Protectionism That Endangers

By Rod Hunter
From the Hudson Institute
Tuesday, July 8, 2008; 12:00 AM

This week G-8 and African leaders meet in Hokkaido to discuss how to respond to rising prices for commodities such as food. The food crisis highlights the need for farmers in developing countries to become productive participants in the global economy. One of the most important steps to achieve that goal would be for members of the World Trade Organization to to liberalize their agricultural markets.

Prices of staples have risen by more than 80 percent since 2005. The sharp price rises are driven by the failure of the world's farms to keep up with food demand powered by global growth. Years of strong growth has lifted millions out of poverty and led to a shift to diets richer in animal protein. It takes a lot of grain to produce a little meat, and as more people eat more meat, grain demand rises.

The world's food supply has not grown as quickly. Farms in developed countries have increased productivity and production, but farms in developing countries haven't kept pace. In 2006, U.S. cereal yields reached nearly 6,500 kilograms per hectare, while Asian and Latin American yields were less than 3,500, and African yields were less than 1,500.

To be sure, other factors contribute to rising food prices. High oil prices and biofuel policies are sucking agricultural commodities into the energy market. Loose monetary policy is spurring inflation and may be encouraging investors to seek refuge from inflation in commodity markets. As always, weather plays a fickle role.

Why aren't farmers in developing countries keeping up? The World Bank's Word Trade Indicators, which combine information on countries' tariffs on imports, tariffs paid by their exporters, logistics and trade costs, and ease of doing business, provide telling insights and suggest a path forward.

  • High tariffs correlate with poverty. WTI data demonstrate a strong negative correlation between tariffs and prosperity, with the poorest countries having the most restrictive tariffs and the wealthiest having the least restrictive.

  • Farm tariffs have not fallen as fast as other tariffs. There has been a trend toward tariff reduction in recent years. But countries have liberalized less in the farm sector than elsewhere.

  • Poor countries have the highest farm tariffs. Trade restrictiveness of agricultural tariffs among developing countries is highest in the Middle East and North Africa (equating to tariffs of 21 percent), South Asia (21 percent), and Sub-Saharan Africa (15 percent).

  • Countries with better trade logistics integrate faster. The World Bank assessed countries' trade logistics services, including efficiency of customs services, ease and timeliness of transport, etc. Logistics rankings are influenced by countries' ports, raid and road infrastructure. Countries with better logistics saw more rapid increases in trade. The Middle East and North Africa and sub-Saharan Africa ranked worst in logistics, as well as in ease of doing business.

    In light of these data, one might expect broad support for improving developing countries' logistics, infrastructure and ease of doing business, and for liberalizing agricultural trade. The focus of donors and multilateral development banks on agricultural infrastructure is promising. Unfortunately, India, which purports to speak for the G-77 of least developed countries, has been hawking a perverse agricultural mercantilism. Indian commerce minister Kamal Nath rightly points out that the U.S. and E.U. need to cut farm subsidies. But he deflects requests to open his market by arguing that developing countries need a "special dispensation" allowing them to make "lower or no cuts" of tariffs for "sensitive" products.

    A glance at India's WTI profile should be enough to dissuade others from wanting to emulate its approach. Indian farmers face low tariff barriers in other countries (the equivalent of 4.7 percent tariffs). India does a poor job, however, on trade logistics and is a notoriously difficult place to do business (ranked 120th out of 178 countries), thus lowering productivity of Indian farmers. India maintains highly restrictive agricultural tariffs (54 percent), compounding the food crisis for India's urban poor.

    Agricultural tariffs cuts are only part of the solution for increasing the production of farmers in developing countries. Donors need to follow through on aid aimed at improving agriculture and rural development; many poor countries need to improve their business environments; and farmers need biotech crops adapted to local conditions. But tariff reductions are an important part of the solution.

    The author is a senior fellow at the Hudson Institute and was senior director of the National Security Council under President George W. Bush.

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