BizCLIR

The principle that trade and investment are important for economic growth is widely accepted. By trading with other countries and attracting foreign investment, nations can take advantage of global market forces—competition, human resource development, technology transfer, and innovation generate growth and reduce poverty.

The agribusiness sector encompasses half of the world’s labor force and 40 percent of consumer purchases. The public policy issues that it raises impact economic development, trade, nutrition, food safety, the environment, intellectual property, genetics, and other social and economic priorities.

Trade is investigated as an area of the business environment under the Agricultural Climate Legal and Institutional Reform project (AgCLIR) because of its large and growing importance to economies the world over and to the growing interconnectedness of these economies. The last twenty years have also seen a dramatic increase in the amount of goods and services traded globally. This growth has come from a variety of sources, including increased global income; improvements in technology, logistics, and transportation efficiencies; and the series of trade negotiations following WW II that eventually led to the establishment of the World Trade Organization (WTO) and dramatically lowered tariffs on a reciprocal basis.1 However, despite rapidly expanding growth in agriculture and food products over this same time period, today the share of developing countries accounts for little more than half the world agricultural trade, and food trade is about the same as it was twenty years ago.2

There are no shortages of issues that constrain the growth of agribusiness trade. Such issues include product perishability, low margins, lengthy distances to markets, and, “lumpy” cash flow (i.e., cash flow is produced only after months of soil preparation, growing season, harvest, and marketing). Moreover, major global trends in agricultural trade limit the ability of developing country firms to compete with their developed country competitors:

• Many OECD countries subsidize their farmers and provide export subsidies to their agribusiness, keeping world prices down and flooding the market with surplus production.

• Poor national infrastructure makes it more expensive for farmers in a remote area to ship commodities to urban consumers in their own country than for internationally competitive agribusinesses on the other side of the world to ship them to those same urban buyers.

• Technological innovations needed by producers and processors come with a high price tag if they are available at all.

• Tariff escalation (i.e., tariff rates that increase as the amount of additional value added by the producer is increased) forces developing countries to export raw product without reaping the employment and other benefits of adding value locally.

• Non-tariff barriers to trade (especially strict plant and animal health standards that can be used to protect markets in lieu of more obvious tariff barriers) further restrict their ability to penetrate global markets.

1 Agriculture, however, has traditionally benefited from special arrangements that sheltered it from the full impact of GATT (and now WTO) rules. Even today, in the WTO, trade in agricultural products are covered by a separate agreement that, to a degree, still shelters it from generally applicable rules.

2 “Summary of World Food and Agriculture Statistics,” Food and Agriculture Organization of the United Nations, 2005.