WORLD BANK TECHNICAL PAPER NO. 364 Work in progress for public discussion V Agricultural Trade Policies in the Andean Group 1/Issm/Opin RECENT WORLD BANK TECHNICAL PAPERS No. 281 Shen and Contreras-Hermosilla, Environmental and Economic Issues in Forestry: Selected Case Studies in Asia No. 282 Kim and Benton, Cost-Benefit Analysis of the Onchocerciasis Control Program (OCP) No. 283 Jacobsen, Scobie, and Duncan, Statutory Intervention in Agricultural Marketing: A New Zealand Perspective No. 284 Vald6s and Schaeffer in collaboration with Roldos and Chiara, Surveillance of Agricultural Price and Trade Policies: A Handbook for Uruguay No. 285 Brehm and Castro, The Market for Water Rights in Chile: Major Issues No. 286 Tavoulareas and Charpentier, Clean Coal Technologies for Developing Countries No. 287 Gillham, Bell, Arin, Matthews, Rumeur, and Hearn, Cotton Production Prospects for the Next Decade No. 288 Biggs, Shaw, and Srivastiva, Technological Capabilities and Learning in African Enterprises No. 289 Dinar, Seidl, Olem, Jorden, Duda, and Johnson, Restoring and Protecting the World's Lakes and Reservoirs No. 290 Weijenberg, Dagg, Kampen, Kalunda, Mailu, Ketema, Navarro, and Abdi Noor, Strengthening National Agricultual Research Systems in Eastern and Central Africa: A Framework for Action No. 291 Vald6s and Schaeffer in collaboration with Errazuriz and Francisco, Surveillance of Agricultural Price and Trade Policies: A Handbook for Chile No. 292 Gorriz, Subramanian, and Simas, Irrigation Management Transfer in Mexico: Process and Progress No. 293 Preker and Feachem, Market Mechanisms and the Health Sector in Central and Eastern Europe No. 294 Vald6s and Schaeffer in collaboration with Sturzenegger and Bebczuk, Surveillance of Agricultural Price and Trade Policies: A Handbook for Argentina No. 295 Pohl, Jedrzejczak, and Anderson, Creating Capital Markets in Central and Eastern Europe No. 296 Stassen, Small-Scale Biomass Gasifiers for Heat and Power: A Global Review No. 297 Bulatao, Key Indicators for Family Planning Projects No. 298 Odaga and Heneveld, Girls and Schools in Sub-Saharan Africa: From Analysis to Action No. 299 Tamale, Jones, and Pswarayi-Riddihough, Technologies Related to Participatory Forestry in Tropical and Subtropical Countries No. 300 Oram and de Haan, Technologies for Rainfed Agriculture in Mediterranean Climates: A Review of World Bank Experiences No. 301 Mohan, editor, Bibliography of Publications: Technical Department, Africa Region, July 1987 to April 1995 No. 302 Baldry, Calamari, and Yam6ogo, Environmental Impact Assessment of Settlement and Development in the Upper L6raba Basin No. 303 Heneveld and Craig, Schools Count: World Bank Project Designs and the Quality of Primary Education in Sub-Saharan Africa No. 304 Foley, Photovoltaic Applications in Rural Areas of the Developing World No. 305 Johnson, Education and Training of Accountants in Sub-Saharan Anglophone Africa No. 306 Muir and Saba, Improving State Enterprise Performance: The Role of Internal and External Incentives No. 307 Narayan, Toward Participatory Research No. 308 Adamson, Bates, Laslett, and Pototschnig, Energy Use, Air Pollution, and Environmental Policy in Krakow: Can Economic Incentives Really Help? No. 309 The World Bank/FOA/UNIDO/Industry Fertilizer Working Group, World and Regional Supply and Demand Balances for Nitrogen, Phosphate, and Potash, 1993/94-1999/2000 No. 310 Elder and Cooley, editors, Sustainable Settlement and Development of the Onchocerciasis Control Programme Area: Proceedings of a Ministerial Meeting No. 311 Webster, Riopelle, and Chidzero, World Bank Lending for Small Enterprises 1989-1993 No. 312 Benoit, Project Finance at the World Bank: An Overview of Policies and Instruments No. 313 Kapur, Airport Infrastructure: The Emerging Role of the Private Sector No. 314 Vald6s and Schaeffer in collaboration with Ramos, Surveillance of Agricultural Price and Trade Policies: A Handbook forEcuador (List continues on the inside back cover) WORLD BANK TECHNICAL PAPER NO. 364 Agricultural Trade Policies in the Andean Group Issues and Options Tim Josling The World Bank Washington, D.C. Copyright @ 1997 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing May 1997 Technical Papers are published to communicate the results of the Bank's work to the development community with the least possible delay. The typescript of this paper therefore has not been prepared in accordance with the procedures appropriate to formal printed texts, and the World Bank accepts no responsibility for errors. Some sources cited in this paper may be informal documents that are not readily available. The findings, interpretations, and conclusions expressed in this paper are entirely those of the author(s) and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. 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ISBN 0-8213-3924-9 ISSN: 0253-7494 Tim Josling is a professor at the Food Research Institute of Stanford University. Library of Congress Cataloging-in-Publication Data Josling, Tim, 1939- Agricultural trade policies in the Andean Group : issues and options / Tim Josling. p. cm. - (World Bank technical paper ; ISSN 0253-7494 ; no. 364) Includes bibliographical references. ISBN 0-8213-3924-9 1. Produce trade-Government policy-Andes region. 2. Tariff on farm produce-Andes region. 3. Produce trade-Andes Region- Statistics. I. Title. II. Series. HD9014.A52J67 1997 97-18637 382'.41'098-dc2l CIP Contents Page No. 1. INTRODUCTION...... .................1 A gricultural Trade Developm ents ................................................................................................. 1 O bjectives and Structure of the Report ....................................................................................... 2 2. BOLIVIA........ ...................3 Background ......................................................................................................................................... 3 Current Trade Policies .............................................................................................................. 3 A gricultural Trade Issues .......................................................................................................... 4 O ptions and Strategies ........................................................................................................................ 6 3. COLOMBIA....... ................8 Background ......................................................................................................................................... 8 Current Trade Policies .............................................................................................................. 8 Agricultural Trade Issues .......................................................................................................... 9 Options and Strategies...................................................................................................................... 10 4. ECUADOR ....................................... .......13 Background ....................................................................................................................................... 13 Current Trade Policies ..................................................................................................................... 13 Agricultural Trade Issues ................................................................................................................. 14 Options and Strategies...................................................................................................................... 15 -v - 5. PERU ........................... 16 Backgron ....................................................................................................................................... 16 Current Trade Policies .....................................................................................................................16 Agricultural Trade Issues .................................................................................................................17 Options and Strategies............................................................................................................... IS 6. VENEZUELA.............................................19 Background....................................................................................................................................... 19 Current Trade Policies ..................................................................................................................... 19 Agricultural Trade Issues ................................................................................................................. 20 Options and Strategies ...................................................................................................................... 21 7. ANDEAN PACT ............................................23 Current Trade Policies ..................................................................................................................... 23 Agricultural Trade in the Pact ........................................................................................................ 23 Options and Strategies ...................................................................................................................... 25 8. CONCLUSIONS....................... ..............28 ANNEX TABLES Table A - Share of Western Hemisphere Trade to and from Andean Pact Countries, 1993............................................................................................ 31 Table B - Flow of Selected Agricultural Products Among Andean Pact Countries and with Other Regions, 1993......................................................................... 32 Bibliography .................................................................................................................35 Foreword The trade policies of the countries of the Andean Group, Bolivia, Colombia, Ecuador, Peru and Venezuela, are in the midst of rapid change. At the same time, the global and regional environment in which these trade policies are set is also changing quickly. This is particularly true in the area of agricultural trade, where trade policies are being overhauled and trade rules rewritten on the domestic, regional and global level. The World Bank has underway a series of studies on the trade policies of the Andean Group countries. Of the five studies, two were available in draft form when the present paper was written, and these proved to be a valuable starting point for this paper. This paper is intended to complement the trade policy studies by emphasizing the agricultural trade options open to each country, by looking at the agricultural trade policy in the light of changes in trade policy generally, and by discussing the particular role that the Andean Pact is playing and might play in the liberalization of agricultural markets. My thanks are due to Raquel Artecona for skillful research assistance and to Alberto Vald6s, John Heath and Demetris Papageorgiou for comments on a draft. I benefitted greatly from discussions with Vald6s, Heath, Norman Hicks, Ernesto May, David Nielson and others at the World Bank, and with Constanza Vald6s at ERS/USDA during the preparation of this paper. Paul Isenman Director Country Department III Latin America and the Caribbean Region  Abstract The trade policies of the Andean Group (Bolivia, Colombia, Ecuador, Peru, and Venezuela) are in the midst of rapid change. In agricultural markets this change is driven by an overhaul of trade rules and policies at the national, regional, and unilateral level. The national economic reforms are notable for the inclusion of agriculture, resulting in an increased market orientation of the sector and a reduction of the role of the state. At the regional level the inclusion of agriculture in the free-trade provisions within the Andean pact has expanded trade and opened up possibilities for competitive producers. At the international level the passage of the Uruguay Round Agreement on Agriculture has initiated a trade reform which promises a more liberal world market for agricultural goods. Of the countries in the Group, Bolivia has proceeded furthest down the road to internal reform, and now protects agriculture with modest tariffs no higher than those in other sectors. The Common External Tariff of the Andean Pact is not applied in Bolivia as it would imply tariff increases. Similarly, the Common Price Band for certain agricultural products is not applied. Bolivia has recently joined a free trade area with the MERCOSUR countries and can be expected to integrate its trade policy increasingly with this group, whilst wishing to maintain access for exports into the Andean Pact, such as soybean sales in Colombia and Venezuela. Peru also has reformed its domestic and trade policies in agriculture, and now operates with moderate protection of the sector. Peru also applies neither the Andean Pact CET nor the Price Band for agricultural commodities, though it has its own tariff surcharge system to guard against low prices. This tariff surcharge stands out as a policy which may require modification in the future to avoid distortion of the sector. Peru is also oriented toward the MERCOSUR market and has relatively little agricultural trade with the other Andean Pact countries. The core of the Andean Pact revolves around Colombia and Venezuela, which both apply the Common External Tariff and the Common Price Band System for agricultural products, along with Ecuador which is exempt from many of the CET provisions. Agricultural trade has expanded as trade has been liberalized and markets opened. Nevertheless this has caused tensions and protests from agricultural groups. The Price Band System itself could become a vehicle for border intervention. Vigilance is needed to prevent a return to protective policies in these countries. The Andean Pact itself has proved useful in promoting free trade in agricultural goods within the region. The Price Band System may need to be modified to bring it in conformity with the World Trade Organization rules on non-tariff barriers. More coordination is possible in the area of external trade policies, including export promotion. The Pact itself could dissolve in a broader agreement with the MERCO SUR countries and eventually be subsumed in a continent-wide free trade area. Perhaps the most useful role of the current agreement is therefore to keep trade policies liberal and stimulate the development of competitive agricultural sectors in the five countries in preparation for such a wider market.  Acronyms AEC - Acuerdo Externo comni del Grupo Andino ALADI - Asociaci6n Latinoamericana de Integraci6n ATAP - Andean Trade Preference Agreement CACM - Central American Common Market CARICOM - Caribbean Common Market CET - Common External Tarif EMPROVIT - Empresa nacional de Productos Vitales ENAC - Empresa Nacional Agricola de Comercializaci6n ERS - Exchange Rate System EU - European Union FAO - Food and Agriculture Organization FONCACAO - Fondo Nacional del Cacao FONCAFE - Fondo Nacional del Caf6 FONPLATA - Fondo Nacional para el Rio de la Plata FTZ - Free Trade Zone G3 - Group of Three GAC - Gravamen Aduanero Consolidado GATT - General Agreement on Tariffs and Trade GDP - Gross Domestic Product GRAN - Pacto Andino IATRC - International Agricultural Trade Research Consortium IDEMA - Instituto de Mercadeo Agropecuario IICA - Instituto Interamericano de Cooperaci6n para la Agricultura LAFTA - Latin American Free Trade Area MERCOSUR - Mercado Com6in Suramericano NAFTA - North American Free Trade Area RTA - Regional Trade Agreement SAPF - Sistema Andino de Franjas de Precio WTO - World Trade Organization  1. Introduction Agricultural Trade Developments Until recently, agricultural trade policy in most countries was largely divorced from more general considerations of commercial policy, and more closely linked with the support of domestic agricultural policies. The focus was on the management of the local market for farm goods and the export of agricultural raw materials to other countries. Domestic economic policy reforms often dodged the reform of the agricultural sector as being too politically sensitive. When regional trade agreements were formed they often left out agricultural trade from the requirements of free trade within the region.' For many years, agricultural trade had also escaped the discipline of the GATT rules that applied in manufactured trade.2 Agricultural trade disputes, from the long-running controversy over the disruptive impact of developed country farm support policies on world markets for agricultural produce to local decisions by marketing agencies in favor of domestic producers over importers, were largely outside the realm of trade rules. This situation is rapidly changing. The Latin American economic reforms are notable among other things for their inclusion of agriculture. The trade policy changes that have characterized the region in the past decade have included the agricultural sector. Tariff reform has been extended to agricultural import goods; domestic marketing agencies have lost their exclusive control over supplies; domestic subsidies have been eliminated or sharply cut back; export taxes have been removed and export agencies been relieved of their monopoly responsibilities. At the same time the new and revitalized regional trade agreements (RTAs) in the area have generally included free intra-RTA trade in agricultural products. MERCOSUR includes trade in agricultural products under the requirement of free trade among its members, as does the Andean Pact and CARICOM. Regional trade in agricultural goods is responding to the more liberal trade conditions. At the multilateral level the Uruguay Round Agreement on Agriculture has instituted a radical change in the rules governing the allowable instruments of trade policy in agriculture, replacing non-tariff import barriers with tariffs, categorizing domestic subsidies into those that are acceptable and those that are objectionable, and banning new export subsidies. A start was made in the difficult process of reducing levels of protection and cutting the level of export and domestic subsidies, though the process has a long way to go before world markets for agricultural commodities are undistorted by domestic agricultural policies. For a more extensive discussion of the inclusion of agriculture in other free trade areas see Tim Josling, "The Treatment of Agriculture in Regional Trade Agreements", FAO Policy Analysis Division, (forthcoming). 2 A forthcoming book describes the treatment of agriculture within the GATT, up to and including the Uruguay Round (see Tim Josling, Stefan Tangermann and Thorald K.Warley, 'Agriculture in the GA TT Past Present and Future ", Macmillan, forthcoming). -2- Objectives and Structure of the Report The aim of this report is to describe briefly, for the countries of the Andean Group, the present state of affairs in the ongoing process of policy reform in the area of agricultural trade; to identify agricultural trade policy options and strategies for each country; to examine the extent to which the Andean Pact can make a contribution to these agricultural trade objectives; to look briefly at the developments in multilateral trade policies that will influence the choices of these countries; and to make some very tentative suggestions as to the preferred choice among these options from the viewpoint of the continued reform of the agricultural sector and the improvement of the contribution of that sector to the economic health of the countries of the region. As with any country that has joined a regional trade agreement the five countries of the Andean Group have to develop a multi-tiered trade policy. A regional trade agreement constrains the scope for unilateral action in the trade area, but also offers possibilities for collaborative action. Membership of an RTA in effect offers another dimension to international action, expanding the possible range of collective decisions. Trade policy in agriculture also exhibits this multi-tiered nature. A coherent trade policy for the sector will combine unilateral, regional and multilateral elements. The balance between these elements along with the overall set of objectives defines the agricultural trade strategy. The report is structured to elucidate this set of choices. The next five sections deal with the individual countries of the region, and include an overview of their trade regimes, their current agricultural trade situation and the options and strategies which each country could pursue in the area of agricultural trade. Section Seven discusses the Andean Pact and the elements of the agricultural program that can be play a significant part in the strategy for the member countries. This section also takes a quick look at the broader regional and multilateral environment in which the agricultural trade policies of the Andean countries need to be placed. A final section gives some tentative conclusions. -3- 2. Bolivia Background Bolivia is a country with a small population (7.3 million), a relatively low level of income ($670 per capita in 1992), a land-locked location and high transportation costs. Economic policy, including the agricultural trade regime, is however more liberal than those of its trading partners. Agriculture makes up about 24 percent of GDP, and an even higher proportion of the labor force, but only accounts for 16 percent of export earnings. Unlike other countries in the Andean Pact, Bolivia is not a major exporter of tropical products. Trade policy in agriculture is chiefly concerned with improving the competitive position of Bolivian farmers within the region and the maintaining access to supplies from other countries. Bolivian agriculture exhibits considerable diversity of crops and conditions, reflecting the geography of the country.3 Major crops produced in Bolivia include corn, wheat, barley, quinoa and potatoes, particularly by small farmers in the altiplano (high plains) regions; coffee, cacao, bananas and sugar cane in the interior valleys (yungas), and soybeans and cattle raising on the eastern plains (llanos). Soybeans has become an important export crop in recent years, with exports going to other Andean Pact countries. Other products however are sold within the Southern Cone countries. Over 60 percent of the agricultural area, and an even higher share of export agriculture, lies east of the Andes, reinforcing the tendency for natural markets to be in the MERCOSUR area. Government policies have been aimed at moving population from the less fertile altiplano to these areas. Current Trade Policies Bolivia underwent a radical reform of its economic and trade policies in 1985. The speed and completeness of the reform was unusual even by Latin American standards. The New Economic Plan included a drastic overhaul of the tariff schedule, resulting in a low uniform tariff, the Gravamen Aduanero Consolidado (GAC), of 20 percent which was reduced in 1990 to 10 percent. A concessional rate of 5 percent for capital goods was added in 1991.4 All export taxes were removed, and exports were encouraged by various promotion schemes. The exchange rate was liberalized in 1985, and a sharp devaluation followed. In 1987 a crawling peg system was introduced and the currency has Information on Bolivian agriculture and agricultural policy is from Nina M. Swann, "Bolivia", in Donna Roberts and David Skully (eds.), "Global Review of Agricultural Policies: Western Hemisphere ", ERS Statistical Bulletin No.892, USDA, Washington D.C., September 1994, as well as from various FAO and World Bank sources. 4 The trade policy of Bolivia is described and discussed in Sarath Rajapatirana, "Bolivia: Trade Policies and Integration Choices", Latin American and Caribbean Department, World Bank, (unpublished). -4- been kept at a competitive level since that time, exhibiting a steady depreciation over the period. Both exporting and import-competing sectors have taken advantage of this and have expanded steadily. Bolivia joined the GATT in 1989 and more recently acceded to the WTO. Bolivia is a member of the Grupo Andino (GRAN, Andean Pact, or Andean Group) and receives preferential (i.e. duty free) access into the markets of Colombia, Ecuador and Venezuela. It does not, however apply the newly-agreed Common External Tariff (AEC or CET) of the GRAN. Bolivia has entered into bilaterals with Chile and Peru (a lapsed member of the GRAN, still discussing re-entry into the main obligation, the Andean Free Trade Zone). In addition, Bolivia benefits from the Andean Trade Preference Agreement (ATPA) with the U.S., which grants preferential access for a number of products into the U.S. market to encourage the move away from coca production. Bolivia also has a trade framework agreement with the EU, but this does not include preferential market access. Bolivia has close relations with the countries of MERCOSUR, and has been granted associate membership in that group.' It has also signed "complementary trade agreements" with the MERCOSUR countries under the framework of the Latin American Integration Association (LAIA, or ALADI). Location plays an important role in Bolivia's trade pattern. Bolivia shares a border with only one other GRAN member, Peru. If Peru does not re-enter the Andean Free Trade Zone then even this link will be lost. MERCOSUR accounted for 23 percent of Bolivia's total trade in 1993, compared with only 6 percent which was with the other GRAN countries. Brazil, Paraguay and Argentina each has a border with Bolivia, as does Chile. Bolivia has access to port facilities by treaty with Argentina (Rosario) and Brazil (Belem and Santos), as well as use of the Paraguay and Parani rivers by long-standing agreement with Paraguay.6 Trade with MERCOSUR is therefore likely to grow as trade barriers come down and transportation links improve. However, Bolivia may well benefit from the increased trade among all the countries of the region as infrastructure improves. Agricultural Trade Issues Agricultural trade was fully included in the 1985 Bolivian economic reform. The low tariffs were applied to agricultural goods, as well as to manufactures. Export licensing, which had been used on beef, corn, rice and soybeans was removed. The sector s The MERCOSUR countries and Bolivia have also negotiated the Treaty of Brasilia, to form the River Plate Basin Group. The goals of this group mirror those of MERCOSUR itself, but emphasize physical integration in such areas as water resources, border matters, health and environmental issues. Its financial agency (FONPLATA) has become an important vehicle for such integration. 6 Bolivia has a treaty with Chile on duty free and preferential access to the Pacific ports of Antofagasta, Iquique and Arica. Negotiations are also underway for similar access to the Pacific with Peru. -5- was deregulated and private enterprises were encouraged to trade in agricultural goods. Sugar imports continued to be constrained by quantitative restrictions until 1992, when these restrictions too were removed. The domestic marketing of agricultural goods, including milk, poultry, cattle, oilseeds, corn and sugar is still in the hands of parastatals, but the Government is considering their privatization. Imports of wheat are largely in the form of food aid, under U.S. PL480 programs. Agricultural trade flows without tariffs under the Andean Group trade arrangements between Bolivia and the other active members (Colombia, Ecuador and Venezuela) and under the bilateral agreement with Peru. Soybean exports go to Colombia and Peru, maize and rice are also exported to Peru, and coffee is sold to Europe, Argentina, Brazil and Chile. In addition, a number of Brazilian cattle are said to come into Bolivia as "tourists" in order to benefit from an tax rebate when exported again. Table 1: Bolivia: Agricultural Trade Flows, Selected Commodities, 1993, (thousand US$) exports to: Commodity Andean Pact MERCOSUR NAFTA Europe Total Rice 49 - 2 - 51 Sugar 15,727 - - - 15,727 Maize 81 28 3 - 112 Wheat 51 - - 51 Meat - 630 - - 630 Coffee 19 238 96 2,617 2,970 Cocoa - 64 404 468 Fruit & Veg 397 4,249 6,813 7,151 18,610 Flowers - 18 635 2 655 Total 16,324 5,163 7,613 10,174 39,274 imports from: Commodity Andean Pact MERCOSUR NAFTA Europe Total Rice 9 300 103 - 412 Sugar 10 202 101 123 436 Maize 1 209 1 - 211 Wheat _ 7,477 24,389 120 31,986 Meat 7 107 - 24 138 Coffee 263 61 9 - 333 Cocoa 181 2 - - 183 Fruit & Veg 17 859 3,493 271 4,640 Flowers 3 - - 3 Total 491 9,217 28,096 538 38,342 Bolivia does not apply the Andean Group system of price bands (Sistema Andino de Franjas de Precios, or SAPF) which were introduced into Colombia, Ecuador and Venezuela in 1995.' The reason given by Bolivia for rejecting the need for price bands is that its landlocked status gives it adequate "natural" protection against low world prices. The price band system is discussed more fully in later sections of this report. -6- This decision also reflects a more determined attempt in Bolivia to operate a liberal trade system without administrative intervention. Options and Strategies Bolivia has undertaken economic reforms which place it in the forefront of the economic policy transformation in the region. This fact places it in an awkward position relative to the other members of the Andean Pact. For Bolivia this trade group offers only a limited attraction. The higher tariff steps in the AEC are above those now in use in Bolivia, and full implementation of the AEC would therefore increase protection levels. MERCOSUR represents the more attractive regional bloc from the viewpoint of present Bolivian trade patterns, but full membership also poses problems with the tariff schedule.' MERCOSUR external tariffs are higher than those in use in Bolivia, and unlikely to be reduced soon enough to prevent Bolivia having to raise its own tariff if it joined. This poses a fundamental problem for Bolivia. It would gain in economic terms from the higher level of protection in its major export markets, but would lose by purchasing higher cost imports from the MERCOSUR countries. The problem is in part resolved by the associate membership which Bolivia has been able to negotiate with MERCOSUR, which does not impose the CET on Bolivia. In these circumstances its export sector would gain from the larger, protected market in MERCOSUR. Although it would still have to give preferential access for relatively expensive goods from that region, it would control the degree of preference by its own tariff policy. In these circumstances it could also maintain Andean Pact membership, though net adopting the AEC, and keep the free-trade area relationship with Colombia, Ecuador and Venezuela, and with Peru. For agriculture, each of these options would have major implications. Full membership in MERCOSUR with the adoption of the CET against third-country supplies and free access for partner supplies, would place Bolivian agriculture in direct competition with production from Argentina and Brazil. Soybean farmers have already voiced their opposition to such an option, fearing that they would not be able to compete with Brazil. Cattle farmers would presumably also be adversely affected, as the degree of natural protection afforded by Bolivia's landlocked and mountainous position would not help in competition with Brazil. Bolivia would in effect be adopting the level of protection of the MERCOSUR countries. Whether this would be in the economic interest of Bolivia would depend upon the trade balance of the commodity concerned. The choice that Bolivia faces with respect to MERCOSUR is similar to that faced by Chile. In both cases, full membership would bring increased protection. This has two impacts: it encourages those countries to import higher-cost MERCOSUR goods in place of imports from the world market, and it obliges them to grant higher protection for domestic producers. Both the trade diversion and the higher protection have an economic cost. See Alberto Valdds, "Joining an Existing Regional Trade Agreement from the Perspective of a Small Open Economy - Chile's Accession to NAF7A and MERCOSUR ", American Journal of Agricultural Economics, (forthcoming). -7- The Andean Pact holds out some advantages for Bolivia in the area of agricultural trade but also some potential disadvantages. The advantages are the access to the markets of Colombia, Ecuador and Venezuela, but with the exception of exports of soybeans to Colombia the volume of trade is presently not high. Moreover, many of the emerging opportunities for agricultural trade are among countries that share borders. Transport costs for the higher value commodities, fruits and vegetables and processed foods may act against an expanding market for Bolivian food products in the northern countries of South America. Maintaining free access into the other Andean Pact countries would therefore be important but not crucial for agriculture. The biggest drawback for Bolivia of current Andean Pact agricultural trade policy is that Bolivia may have to adopt the common price band system, the SAPF. As mentioned above, Bolivia has argued that it does not need such additional protection against low prices as it has the natural protection of high transport costs. High transport costs in themselves are hardly a valid reason for not stabilizing markets. Prices will tend to be even more unstable in situations where the market is isolated, as the stabilizing impact of trade will be less apparent in those circumstances. Price fluctuations on world market prices will still be transmitted to geographically remote markets, if imports can penetrate, though all prices will be at a higher level. As a market somewhat remote from world markets, Bolivia has experienced fairly low prices for a number of traded goods. Transport costs make exports more difficult, and this depresses domestic prices. For those products that are imported, the low income level of the population has made it politically difficult to erect trade restrictions when market prices are low. In effect, Bolivia has made better use of world market surpluses by allowing consumers to purchase these commodities rather than by trying to maintain domestic price levels. It would appear that the substantive argument against the adoption of the SAPF is that it would tend to raise the price of imported commodities and support high-cost domestic production. Unless this tendency were to be corrected (as discussed below), it may be as well to continue to exercise the option of not enforcing the SAPF in Bolivia.9 High transport costs are also a reason why Colombia and Venezuela are less likely to insist that Bolivia adopt the SAPF. Transshipment of low priced goods through Bolivia is unlikely to be a major problem in these markets. -8- 3. Colombia Background Colombia is the most populous country of the Andean Pact (34 million), and has the second largest economy after Venezuela. Incomes are higher than in the more southerly GRAN countries, at a level of $1,500 per capita, but lag behind those in Venezuela. Agriculture makes up only 17 percent of GDP, though a somewhat higher level of the labor force (26 percent). Agricultural exports, primarily of coffee and bananas as well as sugar, cut flowers, cotton and tropical fruits, make up a large proportion of export earnings. Imports consist mainly of grain, milk powder and oilseeds. Blessed with two coastlines and a range of climates, Colombia grows a wide variety of crops. 10 Corn, wheat and barley are grown in the highland areas along with coffee and sugar cane, while rice, bananas, cotton and tobacco are grown in the Caribbean coastal area.1 Cattle raising is the main form of agriculture in the eastern plains, and the tropical forests in the southeast produce rubber and tropical timber. Agricultural interests are perhaps better organized in Colombia than in other Andean Pact countries, adding to the political sensitivity of agricultural policy. Current Trade Policies Colombia was not among the pioneers in the process of economic policy reform in South America, but has in recent years caught up with the pack. Colombia introduced a liberal economic regime, including an open trade policy, in 1990. The Programa de Modernizaci6n y Apertura Econ6mica (the "Apertura") included exchange rate reforms, fiscal tightening, deregulation of the economy and privatization of many state enterprises. Tariffs were reduced to modest levels, from zero to 20 percent, effectively halving the average level of tariff from 31 percent in 1991 to 15 percent in 1992. The system of import licensing was relaxed and import surcharges were removed. A new ministry of foreign trade was created to coordinate trade policy. Colombia is an active member of the Andean Pact (GRAN) and applies the GRAN four-part Common External Tariff (CET or AEC). As such, exports are granted duty-free access into the other parts of the Andean Free Trade Zone (Bolivia, Ecuador and Venezuela) and imports come in duty-free from those countries. Colombia has a free-trade arrangement with Peru, signed in 1992, a bilateral agreement with Chile similar to that between Chile and Venezuela, and trade agreements with CARICOM and the 1o Information on Colombian agriculture and agricultural policy is from Constanza M. Valdds, "Colombia", in Donna Roberts and David Skully (eds.), "Global Review of Agricultural Policies: Western Hemisphere ", ERS Statistical Bulletin No.892, USDA, Washington D.C., September 1994, as well as from various FAO and World Bank sources. The Pacific coastline is a sparsely populated swamp, with little agricultural production. -9- Central American Common Market.12 Colombia has particularly strong bilateral trade ties with Venezuela, and had negotiated a free-trade agreement with that country in 1991 in advance of the broader GRAN accord. With Venezuela and Mexico, Colombia has signed the Group of Three (G3) agreement to remove impediments on mutual trade within ten years. Agricultural Trade Issues Agricultural trade policies were included in the policy reforms of 1990. Before that time, Colombian agricultural trade restrictions had included licenses, quantitative restrictions, export taxes and selective market interventions. As a part of the economic reforms, imports of agricultural goods were made subject to moderate tariffs, between zero and 20 percent.'3 Quantitative import restrictions were removed, including the import quotas for cereals, oilseeds, dairy products and sugar. For these commodities (and Table 2: Colombia: Agricultural Trade Flows, Selected Commodities,1993, (thousand $) exports to: Commodity GRAN MERCOSUR NAFTA Europe Total Rice 1,475 - - - 1,475 Sugar 102,297 - 32,722 3,002 138,021 Maize 17 - - - 17 Wheat 3 - - - 3 Meat 2,396 - - - 2,396 Coffee 1,576 2,569 249,054 785,693 1,038,892 Cocoa 121 - 7,893 6,856 14,870 Fruit & Veg 43,663 214 214,140 202,938 460,955 Flowers 867 1,511 303,708 67,517 373,603 Total 152,415 4,294 807,517 1,066,006 2,030,232 imports from Commodity GRAN MERCOSUR NAFTA Europe Total Rice 20,190 - 10 - 20,200 Sugar 6,299 261 1,906 1,292 9,758 Maize 3,305 12,552 56,438 10 72,305 Wheat 9 14,354 109,134 2,036 125,533 Meat 759 73 1,641 147 2,620 Coffee - 9 2 11 Cocoa 210 - - 26 236 Fruit & Veg 10,184 1,761 45,681 5,844 63,470 Flowers 135 - 55 2 192 Total 41,091 29,001 214,874 9,359 294,325 12 The bilateral with CARICOM is a non-reciprocal preferential access scheme for goods from the Caribbean. The CACM agreement is a "complementary economic agreement" under ALADI rules that envisages tariff elimination by the end of the decade. 13 Most agricultural imports are charged a 15 percent basic tariff. -10- their derivatives) a price band system was introduced in 1991 to stabilize domestic prices in the face of world market price fluctuations.14 This price band system became the model for that introduced in the Andean Group (the SAPF) in 1995. The functions of the agricultural importing monopoly, IDEMA, were also modified in the Apertura. Although some grains are still imported by IDEMA, the agency concentrates its efforts on the domestic marketing of crops from small farmers in the poorer regions of the country. As a part of the privatization of import trade, Colombia has also developed a system of procurement agreements (convenios de absorci6n) for wheat, barley, sorghum and oil palm which guarantees prices for domestic output. 5 Upon presentation of evidence of using available domestic supplies (certificados de absorci6n), firms are allowed to purchase imports with reduced tariffs. The government mediates in discussions between the farm groups and the buyers which set a price for this domestic procurement. The opening of the economy exposed the agricultural sector to competitive pressures. At the same time, farm prices dropped as a result of lower world prices and exchange rate adjustments. Profits dropped sharply in the early 1990s, and farm groups blamed this on the Apertura even though the evidence shows that exchange rates and border prices had the greater effect." Some additional pressure on domestic markets has come from imports from outside the region. Perhaps the most visible imports however have come from other members of the GRAN. This has led to concern over the provisions of free internal trade within the GRAN and over the workings of the SAPF. Options and Strategies Colombia faces a critical decision in agricultural trade policy. Pressures are building for a reversal of the policies introduced with the reform. The introduction of the price band system has opened up the possibility for such a policy shift. The concept of a policy which imparts some degree of stability to the major agricultural markets without any long-run protection is attractive on political grounds, and not without economic rationale. The problem comes with the administration of such a policy and with the incentives that build up around it. Price band policies entail three crucial parameters: the price series used to define the band, the width of the band itself, and the choice of commodities in the band. In addition the administration of the policy entails decisions on the agency that announces the 14 The price band policy has been in use in Chile since 1984 and has now become a part of the Andean Group agricultural policy, as discussed below. 15 World Bank, "Colombia: Review ofAgricultural and Rural Development Strategy", November 1994. 16 Alberto Vald6s, "Surveillance ofAgricultural Price and Trade Policy: A Synthesis for Selected Latin American Countries" Technical Department, Latin America and the Caribbean Region, World Bank, June 28, 1995. -11- parameters, the mechanism for levying additional taxes and paying rebates, and the use to which funds accumulated under the scheme are put. The Colombian system used a deflated 60 month series of border prices (cif), augmented by the appropriate tariff. The resulting prices are ranked and the upper and lower quartiles are discarded. The band is given by the range between the 16th and 45th price. Supplementary levies are imposed on shipments offered below the floor and rebates are given on shipments priced above the ceiling.' The problems that have been associated with the system include the large number of commodities in the scheme, many of which were not the subject of import-induced price instability; the long five year "memory" of import prices used in the formula which makes the band unresponsive, and supports prices in times of secular price decline; and the problems for regional trade of different schemes in different Andean Pact countries. This last problem has led to the introduction of a harmonized system for the Pact. It is apparent that some provision will continue to be politically necessary to give farmers assurance against a market collapse triggered by subsidized imports. The price band system is an invitation to develop a permanent system of administered prices responding to domestic pressures. Alternative safeguard mechanisms are available and should be explored. Temporary protection taken for specific purposes may be better than formula-based protection aimed at market price stabilization. The application of countervailing duties to offset foreign government subsidies, or the imposition of anti-dumping duties on goods "dumped" by foreign firms, are possible instruments. However, both these trade remedies suffer from the problem that they require calculations based on the behavior of foreign governments of firms, a necessitating a costly, contentious and time-consuming process of data gathering. A simple import-quantity trigger which activates a temporary surcharge to the end of the marketing year would be less likely to become captured by protectionist interests. The procurement agreements also have the possibility of leading to a retrogression in agricultural policy. 18 The negotiations between the government, the producers and the manufacturers which buy farm products are intended to ensure that all domestic production is used, and manufacturers have the incentive of a tariff discount on imports if they agree to purchase the domestic crop at the negotiated price. The scheme is intended to cure a problem in the marketing system, whereby domestic production is often less desirable to manufacturers than imports. The problem should be dealt with directly, by improving domestic marketing institutions and facilities. To negotiate prices at which domestic crops are sold would seem to perpetuate a structure of oligopsony in marketing and dependence on political strength in policy setting. It shows a lack of confidence in the ability of the liberalized market to clear. 17 For a discussion of the operation of the Colombian price band see World Bank, "Colom6ia: Review ofAgricultural and Rural Development Strategy", p.75. IS The procurement system is described in World Bank, op. cit., p.78. -12- It is quite possible that some form of income aid will still be needed for those farmers not close to market outlets that might otherwise suffer from the removal of state purchasing. In such cases a form of direct payments, decoupled from current production decisions, may be more appropriate. These could be tailored to regional conditions and be integrated with other social programs in rural areas. The biggest hurdle to the introduction of such direct payments is the financial burden. This could prove a major obstacle for countries in times of fiscal stringency. However, it should be remembered that such payments are less than the implicit transfer from consumers involved in price supports and protection of markets at the border. Colombia would seem to have gained considerably from the strengthening of the GRAN and its inclusion of agricultural trade. As the largest agricultural producer in the region, Colombia is in a position to set the future conditions under which such trade takes place. Colombia is also the largest importer of agricultural goods from other GRAN countries, notably soybeans from Bolivia and rice from Venezuela. If trade within the region is to stay open, much of the leadership will have to come from Colombia. Therefore Colombian actions are crucial to setting the pattern for agricultural trade relations in the region. The harmonization of the price band system appeared to be largely as a result of fears within Colombia that third-country rice was finding its way through Venezuela onto Colombian markets at prices below the price band floor. But the result of this reaction may be to impose price band policies in countries where they are neither needed nor desired. The procurement system is also likely to engender problems within the Andean Pact market, as regional goods imported free will tend to undermine the attraction of domestic market purchases for manufacturers.'9 19 The procurement system seems premised on the fact that these manufacturers obtain rents from the tariff concessions enough to make it worthwhile to agree to a higher domestic price. No such rent is available on regionally produced goods. -13- 4. Ecuador Background Ecuador is the second smallest country (after Bolivia) in the Andean Pact with a population of 10.9 million. The level of per capita income ($1,070) is between that of Colombia and Peru, but well above that of Bolivia. Agriculture accounts for about 15 percent of GDP but the export of agricultural products contributes thirty percent of Ecuador's total export earnings. Cocoa, coffee, rice and bananas are the principle export crops. Agricultural imports include wheat and vegetable oils, mainly from the U.S. Ecuador shares a border with Colombia and a contested border with Peru. Agriculture in Ecuador reflects the range of geographical zones.20 In the upland (Sierra) area production of staples such as corn, beans and potatoes, and the raising of livestock are the main activities, often on large haciendas. In the coastal lowland areas (costa) plantations grow export crops of bananas, coffee and cocoa. Rice is also grown in the coastal areas. The eastern part of the country (oriente) is heavily forested and produces little agricultural income. Current Trade Policies Ecuador has adopted liberal economic policies in recent years, albeit more slowly than some other countries in the region. For many years trade was hampered by a variety of taxes and other constraints on both imports and exports. In 1989 the government began to adjust the economy, introducing tariff reforms and reducing trade barriers. The current government accelerated these reforms upon taking office in 1992, reducing tariffs to a range of 5-20 percent. The tariff rates are now broadly harmonized with the AEC of the GRAN, albeit with numerous exceptions.21 Ecuador, a late convert to the advantages of multilateral trade rules, has recently joined the GATT and the WTO. Ecuador is a member of the GRAN, and participates in the Andean Free Trade Zone which gives duty free access for goods to and from Colombia, Venezuela and Bolivia. Ecuador signed a more limited bilateral free-trade agreement with Peru in 1993, covering about 400 items. Peru has for the past few years been the major trading partner for Ecuador, in particular as a purchaser of Ecuadorian petroleum products. However, border disputes with that country have soured commercial relations between the two 20 Information on Ecuadorian agriculture and agricultural policy is from Christine Bolling, "Ecuador", in Donna Roberts and David Skully (eds.), "Global Review ofAgricultural Policies: Western Hemisphere", ERS Statistical Bulletin No.892, USDA, Washington D.C., September 1994, as well as from various FAO and World Bank sources. 21 Some of the 964 "permanent" exemptions are for items for which the Ecuador tariff is below the AEC, notably input items into the petrochemical industry and steel. For these products Ecuador can maintain a tariff 5 percentage points below the AEC. In addition, Ecuador can keep different tariff rates on 400 items for the next four years. -14- countries. Colombia is becoming a more important regional provider of goods for the domestic market. Most exports still go to Europe, benefitting from some Andean preferences into the European Union, or to the U.S. also in part preferential, and imports come largely from the U.S. Agricultural Trade Issues Agricultural trade has been somewhat less comprehensively liberalized in Ecuador than in other countries of the region. Nevertheless, tariffs on imports of agricultural goods are relatively low, ranging from 5 percent for grains, 10-15 percent for vegetable oils and meals, and 20 percent for milk powder and wheat flour. The tariff level is graduated by degree of processing, giving additional protection to the processing sector. Imports from the active Andean Pact countries enter duty-free. Ecuador instituted a price band system for imports of rice, corn, barley, soybeans and oil, sugar, poultry and milk powder. As of January 1995, Ecuador adopted the common GRAN price band program, the SAPF. The Government has been discussing with the Inter-American Development Bank the desirability of maintaining this price band system. Table 3: Ecuador: Agricultural Trade Flows, Selected Commodities, 1993, (thousand $) exports to: Commodity GRAN MERCOSUR NAFTA Europe Total Rice - - 0 Sugar 252 7,672 - 7,924 Maize 2,171 - - 2,171 Wheat - - 0 Meat 348 - - - 348 Coffee 23 162 47,396 33,881 81,462 Cocoa 1,298 3,910 36,988 23,613 65,809 Fruit & Veg 1,595 34,850 188,055 223,032 447,532 Flowers 170 1,280 30,559 5,500 37,509 Total 5,857 40,202 310,670 286,026 642,755 imports from: Commodity GRAN MERCOSUR NAFTA Europe Total Rice 1,364 8 1 - 1,373 Sugar 14,180 26 801 777 15,784 Maize 239 - 1,329 - 1,568 Wheat - 2,047 39,491 4,099 45,637 Meat 4 - 357 - 361 Coffee 1,112 - 27 - 1,139 Cocoa 403 - - - 403 Fruit & Veg 1,068 138 7,963 496 9,665 Flowers 2 - - - 2 Total 18,372 2,219 49,969 5,372 75,932 -15- The main parastatal trade body, ENAC, no longer has monopoly control over agricultural imports, though only the state agency EMPROVIT handles imports of milk powder.22 The Ministry of Agriculture requires prior approval of imports of oilseeds and meals, on phytosanitary grounds. Agricultural trade has been expanding in part as a result of this liberalization and in part because of market developments. Banana sales, in particular to the markets in Eastern Europe and Russia, have been growing steadily. Coffee exports have been helped by a rise in world prices, and even cocoa exports have been strong. Non-traditional exports, such as cut flowers, tropical fruits and processed vegetables have expanded at an even faster rate.23 Options and Strategies Ecuador is a country undergoing rapid structural change, brought about by a boom in petroleum exports and accelerated by the rapid shift in economic policies. The Ecuadorian economy has yet to establish a strong position in the region and is still heavily dependent upon sales to Europe and the U.S. Of all the Andean Pact countries, Ecuador seems most in need of the stability and security of regional market access offered by the Andean Pact, even if current trade flows show no great dependence on intra-GRAN trade. If Peru were to move closer to the MERCOSUR countries and Colombia to look northwards, to Mexico, the Caribbean and the U.S., Ecuador could find itself somewhat isolated.24 Under such circumstances it might be more difficult to hold onto the gains made in economic policy in the past five years. 22 Imported milk powder is reconstituted as liquid milk and sold on the domestic market. As the government still controls the milk price, it is feared that this imported milk would undercut the market for domestic milk. 23 The sharp increase in non-traditional exports as a consequence of the liberalization of foreign currency laws has been noted in other countries. See for example J.R.Deep Ford and Tim Josling "Structural Adjustment, Integration and Agricultural Policy Reform: Lessons from Jamaica's Agricultural Sector", Paper presented to the IATRC/IICA Conference on Economic Integration in the Western Hemisphere, San Jose, Costa Rica, June 7-9,1995. 24 Ecuador has shown an interest in joining the Group of Three (suitably renamed?) once it is operational, presumably to avoid such isolation. -16- 5. Peru Background Peru is a country with a population of 22.7 million, a little larger than that of Venezuela but less than Colombia, and a per capita income level of $920, somewhat less than Ecuador. Agriculture accounts for only 15 percent of GDP and a somewhat lower share of merchandise exports. The major export crops are cotton, sugar and coffee, and cereals and oilseeds are imported. Peru has a key location in the region. Bordering on Colombia, Ecuador, and Bolivia, as well as on Brazil and Chile, Peru could in the future play a central role in market integration in the region. Agriculture in Peru, as in the other GRAN countries, is sharply differentiated by climatic and topography.25 The Andean highlands (altiplano) produce the bulk of the traditional crops of corn, wheat, barley, potatoes, legumes and coca, and graze sheep and llamas. The dry coastal desert lowlands produce most of the export crops, particularly sugar, coffee and cotton, in oases irrigated by streams from the Andes. The inland (selva) region of the upper Amazon forest grow coffee, cocoa, cacao, tea and bananas, as well as corn, cassava and rice. Transportation difficulties currently limit access between these inland areas and the major population centers. Current Trade Policies Peru undertook radical reforms in economic structure and policy in 1990.26 The government stripped away price controls, privatized many state enterprises, cut government spending and overhauled the tax system. The foreign exchange market was liberalized, and the exchange rate has even appreciated in recent years, as a consequence of the inflow of capital from abroad. Trade policy was reformed, with tariffs replacing non-tariff barriers. The schedule of tariffs now contains two levels, 15 and 25 percent, with most (97 percent) of the imports falling into the lower category. The completeness of the process of economic reform rivals Chile and Bolivia. Peru was a member of the Andean Group until it withdrew from active participation in 1991. In 1994 it was agreed that Peru would rejoin the GRAN, though no timetable has been set. Peru is not a part of the Andean Free Trade Zone, which involves duty-free access, but it does have free-trade bilateral agreements with Bolivia, Colombia, Ecuador and Venezuela individually. These agreements have effectively liberalized trade 25 Information on Peruvian agriculture and agricultural policy is from Miriam Stuart, "Peru", in Donna Roberts and David Skully (eds.), "Global Review of Agricultural Policies: Western Hemisphere ", ERS Statistical Bulletin No.892, USDA, Washington D.C., September 1994, as well as from various FAO and World Bank sources. 26 Peru's trade policies are reviewed in Michael Michaely, "Trade Policies in Peru: Remaining Issues", World Bank, Latin America and Caribbean Department, August 1995. -17- with Colombia and Venezuela in all goods where the AEC is 10 percent or below. The agreement with Bolivia allows for duty-free access on all imports, in either direction.27 Peru does not apply the Andean Pact AEC on third country imports. Agricultural Trade Issues Agriculture was fully included in the economic and trade policy reforms of Peru. Most barriers to agricultural trade were removed, and subsidies were eliminated. Import quotas, import licensing and state trading monopolies have been replaced by tariffs between 15 and 25 percent, with the higher rates applying to the more processed goods. A substantial expansion of imports has followed from these policy changes, and exports, in particular in the area of non-traditional agricultural exports such as asparagus, have also responded. Table 4: Peru: Agricultural Trade Flows, Selected Commodities, 1993, (thousand $) exports to: Commodity GRAN MERCOSUR NAFTA Europe Total Rice 1,374 - 20 - 1,394 Sugar 22 - 14,453 - 14,475 Maize 240 - 440 1,475 2,155 Wheat - - - 0 Meat 11 - - - 11 Coffee 236 307 12,910 26,525 39,978 Cocoa 537 375 5,371 3,215 9,498 Fruit & Veg 4,320 5,673 32,860 97,351 140,204 Flowers 7 - 1,786 1,498 3,291 Total 6,747 6,355 67,840 130,064 211,006 imports from: Commodity GRAN MERCOSUR NAFTA Europe Total Rice 49 26,046 11,740 1,108 38,943 Sugar 49,034 11,924 9,325 656 70,939 Maize 81 59,755 25,810 - 85,646 Wheat 51 87,558 71,387 7,828 166,824 Meat 312 378 51 - 741 Coffee 423 1 104 10 538 Cocoa 1,071 - - 7 1,078 Fruit & Veg 842 2,333 34,621 2,833 40,629 Flowers 41 - 8 - 49 Total 51,904 187,995 153,046 12,442 405,387 27 The agreement with Ecuador was suspended with the outbreak of hostilities over the issue of the border. -18- Peru introduced in March 1991 a tariff surcharge system for 18 grain, sugar and dairy products. This system is in some ways similar to the price bands in force in Ecuador, Colombia and Venezuela (i.e. the Andean Pact SAPF). In addition to the normal 15 (or 25) percent tariff, surcharges are levied if the offer price falls below the average of the past five years (less one standard deviation). However, there is no scope for rebates to be paid to importers at times of high world prices. The scheme has in addition proved to be susceptible to administrative manipulation. The Ministry of Agriculture has been allowed to keep much of the revenue from the surcharge, and therefore has a budgetary incentive to widen the net to gain more revenue. Prices to farmers do not seem to be supported by the surcharges, leading to the presumption that the markets may be imperfectly competitive. Options and Strategies Peru, like Bolivia, tends to find the GRAN trade regime less liberal than it would like. The withdrawal from the GRAN may have been for political reasons, but the reluctance to return is driven in part by these economic calculations. Peru would have to abandon its almost uniform 15 percent tariff in favor of the four-step AEC. Until this problem is resolved, either by reducing the AEC or by abandoning the attempt to forge a customs union, the Andean Pact will hold little attraction for Peru. In recognition of this, Peru has shown an increasing interest in joining the MERCOSUR, with its allure of larger domestic markets. However, the CET of that trade group is also less liberal than its own tariff schedule. As with Bolivia, the best regional solution could be a free-trade agreement with MERCOSUR, leading to membership when the CET is lower, in addition to the existing bilateral arrangements with the GRAN. This would avoid the problem of importing higher cost imports under preferences, and distorting Peruvian agriculture with levels of protection above those presently in effect. The system of surcharges is at present the main deviation of Peruvian agricultural trade policy from the liberal economic model chosen for the economy as a whole. Perhaps even more than in the case of Colombia, a plausible stabilization policy is in danger of being captured for protectionist ends by those administering it and those that can gain financially from its operation. The suggestion sometimes put forward for a 10 percent ad valorem tariff surcharge for key agricultural goods seems not to achieve the objectives of the current policy. Instead it would seem to be better to consider a safeguard system triggered by import surges. Two such safeguards are available under GATT/WTO rules. A general safeguard provision allows for temporary surcharges when imports cause injury to local producers, but requires compensation to be given to the exporting country. A special safeguard for agricultural products also exists which allows additional duties on a sliding scale in cases where either imports surge or when world prices fall sharply. Though presently of restricted use, the special safeguard may be adaptable (as discussed in section 7, below) to meet the needs of countries such as Peru. -19- 6. Venezuela Background Venezuela is the country with the highest per capita income ($2,590) among the GRAN, and indeed in Latin America. This favored situation is due to large oil reserves, mainly around Lake Maracaibo and in the Orinoco basin, and over eighty years of exporting petroleum. Population stands at 20.7 million, and only 16 percent live in rural areas. Agriculture has been less important in the economy than in other GRAN countries, accounting for only about 5 percent of GDP. Venezuela earns only two percent of its export revenue from agricultural sales, although 12 percent of imports are of agricultural goods. The Venezuelan economy, as well as its topography, faces the Caribbean and North America. The long border with Brazil is sparsely populated and the poor infrastructure does not act as an encouragement to trade. Only Colombia has proved a regional trade partner willing to take steps toward market integration, and this trade has responded in recent years. Crop production is concentrated in the coastal mountain range and in the foothills of the Andes.28 Principal crops include rice, corn, sorghum and sugar cane, along with bananas, cotton and citrus. Cattle are raised extensively in the plains (llanos) to the north of the Orinoco. Little commercial agriculture exists in the high forests to the south of the river (Guyana), which contains nearly one half of Venezuela's territory. Current Trade Policies Venezuela has lagged behind the other countries of the GRAN in adopting liberal trade and economic policies, and has more recently taken steps in the other direction. The Government initiated such a program in 1989, but public discontent, political challenges and financial crises have slowed down the process of policy reform. The foreign exchange market was liberalized in 1989, but exchange controls were reintroduced in 1994. The Central Bank still actively manages the floating rate for the currency. Consumer subsidies were removed in the 1989-93 reform program, but the Government has continued to regulate food prices through agreements with the processors and producers. Emergency price controls were introduced in 1994 in response to the crisis of that year. Trade policy reform has also been equivocal. Non-tariff barriers were removed and tariffs were reduced in 1992 to a maximum rate of 20 percent, but these tariffs can be increased by up to 60 percent should domestic producers be threatened. Export restrictions were removed at that time, but import restrictions can still arise from the 2s Information on Venezuelan agriculture and agricultural policy is from Richard Kennedy, "Venezuela", in Donna Roberts and David Skully (eds), "Global Review of Agricultural Policies: Western Hemisphere ", ERS Statistical Bulletin No.892, USDA, Washington D.C., September 1994, as well as from various FAO and World Bank sources. -20- administrative decisions of the responsible agencies. Until the political system is more stable it may be difficult to maintain the trade policy reforms that have been undertaken so far. Venezuela is an active member of the Andean Pact, has adopted the AEC, and is one of the countries in the Andean Free Trade Zone. As a result, access for imports is supposed to be duty-free between Venezuela and Colombia, its largest regional trade partner, and also with Ecuador and Bolivia. Venezuela has in addition signed trade agreements with Peru, as a way of maintaining access to that country; with CARICOM, for non-reciprocal access for CARICOM goods; with the Central American Common Market (CACM); and with Chile. Venezuela is also a member of the Group of Three (G3), along with Colombia and Mexico. Venezuela joined the GATT in 1990, and has recently become a member of the WTO. Table 5: Venezuela: Agricultural Trade Flows, Selected Commodities, 1993, (thousand $) exports to: Commodity GRAN MERCOSUR NAFTA Europe Total Rice 19,364 1 - 1 19,366 Sugar 6,096 - 3,490 - 9,586 Maize 1,134 - 721 - 1,855 Wheat 9 - - - 9 Meat 723 - - - 723 Coffee - - 29,910 3,390 33,300 Cocoa 8 - 6,405 3,390 9,803 Fruit & Veg 7,535 599 32,736 10,035 50,905 Flowers - - 490 14 504 Total 34,869 600 73,752 16,830 126,051 imports from: Commodity GRAN MERCOSUR NAFTA Europe Total Rice 650 2 97 10 759 Sugar 54,871 56 958 485 56,370 Maize 17 40,817 111,646 1,381 153,861 Wheat 3 358 174,568 8,783 183,712 Meat 2,396 25 335 - 2,756 Coffee 56 - 16 1 73 Cocoa 99 1 92 442 634 Fruit & Veg 45,399 50,964 94,974 17,966 209,303 Flowers 863 - 101 80 1,044 Total 104,354 92,223 382,787 29,148 608,512 Agricultural Trade Issues Reform of agricultural policy in Venezuela has shown the same hesitancy as economic policy reform in general. The initial reform program removed minimum prices for rice, sugar and wheat. Milk prices however remain fixed. Some important agricultural inputs are still subsidized, including irrigation, fertilizer, electricity and agricultural credit. Although price controls for basic foodstuffs were relaxed in the reform process, and -21- replaced by direct and targeted subsidies to consumers, price controls were later reintroduced for cereals, flour, sugar, meats milk, eggs and fruits and vegetables. Trade policy in agricultural products reflects this incomplete liberalization of the domestic market. Imports of certain agricultural products are subject to licenses granted by the Ministry of Agriculture, ostensibly for plant and animal health reasons. The provision of these licenses has on occasions, and in particular since 1994, been used to control imports and protect domestic producers. Moreover, Venezuela has run a variant of the price band system since 1991, though with just a floor price. The commodities in the scheme included rice, corn, sunflower oil, copra, palm oil, milk, sugar, sorghum, poultry and eggs, and hogs. This system has now been replaced by the GRAN price band scheme, the SAPF. In common with other countries in the region, Venezuela has attempted to revitalize agricultural exports. Export controls have been relaxed for agricultural products, and the state monopolies for coffee (FONCAFE) and for cocoa (FONCACAO) have been eliminated. If experience in other countries is repeated, the privatization of these sectors will unleash competitive energies and creative market developments. Options and Strategies The main choice for Venezuela is the difficult one of whether to persevere with the economic reforms in the face of domestic unpopularity or whether to revert to a system of price controls, protection of less efficient sectors, government subsidies, easy money and overvalued exchange rates. If the price of oil were to rise steeply the latter course might be just be affordable, if not desirable. In its absence it is difficult to see any alternative to the development of a more competitive non-oil economy through a continuation of the reform. For agriculture, a small but sensitive part of the economy, the task will not be easy. Membership of the Andean Pact has an important part to play in the strategy for agricultural trade. In essence it gives a useful regional outlet for local production, in particular in Colombian markets, whilst at the same time preventing too much backsliding of the reform. The scope for an independent price policy in Venezuela is constrained by the fact that the border can no longer be used to isolate a market within a free-trade area (or customs union). For example, too high a price level set in the domestic market will attract imports from Colombia. If the Venezuelan authorities were to attempt to purchase agricultural products to maintain high prices then the cost would be inflated by the inflow. If they tried to keep prices low then exports would flow to Colombia and other Pact countries. The tools left are essentially those that operate to reduce costs and improve marketing systems. Payments either to consumers or producers, if desired for reasons of equity or regional development, will tend more and more to be paid in a direct form rather than through the manipulation of product prices. -22- The future of Venezuelan agriculture probably lies in sales to countries outside the Andean Pact region. Export markets in North America hold out more long term promise than the regional markets of the GRAN.29 One potentially important development in that direction is the initiative to form the Association of Caribbean States, including the countries of CARICOM, the Spanish-speaking Caribbean, the CACM and the other G-3 countries. This grouping of 48 countries would constitute a sizable political and economic force, with geographical advantages over both MERCOSUR and NAFTA in each other's markets. Failing this, Venezuela could take the lead in expanding the current bilateral with CARICOM into a full free-trade area. Venezuela has at times in the past shown some interest in joining CARICOM. A free-trade area would allow it to develop trade with its neighbors to the north and east and at the same time keep its open trade relations with Colombia. In both economic and cultural ties, Venezuela is among the most U.S.-oriented countries in the region. It is therefore possible that this country will be high on the list of acceptable partners if and when NAFTA is expanded. In time this would imply becoming a part of a large regional market for agricultural goods, with the benefit of free access to the affluent markets to the north and the entry price the need to be competitive with U.S. producers. To a greater extent than for the other Andean Pact countries this is the ultimate challenge for which agricultural policy should be preparing. 29 Venezuela does not at present trade much with MERCOSUR. This trade could also increase over time, but transportation costs will always prove a major hurdle for any ground or sea movement of goods. -23- 7. Andean Pact Current Trade Policies The Andean Pact has had a chequered past and faces an uncertain future. The Pact was formed in 1966 by Bolivia, Chile, Colombia, Ecuador and Peru. Chile subsequently left the Pact and Venezuela joined. As a trade group it emerged from the disillusion of the Andean countries with the operations of the Latin American Free Trade Association (LAFTA) which had been founded in 1960. It was felt that the larger countries were the main beneficiaries of the LAFTA arrangements, and that those without an existing industrial base were being left behind. The Andean Pact sought to develop regional industries within the framework of a common market. The timetable for establishing a Common External Tariff slipped, however, and barriers remained on trade among members. Trade flows within the Pact, after an initial boost from its formation, stagnated and remain at a low level relative to several other RTAs. In 1991, under the Act of Barahona, the Pact was revived and the plans were laid for the Andean Free Trade Zone (or Area) to be completed by 1992. Internal trade barriers were largely removed and the Common External Tariff was finally agreed after much debate in 1994. The Free Trade Zone and the CET illustrate both the degree of progress achieved by the GRAN and the continuing problems that it faces. The Zone covers Bolivia, Colombia, Ecuador and Venezuela, and thus represents a step towards larger markets and unrestricted trade. The CET, on the other hand, is fully applied only by Colombia and Venezuela. Both Bolivia and Peru consider the CET too high, and Ecuador has been granted a number of exemptions from its application. It may therefore be more accurate to characterize the GRAN as a free-trade area rather than a full customs union, albeit with the two largest countries adhering to common tariffs. Agricultural Trade in the Pact The countries of the Andean Pact have not ignored the problems of agriculture and agricultural trade. The Andean Pact includes two features which give it a key role in agricultural policy for the countries of the region, and for the agriculture of the region. The first of these is that agricultural products are included in the provision for free trade within the GRAN. This provision is of both immediate and long-term significance. In the short-term, it has curbed the tendency for governments to favor their own agricultural sectors and allowed an expansion of trade in agricultural products to the benefit of the countries concerned. In the long term it will have a profound influence on the pattern of integration of the regional economies and markets by fully incorporating the agricultural sector. The short run trade effects can either be desirable or undesirable from the viewpoint of the rational development of agricultural resources. Some of the trade flows that have been encouraged by the opening up of the Andean Pact markets are undoubtedly of a potentially trade diverting nature, replacing low-cost third country sources with higher-cost regional goods. However, the extent to which this can happen is limited by -24- the extent of the protection against third country imports (i.e. the degree of preference within the region). In the case of the Andean Pact the external tariff rates are modest, at least compared with many other countries. An external tariff of 20 percent can still be an imposition on consumers, who bear the burden, and a 20 percent preference may still be enough to switch sources to regional suppliers. But so long as the level of the tariff does not increase, and is over time reduced further, the distortions created are likely to be tolerable. The second feature of the Andean Pact has a more equivocal influence on trade in agricultural goods in the region. In 1990, the Andean Pact countries agreed that there should be a "Common Agricultural Policy" for the Group, (Acta de La Paz, November 1990). This policy was intended to include the harmonization of national support policies, including the price bands operated by Colombia, and later introduced in Ecuador, Peru and Venezuela. Designed to complement the establishment of free-trade in agricultural products, the implementation of the harmonized price band system, the SAPF, has not been without its problems, in particular for Bolivia. The price band is of dubious status within the GATT/WTO, which outlaws variable levies explicitly. The measure is unpopular with exporting countries, such as the U.S., which claim that it is protectionist in operation if not in intent. On the other hand, if each individual member is going to use such a device it makes some sense to establish rules at the Pact level to avoid disputes among countries and a possible breach in the requirement for free intra-Pact trade. The resolution to this problem lies in part in the alternatives available to countries to safeguard domestic markets against import surges and sharp price declines. Whilst the price band can in principle be used to guard against these market disruptions it is not ideal for the purpose. It is too easily diverted to other objectives, such as countervailing against the domestic and export subsidies of other countries or attempting to stabilize the domestic market price.o Over time it can become a vehicle for the reintroduction of protection and price rigidity, as the range of commodities expands, the administration of the system becomes more complex and the policy is emulated in other areas of commerce. Safeguards in the form of temporary tariff surcharges are allowed in the GATT/WTO. These can be introduced quickly without the delay of anti-dumping or subsidy-countervail actions. They have the drawback, however, from the government's point of view, of requiring compensation to be paid to the exporter whose goods are subject to the surcharge. The temporary tariff once removed cannot be reapplied until the same period has elapsed as that over which the original surcharge was applied. The safeguard is thus structured in a way that prevents it from being used as a devise for protection of inefficient industries over a long period. 3o Import surcharges and duty rebates may indeed help to stabilize domestic prices of some commodities if the cause of the instability is import prices. However, for the Andean Pact countries a high proportion of staple foods are locally provided. Stabilizing the duty-paid price of imports may not be enough to prevent market price fluctuations for these products. -25- The Uruguay Round Agreement on Agriculture provides another "special" safeguard for those commodities subject to tariffication as a part of the outcome of the Round. The intention to use these special agricultural safeguards had to be included in the Schedules of tariffs and commitments for each country. Andean Pact countries do not appear to have indicated such intentions. As they had all removed non-tariff barriers as a part of domestic economic reforms, their tariffication had in effect preceded the Uruguay Round Agreement. It could be that the other WTO members would prefer to see the Andean countries (and others in Latin America) adopt the special agricultural safeguards, even if not indicated on their WTO schedules, rather than continue the use of dubiously-legal price bands. It seems unfortunate that those countries that converted to fixed tariffs in advance of the Uruguay Round Agreement should be treated less favorably in this regard. It should be noted however that in one respect the Andean Pact price band scheme is superior to the GATT price-trigger safeguard. By using a 60 month moving average of actual world prices the temptation is removed to base the supplementary tariff on a reference price which could be politically chosen. A uniform agricultural safeguard for early-tariffication countries could incorporate this desirable feature. Options and Strategies The fundamental issue for the GRAN is whether the agreement continues to serve a need for the countries concerned. The five countries share the geographical feature of the Andean chain, along with some cultural links, and historically have been thrown together for mutual protection against dominance by the larger countries in the region. The common thread of a mountain chain however does not appear to be a sufficient economic linkage. All the countries share certain problems associated with poor transportation and high-cost infrastructure, but the existence of the Andes as often inhibits as facilitates trade linkages. The strongest linkages among the countries of the Pact are pairwise. Colombia is closely linked with Venezuela, and Ecuador is strongly tied in with Colombia. Peru trades with Bolivia, but neither trade much with other GRAN members. The economic linkages holding the GRAN together are therefore tenuous at best. The reforms in economic policy of recent years have both weakened further the cohesiveness of the GRAN and made it less necessary. As countries in the region reduce trade barriers, membership in a free-trade area becomes less attractive from the viewpoint of access. In an open economy, preferential access is worth less to the regional partner. It also becomes less distortionary, as the possibility of trade diversion is lessened. The Andean Pact could aim to be the first regional trade agreement in modem history to lose its relevance not because of the refusal of countries to liberalize but because of their success in reducing trade barriers. The end-point of open regionalism is the de facto merger of the openly-regional blocs because no bloc protects itself against any other. The Andean Pact could in effect merge with MERCOSUR and Chile on the one hand and open up trade with the CACM and CARICOM on the other. In other words it could prove the key to forging the Free Trade Area of the Americas adopted as a target at the Miami Summit in 1994. -26- What happens to trade relations as a whole clearly conditions agricultural trade. There are however some preconditions to be met before the agricultural sectors of the region can be integrated into an agricultural market "of the Americas". The first precondition is to cement the rule of free intra-GRAN trade in agricultural goods. The move to open up the regional markets appears to have been remarkably successful up to now, with relatively few cases of overt protection being triggered by intra-regional trade flows. However there will be continued tensions arising from the macroeconomic instability of most of the countries in the region. The Pact may need to devise ways in which countries can respond within the framework of free intra-regional trade. The second precondition is to find a way to run a stabilization policy without allowing "back door" protection. This implies that the price band system will need to be modified or abandoned. The third precondition is to set the external tariff applied by the member countries low enough that it prevents the emergence of uneconomic trade flows within the region. The countries of the Andean Pact are major exporters of tropical beverages and fruits. As such, their economies are strongly effected by world market conditions. The Andean Pact itself can only have a marginal impact on the development of these markets, but some habits of cooperation could be established. One area where such coordination is already taking place is in the matter of preferential access to developed country markets. The Andean Pact countries benefit from collective representation in talks with the EU on trade preferences such as the 1991 agreement aimed at expanding the European market for legal agricultural commodities. The negotiations with the U.S. on the ATAP scheme of preferences were also coordinated. Alongside the changes outlined above for intra-bloc and preferential trade policy, the Pact could also coordinate actions within the WTTO. Now that all Andean Pact countries are members of the WTO, some rationalization of the tariff bindings could usefully be attempted.' In the Uruguay Round the four GATT members chose different ceiling bindings for their agricultural schedules.32 In the case of Bolivia and Venezuela these bindings were at 40 percent for all products. Colombia chose to bind at an initial level of 100 percent, declining over the ten year transitional period to either 90 percent or 70 percent, depending upon the product.33 For non-agricultural products the bindings were mostly at 35 percent, with some tariffs bound at 40 percent. Peru chose to bind the tariffs for a number of agricultural commodities at 30 percent, but for those products subject to price bands the ceiling was set at 68 percent. Such a dispersion of tariff bindings does not enhance the credibility of the Andean Pact as a customs union with a common external tariff. 31 Ecuador was admitted to the GATT/WTO in the summer of 1995. 32 See Tim Josling, et.al., "The Uruguay Round Agreement on Agriculture: An Evaluation", International Agricultural Trade Research Consortium, Commissioned Paper No. 9, July 1994. 3 The higher rate was presumably chosen to give more flexibility for additional tariffs under the price band system for certain products. -27- These bound tariff levels in all cases are far above those actually applied in the Andean Pact to imports from third counties. If member countries of the Andean Pact were ever to make use of their ceiling bindings the result would be serious distortions in agricultural trade as well as in domestic resource allocation. If the scope for high tariffs is not to be used then it would be better to negotiate away the unneeded protection, perhaps for the safeguard system mentioned above. It would seem to be risky to hold onto unused and unwanted protection at a time when domestic producer groups are pressing for a return to more government intervention in agricultural markets. The binding of the tariffs for agricultural produce, subject to the suggested safeguards, at the Bolivian and Venezuelan level of 40 percent and the remainder of the products at the Peruvian level of 30 percent would be a constructive way of signaling to trade partners as well as to domestic interests that high protection for agricultural markets is a thing of the past in the Andean Pact. -28- 8. Conclusions The agricultural trade policies of the five countries of the Andean Pact have reached a critical stage in the path towards economic rationality and political sustainability. Three developments have pushed these policies in a more liberal direction. First, and most importantly, domestic economic policy reform has included dramatic changes in agricultural policy. This has led to the deregulation of the agricultural sector, in particular the privatization of many of the functions of parastatal enterprises; the removal of most of the subsidy and price support programs; and the replacement of non-tariff measures with tariffs as the main means of border protection. This process has been taken further in Latin America than in most other parts of the world, and the five countries of the Andean Pact have been among the leaders in implementing these policy changes. The second development has been the incorporation of agricultural trade in the free-trade provisions for regional trade agreements. This is in sharp contrast to the practice in the 1960s, when trade pacts such as LAFTA and EFTA omitted agriculture from the trade liberalization aspects of the agreement. The inclusion of agriculture fully within the free-trade obligations of the GRAN countries was a bold step, and one fully in line with the new "open" model for such regional agreements as exemplified by MERCOSUR and NAFTA. Moreover, with the possible exception of the price band system, the GRAN countries have resisted the temptation to solve internal domestic agricultural problems by putting up a high external tariff and establishing common support systems. As the EU experience has shown, such a path leads to high budget costs, trade frictions and an inefficient agricultural sector unable to survive without considerable transfers from the rest of the economy. The third development has been the binding of tariffs within the GATT Agreement on Agriculture which emerged from the Uruguay Round. The Agreement called for the conversion of all non-tariff import measures into tariffs which were to be bound and in many cases reduced according to an agreed schedule. GRAN countries had for the most part already changed non-tariff barriers to tariffs, but the binding of these tariffs is an important step in locking in the changes in domestic policy which might otherwise be reversed. Other aspects of the Agreement will also have an effect on the choice of policies for the GRAN countries in the future. The injunction against the use of export subsidies, except where entered into the Schedules, takes away one possible instrument for reintroducing price support in agriculture. The budget cost of such subsidies would also make it unlikely that they would ever feature in the policies adopted by these countries. More significant is the impact of export subsidy restrictions on world prices for agricultural products. The extremely low prices for certain products which resulted from the export subsidy policies of the U.S. and the EC in the mid-1980s are unlikely to return.34 The constraints on domestic subsidies negotiated in the Uruguay Round are even less likely to have an impact on the policy choice of the GRAN. The cross-commodity nature of the measure -29- The combination of these three developments provides the environment for a newly articulated agricultural strategy for the countries of the Andean Pact. The core of that strategy could be to prepare the agriculture of the region to face competition from agricultural producers of Canada and the U.S., as well as those from Argentina, Brazil, Chile and Uruguay, in a large regional internal market. It should not be assumed that it will be possible or feasible to maintain significant protection against goods coming from these countries. This involves the investment of resources into the modernization of agricultural enterprises and the removal of remaining impediments to these developments. This element of the strategy would also include parallel measures to improve cooperation in research, to assist in the mobilization of investment funds on a regional basis, and to promote coordination among regulatory agencies. A second aspect of this strategy would be to be able to sell the tropical products and sugar grown in the region in foreign markets in the absence of preferences. Of course so long as preferences still exist each country will benefit by making use of them. But not only is it unlikely that these preferences in the European and U.S. markets will survive far into the next century, but it is not clear that it is in the long run interest of the countries that benefit from them to continue to orient their economies in that direction. This movement away from dependence on preferences may require some regional cooperation. The negotiations with the EU and the U.S. on the ending of such preferential arrangements may be more successful if organized on a regional basis. A final element in the strategy would be to build on the basis of regional free trade in agricultural products to develop marketing and processing firms, along with complementary public institutions, based not on narrow national markets but on regional patterns of production and demand. These regional firms and institutions should be encouraged to emphasize quality and timeliness, establish regional identities for product differentiation and aim to increase consumer awareness of the availability of regional produce. Clearly the success of this strategy depends on economic growth and macroeconomic stability, but it could be stimulated by actions at the regional level. One element of this is the removal of technical trade barriers arising from different standards. (the Aggregate Measure of Support, or AMS) used to express the limits on domestic support, together with the extensive reforms which have taken place since the base period used for that measure, ensure that these quantitative constraints will not be operative. As it is mainly through the AMS constraint that the pressure on countries to move to "green box", i.e. less trade-distorting, domestic subsidies is felt, it would seem that even this innovation is unlikely to have much impact. -30- An attempt at the level of the Andean Pact to develop regional regulations, or to encourage the mutual recognition of national standards, could prove a useful boost to market integration and the development of agricultural trade. Without a consistent strategy for agricultural trade the political sustainability of the policy reforms will remain in doubt. Pressures are building for a return to more intervention in agricultural markets. These pressures will build as world prices continue their long run downward march, after the present short term price surge has receded. As the expansion of intra-regional trade continues the tendency to blame domestic productivity shortcomings on unfair competition will intensify. Macroeconomic fluctuations, in particular currency upheavals will also bring calls for protection against imports of agricultural goods. A well-defined strategy may be the only way to prevent a reversion to the inward-looking policies which have for so long shackled the competitiveness of Andean Pact agriculture. Implementation of such a strategy clearly entails action at the national as well as at the regional and multinational level. At the national level the continuation of economic and trade reforms are the key to successful agricultural policy changes. Bolivia, Colombia and Peru have undergone these reforms in a comprehensive way, though even in these countries there are still relics of the old policies. In the case of Bolivia the marketing of domestic farm products is still in the hands of parastatals. Colombia shows signs of backsliding in response to protectionist pressures from those who would rather not face up to international competition. Peru still has a surcharge system for agricultural products that shields uneconomic domestic production from pressure from imports. The process of domestic reform is still incomplete in Ecuador and Venezuela, and this is hampering the development of an agricultural trade strategy. In Ecuador the policy reforms still have to be fully implemented, and in Venezuela the process has apparently stalled. Regional decisions cannot determine the pace of unilateral reform, but they can be useful as a way of reinforcing changes taken at the national level and lowering the risks associated with such changes. At the regional level the implementation of the strategy outlined above can best be achieved by policies which maintain free access to regional markets whilst encouraging the development of trade with other regions. The Andean Pact has a role in coordinating regional trade positions within the WTO. This could include the rationalization of the tariff bindings and agreement on the continuation of multilateral trade reforms but it should focus on the development of a GATT-consistent safeguard system for agricultural products to replace the Price Bands. The Pact also has a role in preparing the agricultural sectors of the region for the merging of the preferential trade agreements in the Americas. It should avoid policies which give protection to or encourage agricultural development which is unlikely to prove competitive in the broader marketplace. Whether the Pact survives as an integral part of the economic and trade policies of its members depends in large part on how well it performs the task of preparing the regional economy for wider competition. Table A: Share of Western Hemisphere Agricultural Trade to and from Andean Pact Countries, 1993 Bolivia Colombia Ecuador Peru Venezuela Share of Imports from Andean Pact 14.6% 17.7% 22.8% 19.8% 10.1% Share of Imports from MERCOSUR 45.0% 9.6% 8.1% 21.6% 11.6% Share of Imports fromn NAFTA 40.4% 72.7% 69.2% 58.6% 78.3% Share of Exports to Andean Pact 28.0% 24.7% 13.9% 19.7% 11.0% Share of Exports to MERCOSUR 26.5% 3.3% 3.6% 13.7% 4.3% Share of Exports to NAFTA 45.5% 72.0% 82.4% 66.6% 84.7% Table 81: Flows of Agricultural Products, Andean Pact Countries Rice: Flow of Andean Pact Trade, 1993 in thousand US$) Imports Bolivia Colombia Ecuador Peru Venezuela Mercosur Nafta Europe Rest of World Exports Bolivia 49 2 Colombia 9 816 650 2 Ecuador 14 Peru 826 648 20 Venezuela 19,364 1 1 31 Mercosur 300 8 26,046 2 Nafta 103 10 1 11,740 97 Europe 1,108 10 Rest of World 1 6 1 69,645 7 Maize: Flow of Andean Pact Trade, 1993 ( in thousand US$) Imports Bolivia Colombia Ecuador Peru Venezuela Mercosur Nafta Europe Rest of World Exports Bolivia 81 28 3 Colombia 1 16 Ecuador 2,171 1 Peru 239 1 440 1,475 927 Venezuela 1,134 721 7 Mercosur 209 12,552 59,755 40,817 Nafta 1 66,438 1,329 26,810 111,646 Europe 10 - 1,381 Rest of World 11 62 669 1,699 Wheat: Flow of Andean Pact Trade, 1993 ( in thousand US) Imports Bolivia Colombia Ecuador Peru Venezuela Mercosur Nafta Europe Rest of World Exports Bolivia 61 Colombia 3 Ecuador Peru Venezuela 9 Mercosur 7,477 14,354 2,047 87,568 368 Natta 24,389 109,134 39,491 71,387 174,568 Europe 120 2,036 4,099 7,828 8,783 Rest of World 258 7,283 10 - 3,257 Table 82: Flows of Agricultural Products, Andean Pact Countries Meat:Flow of Andean Pact Trade, 1993 ( in thousand US$) Importer Bolivia Colombia Ecuador Peru Venezuela Mercosur Nafta Europe Rest of the world Exporter Bolivia 630 Colombia 2,396 Ecuador 36 312 Peru 7 4 Venezuela 723 1 Mercosur 107 73 378 25 Nafta 1,641 357 51 335 Europe 24 147 Rest of the world 8 - 2,140 56 Fruits and Vagetables:Flow of Andean Pact Trade, 1993 ( in thousand US$) Imports Bolivia Colombia Ecuador Peru Venezuela Mercosur Nafta Europe Rest of the world Exports Bolivia 266 131 4,249 6,813 7,151 971 Colombia 2 444 335 42,882 214 214,140 202,938 44,686 Ecuador 1,264 260 71 34,850 188,055 223,032 142,113 Peru 15 1,254 605 2,446 5,673 32,860 97,351 13,160 Venezuela 7,400 19 116 599 32,736 10,035 18,987 Mercosur 869 1,761 138 2,333 50,964 Nafta 3,493 45,681 7,963 34,621 94,974 Europe 271 5,844 496 2,833 17,966 Rest of the world 1,793 36,882 4,161 22,246 41,220 Flowers: Flow of Andean Pact Trade, 1993 ( in thousand US$) Imports Bolivia Colombia Ecuador Peru Venezuela Mercosur Nafta Europe Rest of the world Exports Bolivia 18 635 2 Colombia 11 856 1,511 303,708 67,517 8,662 Ecuador 133 30 7 1,280 30,559 5,500 527 Peru 3 2 2 1,786 1,498 341 Venezuela 490 14 61 Marcosur Nafta 55 - 8 101 Europe 2 80 Rest of the world - 2 1 1 11 Table B3: Flows of Agricultural Products, Andean Pact Countries Sugar: Flow of Andean Pact Trade, 1993 (in thousand US$) Imports Bolivia Colombia Ecuador Peru Venezuela Marcosur Nafta Europe Rest of the world Exports Bolivia 2,386 13,341 Colombia 11,785 35,641 54,871 32,722 3,002 24,559 Ecuador 200 52 7,672 1 Peru 10 3 9 14,453 - 1 Venezuela 6,096 3,490 459 Mercosur 202 261 26 11,924 56 Nafta 101 1,906 801 9,325 958 Europe 123 1,292 777 656 485 Rest of the world 13 337 25 28,018 8,943 Coffee: Flow of Andean Pact Trade, 1993 ( in thousand US) Imports Bolivia Colombia Ecuador Peru Venezuela Marcosur Nafta Europe Rest of the world Exports Bolivia 19 238 96 2,617 908 Colombia 263 876 381 56 2,569 249,054 785,693 171,506 Ecuador 23 162 47,396 33,881 25,906 Peru 236 307 12,910 26,525 20,097 Venezuela 29,910 3,390 1,591 Mercosur 61 1 Nafta 9 9 27 104 16 Europe 2 10 1 Rest of the world 121 1 1 462 Cocoa: Flow of Andean Pact Trade, 1993 ( in thousand US$) Imports *. Bolivia Colombia Ecuador Peru Venezuela Mercosur Nafta Europe Rest of the world Exports Bolivia 64 404 395 Colombia 11 36 74 7,893 6,856 230 Ecuador 202 1,071 25 3,910 36,988 23,613 12,639 Peru 170 367 375 5,371 3.215 1,735 Venezuela 8 6,406 3,390 1,248 Mercosur 2 1 Nafta 92 Europe 26 7 442 Rest of the world 3 1 57 -35- Bibliography Bolling, Christine, "Ecuador ". Josling, Tim, "The Treatment of Agriculture in Regional Trade Agreements", FAO Policy Analysis Division, (forthcoming). Josling, Tim, Stefan Tangermann and Thorald K.Warley, "Agriculture in the GA TT: Past Present and Future ", Macmillan, (forthcoming). Josling, Tim, et.al., "The Uruguay Round Agreement on Agriculture: An Evaluation", International Agricultural Trade Research Consortium, Commissioned Paper No. 9, July 1994. Josling, Tim and J.R.Deep Ford, "Structural Adjustment, Integration and Agricultural Policy Reform: Lessons from Jamaica's Agricultural Sector ", Paper presented to the IATRC/IICA Conference on Economic Integration in the Western Hemisphere, San Josd, Costa Rica, June 7-9,1995. Kennedy, Richard, "Venezuela ". Michaely, Michael, "Trade Policies in Peru: Remaining Issues", World Bank, Latin America and Caribbean Department, August 1995. Rajapatirana, Sarath, "Bolivia: Trade Policies and Integration Choices", Latin American and Caribbean Department, World Bank, (unpublished). Roberts, Donna, and David Skully (eds), "Global Review of Agricultural Policies: Western Hemisphere ", ERS Statistical Bulletin No.892, USDA, Washington D.C., September 1994. Stuart, Miriam, "Peru". Swann, Nina M., "Bolivia". Vald6s, Alberto, "Joining an Existing Regional Trade Agreement from the Perspective of a Small Open Economy - Chile's Accession to NAFTA and MERCOSUR", American Journal of Agricultural Economics, (forthcoming). Vald6s, Alberto, "Surveillance of Agricultural Price and Trade Policy: A Synthesis for Selected Latin American Countries" Technical Department, Latin America and the Caribbean Region, World Bank, June 28, 1995. Vald6s, Constanza M., "Colombia". World Bank, "Colombia: Review of Agricultural and Rural Development Strategy", November 1994. various FAO and World Bank sources.  D istributors of COLOMBIA HAM ITALY NEW ZEALAND ROMANIA SWITZERLAND Infeenlace Lida. Cehture DifsinLoose omsdnri asn P EBSCO NZ Ltd. Comparil De Librank Becureeti S.A. 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Faa: (972 2) 6271634 GAlL: hilpitwwwe.worldonline.nIf-lisdeboo ToL (1) 347-4962 S-171 25 Solos Harare Fa: 010641725100 82 Athens Poe: (1) 347-0264 Tel: (46 6( 705-97-50 Tel: (263 4)86216617 Tel: (30 1( 364-1028 Foe: (468(27-00-71 Foe: (263 4( 631670 Fax: (30 1) 364-254 E-mail: mai-2w79i se 31M  RECENT WORLD BANK TECHNICAL PAPERS (continued) No. 316 Schware and Kimberley, Information Technology and National Trade Facilitation: Making the Most of Global Trade No. 317 Schware and Kimberley, Information Technology and National Trade Facilitation: Guide to Best Practice No. 318 Taylor, Boukambou, Dahniya, Ouayogode, Ayling, Abdi Noor, and Toure, Strengthening National Agricultural Research Systems in the Humid and Sub-humid Zones of West and Central Africa: A Framework for Action No. 320 Srivastava, Lambert, and Vietmeyer, Medicinal Plants: An Expanding Role in Development No. 321 Srivastava, Smith, and Forno, Biodiversity and Agriculture: Implications for Conservation and Development No. 322 Peters, The Ecology and Management of Non-Timber Forest Resources No. 323 Pannier, editor, Corporate Governance of Public Enterprises in Transitional Economies No. 324 Cabraal, Cosgrove-Davies, and Schaeffer, Best Practices for Photovoltaic Household Electrification Programs No. 325 Bacon, Besant-Jones, and Heidarian, Estimating Construction Costs and Schedules: Experience with Power Generation Projects in Developing Countries No. 326 Colletta, Balachander, and Liang, The Condition of Young Children in Sub-Saharan Africa: The Convergence of Health, Nutrition, and Early Education No. 327 Vald6s and Schaeffer in collaboration with Martin, Surveillance of Agricultural Price and Trade Policies: A Handbook for Paraguay No. 328 De Geyndt, Social Development and Absolute Poverty in Asia and Latin America No. 329 Mohan, editor, Bibliography of Publications: Technical Department, Africa Region, July 1987 to April 1996 No. 332 Pohl, Djankov, and Anderson, Restructuring Large Industrial Firms in Central and Eastern Europe:An Empirical Analysis No. 333 Jha, Ranson, and Bobadilla, Measuring the Burden of Disease and the Cost-Effectiveness of Health Interventions: A Case Study in Guinea No. 334 Mosse and Sontheimer, Performance Monitoring Indicators Handbook No. 335 Kirmani and Le Moigne, Fostering Riparian Cooperation in International River Basins: The World Bank at Its Best in Development Diplomacy No. 336 Francis, with Akinwuni, Ngwu, Nkom, Odihi, Olomajeye, Okunmadewa, and Shehu, State, Community, and Local Development in Nigeria No. 338 Young, Measuring Economic Benefits for Water Investments and Policies No. 339 Andrews and Rashid, The Financing of Pension Systems in Central and Eastern Europe: An Overview of Major Trends and Their Determinants, 1990-1993 No. 340 Rutkowski, Changes in the Wage Structure during Economic Transition in Central and Eastern Europe No. 341 Goldstein, Preker, Adeyi, and Chellaraj, Trends in Health Status, Services, and Finance: The Transition in Central and Eastern Europe, Volume I No. 343 Kottelat and Whitten, Freshwater Biodiversity in Asia, with Special Reference to Fish No. 344 Klugman and Schieber with Heleniak and Hon, A Survey of Health Reform in Central Asia No. 345 Industry and Mining Division, Industry and Energy Department, A Mining Strategy for Latin America and the Caribbean No. 347 Stock and de Veen, Expanding Labor-based Methods for Road Works in Africa No. 350 Buscaglia and Dakolias, Judicial Reform in Latin American Courts: The Experience in Argentina and Ecuador No. 352 Allison and Ringold, Labor Markets in Transition in Central and Eastern Europe, 1989-1995 No. 353 Ingco, Mitchell, and McCalla, Global Food Supply Prospects, A Background Paper Prepared for the World Food Summit, Rome, November 1996 No. 354 Subramanian, Jagannathan, and Meinzen-Dick, User Organizations for Sustainable Water Services No. 355 Lambert, Srivastava, and Vietmeyer, Medicinal Plants: Rescuing a Global Heritage No. 356 Aryeetey, Hettige, Nissanke, and Steel. Financial Market Fragmentation and Reforms in Sub-Saharan Africa No. 357 Adamolekun, de Lusignan, and Atomate, editors, Civil Service Reform in Francophone Africa: Proceedings of a Workshop Abidjan, January 23-26, 1996 No. 358 Ayres, Busia, Dinar, HirJi, Lintner, McCalla, and Robelus, Integrated Lake and Reservoir Management: World Bank Approach and Experience No. 360 Salman, The Legal Framework for Water Users' Associations: A Comparative Study No. 361 Laporte and Ringold, Trends in Education Access and Financing during the Transition fin Central and Eastern EuropeN No. 362 Foley, Floor, Madon, Lawali, Montagne, and Tounao. The Niger Household Energy Project: Promoting Rural Fuelwood Markets and Village Management of Natural Woodlands *mme THE WORLD BANK lM ~ I |t l»,e N..\ kll phone 2112-4V7 123 i \P-l 21 l NN \\<>l< l8)2I\\-3 24 |1 924 ISBN 0-8213-3924-9