44899 The World Bank JUNE PREMnotes 2008 N U M B E R 120 TRADE Global Food Price Crisis— Trade Policy Options Jean-Pierre Chauffour, Economic Adviser, PREM Trade The current global food price crisis has deep historical roots in the distortions of the world trading system (see companion note, Global Food Price Crisis—Trade Policy Origins). Trade policy options to deal with the crisis involve correcting these historical distortions. They include removing export controls on agricultural products, eliminating restrictions on humanitarian food aid, reducing excessive stocks of food grains, reversing biofuel subsidies and protection to inefficient producers, lowering customs duties on agricultural products, facilitating agriculture trade, completing the Doha round of trade negotiations, and, in the long run, further liberalizing agricultural trade on a multilateral basis. Many importing countries have already embarked on this agenda by slashing tariffs to lower the costs in their domestic markets. Trade Policy Options: Eight cially strong. India’s decision last October Ways to Make the Future Better to ban rice exports, except for Basmati, was Pressure on food supplies and associated quickly followed by Vietnam and other major high food prices are likely to be a medium- to players, with an immediate impact on prices. long-term reality, because some of the driving Actions by large rice importers, such as the factors—rising prosperity in the developing Philippines, which organized large tenders world, which creates more demand; high to obtain needed rice imports against this fuel prices; stagnant agricultural productiv- background of shrinking traded supplies, ag- ity; and climate change–induced pressure gravated the problem. Reversing these poli- on agricultural supplies—are also durable. cies would significantly ease market pressure While the policy response to the current and reduce the price of rice. For example, crisis must involve much more than trade when Ukraine announced that it would relax policy (World Bank 2008a), a number of its export restrictions in April 2008, wheat trade policy options could help mitigate the prices immediately declined by 18 percent. impact of the crisis, both in the short term An international call has been made for re- and in the medium to long run. moving all export bans and restrictions on food products, at the very least for shipments 1. Removing export bans and other export to the least developed countries and those restrictions on agricultural products in fragile situations (World Bank 2008b). Furthermore, the need to discipline export While exports restrictions are introduced as restrictions is all the more important as the an attempt to address the complex political prospect of being confronted with them per- economy of rising food inflation, they only versely bolsters the argument that net food make matters worse both from a global and importers need to have the ability to support domestic perspective (Nogués 2008). In the farmers through restrictive trade policies. case of the thinly traded rice market, the In the absence of reliable world markets for impact of these restrictions has been espe- food products, a country cannot help but self- insure and support its own farmers. FROM THE POVERTY REDUCTION AND ECONOMIC MANAGEMENT NETWORK 2. Eliminating taxation or restrictions on efficient and less competitive with production humanitarian food aid. of staple foods (that is, sugar cane). It would remove pressure from food prices and allow Untying food aid would allow countries such the potential benefits of biofuels to be gained as the United States, Canada, and Germany without the negative consequences. Biofuel to significantly increase their assistance for a production from sugar cane in Brazil is both given amount of financial resources (Subra- competitive at current oil prices without the manian 2008). If the tying requirements were need for subsidies and does not come at the eliminated, just the savings from increased expense of shifting large amounts of land shipping and distribution costs would allow away from staple foods. It is also five times every dollar of food aid to go much further more efficient in terms of carbon emissions (Elliot 2006). Clear rules should be set so than biofuel from corn. This is an opportu- that even countries with restrictions on com- nity not just for Brazil, but for many other mercial exports allow food for humanitar- developing countries, including several in ian needs to be sourced from their country. Africa (for example, Mozambique, Tanzania) Restrictions on procuring food grains for that are very large potential efficient suppli- humanitarian purposes have been particu- ers of sugar cane biofuels. larly detrimental. 5. Reducing import tariffs on agricultural 3. Reducing excessive stocks of food grains. products. Japan currently has roughly 900,000 tons of Many countries that had relatively high im- U.S. medium grain rice and 600,000 tons port tariffs on wheat, maize, and/or rice until of long grain rice imported from Thailand the recent food price surge have reviewed and Vietnam, which are surplus to domes- and significantly reduced their duties on food tic consumption requirements based on its products in recent months to cut food costs World Trade Organization (WTO) obligation. to local consumers. However, such revisions, However, this rice may not be reexported be- at times, appear to have been ad hoc, to lack cause of Japan’s market access commitments transparency, and to lead to uncertain effects under the WTO Agreement on Agriculture on the actual level of protection and domestic These stocks are not sold domestically; in- food prices. Tariff cuts should to the extent stead they are allowed to decay and then used possible be made in the context of a broader as livestock feed. Last year about 400,000 tariff schedule reform. Countries where high tons of rice was disposed of in this manner. import duties still apply (for example, rice Temporarily allowing Japan to sell its stocks in the Philippines) should consider reducing commercially or as food aid could make a their tariff, especially when they have the significant difference and prick the current fiscal space. rice price bubble. China is also holding rice stocks equal to at least four months of do- 6. Facilitating agricultural trade in develop- mestic consumption (significantly in excess of ing countries. food security guidelines of 18–20 percent of total consumption) and could help stabilize Beyond tariff cuts, many developing coun- the world rice market without affecting its tries could reduce the price of imported food security. agricultural products through trade facilita- tion measures. For many low-income coun- 4. Curbing subsidies and tariffs on Euro- tries (LICs), especially net-food importing pean Union (EU) and U.S. biofuels produc- countries, transport and logistics costs are tion and imports. often a more important component of total trade costs than tariff barriers. Their logis- Phasing out biofuel policies that subsidize tics costs could amount to up to 50 percent production from food crops, such as corn of the import value, compared with the and vegetable oils, and reducing tariffs that Organisation for Economic Co-operation restrict imports from lower-cost producers and Development (OECD) benchmarks of would promote biofuels that are both more around 9 percent. The situation is particu- 2 PREMNOTE JUNE 2008 larly severe in landlocked countries, notably and predictable food trading system. In par- in Africa, where land transportation adds ticular, a Doha agreement would eliminate significantly to logistics costs (typically US$ export subsidies and may somewhat reduce 10 cents per ton and kilometer). This could domestic farm support for inefficient produc- double the shipping charges from overseas tion in developed countries. Tariff bindings, sources, which for high volume, relatively even if above applied duties, would allow low value goods such as grains and edible cutting tariff peaks, which are often the most oils could represent a significant part of the costly, while reinforcing predictability of the final price to consumers. While countries can trading system. Such efficiency gains in ag- do little to reduce ocean shipping costs, or ricultural production may provide incentives the impact of fuel prices on trucking costs, to promote investments in the agriculture they have substantial margin for improv- in developing countries. A Doha agreement ing the efficiency of their supply chain and could also add some transparency disciplines addressing the broader facilitation issues on the use export restrictions in enforcing that affect price and availabilities of food the notification of new export restrictions or deliveries. According to the World Bank’s prohibitions to the WTO; and minimal disci- Logistics Performance Index, customs clear- plines on the period of application of these ances, logistics, competence of services, and restrictions or prohibitions. A better func- timeliness are particularly poor in LICs, in tioning multilateral trading system would particular net-food importing countries. In in turn help prevent the recurrence of such many LICs, food products are often subjected types of crisis by reducing the magnitude of to a series of delays, unnecessary overhead distortions for agricultural production and costs, and losses and damages that further making agriculture markets more resilient. tax consumers. Furthermore, thin markets Current high food prices should make it and weak competition and governance politically easier to strike a deal that would encourage rent-seeking behaviors. In some require farmers in rich countries to adjust. African trade corridors, distribution margins Negotiations in the area of non-agricultural have been inflated by 30 percent on top of market access (NAMA) services and trade fa- increasing transportation prices. cilitation could also have positive impacts on national transport and infrastructure, food 7. Completing the Doha round of multilat- distribution systems, and marketing costs for eral trade negotiations. food and food inputs, especially if supported by a strong Aid for Trade program. While the WTO cannot provide anything immediate to help solve the current crisis, it 8. Beyond Doha, further liberalizing agri- can, through the Doha Round negotiations, culture trade would help. provide medium- to long-term solutions (WTO 2008). A Doha deal is unlikely to In the longer run, taking steps toward fully have much, if any, impact on food prices in liberalizing agriculture trade on a multilat- the next two or three years because imple- eral basis would help establish a more effi- mentation of its provisions is gradual and cient and resilient global agriculture sector. because the long-run impacts on prices of Restrictive trade policies by net commodity staple foods would be modest since many exporters to protect the urban poor tend to countries have now reduced applied rates have unintended negative consequences at below bound rates, the target of Doha ne- the domestic level, and at the global level, gotiators. Nonetheless, a successful Doha they push up world prices even further and round would place important disciplines on hurt net importers. From a global perspec- the use of agricultural subsidies and tariffs tive, maintaining free trade in commodities if and when prices eventually do come down while fostering incentives for production and and the temptation to revert to the distorting using efficient policies to protect the urban policies of the past reemerges. Completion poor (for example, targeted cash transfers) of the round would therefore represent a is a priority. WTO members would therefore major step in the right direction. It would need to make more substantial cuts to their help create a more transparent, rules-based, bound tariff rates and domestic farm support JUNE 2008 PREMNOTE 3 commitment to seriously begin to eliminate that are aimed at increasing productivity or global distortions. Some of these are now linking rural communities to markets are being achieved unilaterally with the reduc- much superior to trade policy in helping tions in tariffs in many importing developing the poor benefit from trade opportunities. countries. More importantly, the benefits Trade liberalization therefore needs to be of freer global trade would go way beyond complemented by other domestic policies the positive impact on food and changes in to help put in place such productivity and food prices. For low-income countries, they income-enhancing policies. will result in higher real incomes as other (nonfood) distortions are removed and more References opportunities are created in nonfood agri- Elliott, Kimberly Ann. 2006. Delivering on culture (for example, for cotton farmers, for Doha: Farm Trade and the Poor. Washing- sugar producers to satisfy ethanol demand), ton: Peterson Institute for International manufacturing, and services. Economics and Center for Global Devel- opment. Conclusion Nogués, Julio. 2008. “Socio Economic and The long-term trade option to high food Fiscal Impacts of Policy Barriers on prices is greater liberalization around the Argentine’s Agro-Industrial Exports.” world and commitment to multilateral trade Draft mimeo. rules that allow supplies to emerge. Pro- Subramanian, Arvind. 2008. Statement be- gressively curbing the use of trade policy to fore the U.S. House of Representatives, interfere with market signals—on both the Committee on Financial Services, hear- export and import side—is the most sustain- ing on Contributing Factors and Inter- able and inclusive policy option available to national Responses to the Global Food trade policy makers to create more efficient Crisis, May 14, 2008. and resilient agricultural markets. Trade World Bank. 2008a. “Addressing the Food policy is not the appropriate instrument to Crisis: The Need for Rapid and Coordi- pursue equity objectives or to attain goals nated Action.” Group of Eight, Meeting of such as food security and rural development. Finance Ministers, Osaka, June 13–14. This is not just because trade policy distorts World Bank. 2008b. Statement by Robert consumption and production decisions but Zoellick at the Rome Food Summit, June also because the distributional consequences 3, 2008. of protecting agriculture may be harmful to WTO (World Trade Organization). 2008. many poor households, especially those that Statement by Pascal Lamy at the Rome are net consumers and do not derive income Food Summit, June 3, 2008. from agriculture. Other policy instruments This note series is intended to summarize good practices and key policy findings on PREM-related topics. 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