandemic, many countries quite rightly are investing heavily to ensure that essential supply chains can operate effectively, and that food can move from where it is produced to where it is needed.

Special assistance is also being provided to vulnerable populations. Continued vigilance is required to ensure that this health and economic crisis does not also become a food crisis, including by avoiding measures that restrict trade flows. And as the pandemic spreads to less developed parts of the world, the international community can be expected to be called upon to help avoid an increase in global hunger and malnutrition.

Looking beyond the pandemic, governments need to act urgently, first to roll back the most distorting and wasteful policy measures, many of which have been in place for many years. In this way, scarce financial resources will be released and can be devoted to high-return policy interventions which create the enabling environment for a strong, productive, sustainable, and resilient agro-food sector. This means investing in innovation systems, in hard and soft infrastructure, in climate and environmental measures, in risk management for improved resilience, and in some cases in temporary adjustment support.

Concentrating policy effort in this way will pave the way for progress to be made on international trade in agriculture and food, because of the important role it can play in generating growth and income, and in assuring food security in the face of climate change. International agreements currently in force allow wide scope for the beneficial, high-return measures described here to be implemented. www.oecd.org/agriculture

tad.contact@oecd.org

Miscellaneous

Optical Medicals

Motor Vehicles

Machinery & Electrical Equipment

Base Metals

Precious stones

Stone Cement

Footwear

Textile

Paper

Wood

Raw hide skins

Rubber Plastics

Chemical products

Processed food

Fats and Oil

Vegetable products

0%

Live animals

5%

The implications of such a policy shift are significant.

While consumers and society overall can be expected to benefit substantially, the burden of adjustment will fall more narrowly on relatively resource poor farm households unable to adjust on their own. In some cases adjustment within in the sector will be possible, with time and transitionary support from governments; in other cases adjustment will require moving out of the sector to more remunerative employment opportunities.

Well targeted temporary income support and active labor market measures will be required to support the needed adjustment, ensuring that no one is left behind.

Further reading • OECD (2020), Agricultural Policy Monitoring and Evaluation 2020, OECD Publishing, Paris, https:// doi.org/10.1787/22217371.

• OECD (2020), Producer and Consumer Support Estimates, OECD Agriculture Statistics (database), http://dx.doi.org/10.1787/agr-pcse-data-en.

• OECD (2019), “The changing landscape of agricultural markets and trade: prospects for future reforms”, OECD Food, Agriculture and Fisheries Papers, No. 118, OECD Publishing, Paris, https://doi.org/10.1787/7dec9074-en.

• OECD/FAO (2020), OECD-FAO Agricultural Outlook 2020-2029, OECD Publishing, Paris/FAO, Rome, https://doi.org/10.1787/19991142.

• Cadot, O., J. Gourdon and F. van Tongeren (2018), “Estimating Ad Valorem Equivalents of NonTariff Measures: Combining Price-Based and Quantity-Based Approaches”, OECD Trade Policy Papers, No. 215, OECD Publishing, Paris, http:// dx.doi.org/10.1787/f3cd5bdc-en.

@OECDagriculture