understanding international trade in …

UNDERSTANDING INTERNATIONAL TRADE IN

AGRICULTURAL PRODUCTS: ONE HUNDRED YEARS OF

CONTRIBUTIONS BY AGRICULTURAL ECONOMISTS

TIM JOSLING, KYM ANDERSON, ANDREW SCHMITZ, AND STEFAN TANGERMANN

The study of international trade in agricultural products has developed rapidly over the past fifty years.In the 1960s the disarray in world agriculture caused by domestic price support policies became thefocus of analytical studies. There followed attempts to measure the distortions caused by policies alsoin developing countries and to model their impact on world agricultural markets. Tools were advancedto explain the trends and variations in world prices and the implications of market imperfections.Challenges for the future include analyzing trade based on consumer preferences for certain productionmethods and understanding the impact of climate change mitigation and adaptation on trade.

Key words: agricultural trade; commodity prices; trade policy; agricultural trade distortions; measure-ment of agricultural protection; modeling agricultural trade.

JEL Codes: F13, F55, Q17.

The study of the economics of internationaltrade in agricultural and food products is a rela-tively new area of specialization in the agricul-tural economics profession. Certainly the threemainstream areas that dominated the first fiftyyears of the American Agricultural EconomicsAssociation (AAEA)—production economics,marketing, and policy—each acknowledgedthe existence of international trade, but theylargely ignored the analytical challenge ofunderstanding the behavior of internationalmarkets and their role in resource-use effi-ciency and income distribution. By contrast,most agricultural economists trained sincethe 1960s have been exposed to interna-tional trade theory and recognize the per-

Tim Josling is Professor Emeritus, Food Research Institute, andSenior Fellow, Freeman Spogli Institute of International Studies,Stanford University. KymAnderson is the George Gollin Professorof Economics and former executive director of the Centre forInternational Economic Studies at the University of Adelaide;Andrew Schmitz is the Ben Hill Griffin, Jr. Eminent Scholarand a professor of Food and Resource Economics, University ofFlorida, Gainesville; a research professor, University of California,Berkeley; and an adjunct professor, University of Saskatchewan,Saskatoon. Stefan Tangermann is Professor Emeritus, Universityof Göttingen and former Director for Trade and Agriculture atOECD. We would like to thank the many members of the Inter-national Agricultural Trade Research Consortium (IATRC) whoresponded to an informal poll on the most influential writings inagricultural trade in their experience.

vasive influence of international economicevents on domestic markets and policies.Trade agreements have evolved to wherethey constrain domestic policy, and interna-tional commodity prices are usually trans-mitted at least to some extent back to thefarm level. Even the “newer” areas of agri-cultural and applied economics, such as envi-ronmental and resource economics, develop-ment economics, and consumer economics, areinfluenced by the institutions of internationaltrade.

This review aims to document the growthof the study of international agricultural mar-kets and institutions by identifying some ofthe main contributions of the profession toour understanding of the key issues. It is asubjective assessment of the development ofprofessional thinking on several of the mainareas where contributions have been madeto the understanding of the nature of inter-national trade in agriculture and food com-modities. Each of these advances illustrates thecumulative contributions made by economistsworking in universities and research agen-cies of national and international institu-tions. We apologize at the outset to themany whose work we have not been ableto mention.

Amer. J. Agr. Econ. 92(2): 424–446; doi: 10.1093/ajae/aaq011Received December 2009; accepted January 2010

© The Author (2010). Published by Oxford University Press on behalf of the Agricultural and Applied EconomicsAssociation. All rights reserved. For permissions, please e-mail: [email protected]

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Josling et al. Understanding International Trade in Agricultural Products 425

Changing Trade Issues over the Past TenDecades

Agricultural economists, by the nature of theirdiscipline, are attracted to the issues of the day.It follows that those who work on internationaltrade issues in the main respond to emerg-ing trade situations that demand analysis andexplanation. Theoretical developments andimprovements in analytical technique oftenaccompany these attempts to understand andexplain current problems. As a backdrop to themore detailed discussion of the contributionsof economists to the study of international agri-cultural trade, we therefore begin by tracingthe evolution of trade issues over the 100 yearssince the founding of theAAEA.This will illus-trate the tumultuous nature of the changes thathave called out to be addressed by economists,as well as the dramatic advances in theoreticaland analytical tools that have been developedto understand these issues.

Agricultural trade historically has been asignificant share of total commerce, and formany countries has played a dominant rolein determining foreign policy. As late as 1890,agricultural exports accounted for 75% of thetotal exports from the United States (Johnson1977, p. 298). By the time the AAEA came intoexistence in 1909, the export share was about50%, and that share fell steadily until the 1940sbefore reviving in the immediate postwar erato about 20%. For the world as a whole, agri-cultural trade has steadily declined as a shareof total trade in goods and services and is nowless than 8%, even though it has been increas-ing faster than world agricultural production.Yet trade in agricultural products remains veryimportant for both high-income and develop-ing countries, and agricultural trade policiestypically are among the most sensitive in anyinternational trade negotiations.

The first two decades of the AAEA, from1909 to 1929, was a period of steady decline intrade from the high point of the nineteenth-century globalization period to the growthof protectionist movements and the collapseof European empires in the devastation ofWorld War I. Though the founding fathers ofthe AAEA were well aware of the geopol-itics of the period and the impact on agri-cultural trade flows, few books or articles byagricultural economists stand out as dealingsystematically with trade issues during thatperiod. Government intervention in agricul-tural markets was not on the horizon, andagricultural tariffs were generally low relative

to barriers to trade in manufactured goods andservices.

During the 1920s, the situation began tochange. With domestic farm policy emergingas a way to boost rural incomes, pressure grewto use trade policy as part of the strategy. TheMcNary-Haughen Act was an early attemptto use trade policy to influence domestic mar-kets, and the same trend toward protectionismwas occurring in other countries.1 The book byEdwin Nourse (1924) introduced a more holis-tic view of world markets as well as a cogentexplanation of their significance for U.S. agri-culture. At this time, trade theorists began toexpand on the determinants of trade, and thesignificance of resource endowments emergedas a major factor in the explanation of tradeflows.

By the third decade of the AAEA’s exis-tence, trade policy was a matter of high polit-ical interest and international contention. TheGreat Depression was widespread and pro-tracted in part because of increased trade pro-tection, and agricultural trade was not spared.The 1930 Smoot-Hawley tariff bill was origi-nally designed as an agricultural tariff increasebut ended up more generally applied to allgoods. Did the profession sit idly by while theworld trade system disintegrated and economicautarchy reigned? It is not easy to find sem-inal articles from this period on agriculturaltrade and the collapse of markets, with thenotable exception of T. W. Schultz’s, who wroteon world agricultural trade and the seriousimplications for U.S. markets (Schultz 1935).

The fourth decade was not one of majorcontributions to the agricultural economics lit-erature in the area of trade. Wartime condi-tions were not conducive to academic pursuits,since many members of the profession wereco-opted into government posts and presum-ably made contributions that may never berevealed.2 However, the postwar trading sys-tem was being constructed in the 1940s, andagricultural issues were often at the heart of thediscussion.3 The debates between such notableeconomists as James Meade and Keynes and

1 Agricultural economists commented on these issues, in the con-texts of both domestic policy and the trade system. A fine exampleis the study by Black (1928), who warned of the consequences ofthis policy.

2 An exception was Henry C.Taylor’s book on world agriculturaltrade, emphasizing the importance of the European market (Taylorand Taylor 1943).

3 The debate on managing commodity markets is an example;see the discussion below of the writings by Davis (1942) and Tsouand Black (1944).

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their American counterparts explicitly dealtwith the inclusion of agricultural trade in thepostwar system but were notable for theirassumption that these issues were of such a highpolitical importance that the arguments forfreer markets were unlikely to prevail. Mean-while the theory of international trade tookmajor steps forward: Samuelson’s (1948) arti-cle on factor price equalization appeared, andthe basis was laid for modern trade theory.

The decade of the 1950s saw the start of aserious professional interest in agricultural andcommodity trade. D. Gale Johnson published abook on the inconsistency between U.S. tradeand agricultural policies: the one advocatingopen markets, the other maintaining protec-tive barriers (Johnson 1950). For twenty yearsJohnson refined this message and had a pro-found impact on the profession (if not onpolicy), as is detailed below. Condliffe (1951)included some insightful comments about agri-cultural trade in his book The Commerce ofNations, in addition to showing the complexi-ties of trade regulations at that time (Condliffe1951).4 The link between commodity trade andeconomic development and growth also beganto be considered during this period. In fact thiswas the start of development economics as thecolonial system disintegrated. Even the begin-nings of the political economy of agriculturaltrade can be traced to this period. Kindleberger(1951) introduced interest-group analysis intothe explanation of national tariff policies, set-ting the stage for later political economy workon agricultural trade.

By the start of the 1960s the issue of agri-cultural commodity trade became a significantinternational concern. The 1960s saw sharpincreases in agricultural protection in indus-trial countries. The trade system staggeredunder the burden of the disposition of sur-pluses built up under high price supports.Developing countries saw a different side ofthis with their requests for market access (onconcessional terms) rebuffed by strong domes-tic political forces and their export earningsdepressed by low commodity prices in interna-tional markets. Much of the professional writ-ing in the United States on agricultural trade in

4 Condliffe influenced a generation of students at Berkeley,including Hillman,who began to ask systematic questions about theissues facing agricultural trade. Hillman (1996) shows some frus-tration over the lack of earlier studies on trade, declaring:“[A]boutthe only works relating to agricultural trade were a 1920s book byNourse and Gale Johnson’s work on the trade policy dilemma ofUS agriculture.”

this period focused on how to increase exports,either commercially or through food aid.

The 1960s saw another development thathas had a profound impact on agriculturaltrade: the rebirth of regional economic integra-tion and somewhat less ambitious free tradeareas. European economists, as well as theirNorth American counterparts, were intriguedby the bold experiment of the European Eco-nomic Community (EEC) but were concernedabout the protectionist Common AgriculturalPolicy (CAP) that formed an integral partof the agreement. The tensions between theEEC (later the EU) and the United Statesover agricultural trade were a major theme foreconomists during this period and indeed untilthe mid-1990s, when the World Trade Orga-nization (WTO) internalized some of theseconflicts.

Both trade theory and the theory of eco-nomic integration were developing rapidly, asreal-world events challenged accepted expla-nations. In the 1960s, trade theorists paidincreasing attention to international capitalmovements within the context of standardtrade theory: Capital movements could be asubstitute for product trade.5 Agricultural eco-nomics as a whole stuck close to its microeco-nomic roots and to a “closed economy” viewof the agricultural sector. There was still a dis-connect between the teaching of agriculturalmarketing and domestic policy on the one handand teaching about the functioning of the inter-national trade and monetary system on theother.This meant that the profession was some-what slow in responding to the emerging tradeissues of the 1960s.6

By the 1970s a host of new issues had arisenwhich emphasized the importance of externaleconomic events. A sharp rise in oil prices,together with droughts in India,Africa, and theUSSR,caused agricultural commodity marketsto spike upward.Two devaluations of the dollar

5 Schmitz and Helmberger (1970) then developed a modelin which they demonstrate that capital movements and producttrade can be complements, in that increased capital movementsbring about increased product trade. Their examples chosen werefor agriculture and natural resource industries and presaged thegrowth of agricultural and food trade linked to foreign directinvestment that has continued to this day.

6 In an editorial introduction to the otherwise impressive col-lection of articles on agricultural economics published by theAmerican Economics Association (AEA) in 1969, the editorsadmit that the “decision to emphasize a limited number of topicsresulted in the exclusion of a number of areas in which agriculturaleconomists have specialized.Among the more important fields thathave been excluded [is] . . . international trade” (AEA 1969, p. xvi).D. Gale Johnson was on the selection committee for this volume, sopresumably he found inadequate material in this area to include.

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and the virtual abandonment of the BrettonWoods monetary system added more shocksto markets. Increased macroeconomic instabil-ity and chaotic commodity market behaviorshowed up the dysfunctionality of domesticpolicies. D. Gale Johnson’s seminal bookWorldAgriculture in Disarray and his work on sugarmarkets encapsulated this situation (Johnson1973,1974). G. Edward Schuh (1974) remindedthe profession of the importance of macroeco-nomics to agricultural markets and the signif-icance of exchange rates to agricultural tradepatterns. And, in an extensive survey of “tra-ditional” fields of agricultural economics fromthe 1940s to the 1970s (Martin 1977), policiesrelated to agricultural trade were deemed wor-thy of a full section, authored masterfully byD. Gale Johnson (Johnson 1977).

The 1980s ushered in a remarkable period ofconflicts over agricultural trade and of policyreform that sowed the seeds for their rec-onciliation. The reform of multilateral traderules for agriculture had to await the neces-sary changes in domestic policy, but this reformeventually emerged from a mix of budgetpressures and paradigm shifts.7 The Interna-tional Agricultural Trade Research Consor-tium (IATRC, discussed in a later section)became a focus for work on trade. It wasalso a period when economists were becomingincreasingly sophisticated in the art of buildingmodels of markets and estimating behavioralparameters. The international trade literaturein general was changing over this period, withan examination of imperfect competition mod-els and of the importance of geography, thestudy of the political economy of protection,and the issue of regional integration. Agricul-tural economists became adept at translatingand applying these new areas of explorationinto the world of agricultural product trade andassociated policies, as discussed below.

The decade of the 1990s saw a signifi-cant change in the international rules gov-erning national trade policies for agriculturemakes. That set of changes made this an activedecade for agricultural trade professionals.Despite the signing of the General Agree-ment on Tariffs and Trade (GATT) in 1947by the advanced industrial countries, and theprogressive reduction of tariffs on imports ofmanufactures, there had been little progresson reducing agricultural trade barriers. The

7 Policy dialogue in international bodies such as the Organisationfor Economic Co-operation and Development contributed signifi-cantly to the paradigm shift, and this dialogue was an extension ofthe academic discussions of the time.

changing paradigms of economic policy thatstarted in the mid-1980s led eventually in 1995to the full incorporation of agriculture intothe successor to the GATT, the World TradeOrganization.8 Multimarket and economy-wide models became still more sophisticated.This was an age of detailed empirical workon agricultural trade rather than one of con-ceptual improvements. But agricultural tradewas becoming mainstream in agricultural eco-nomics curricula, and domestic policy coursesin the United States and the EU began toinclude some “open economy” issues. Mean-while, agricultural trade itself was changingwith the globalization of the food industry,posing novel challenges for economists.

It is clearly too early to judge the lastingnature of contributions since the beginning ofthe new millennium, but the expansion of therange of trade issues connected with environ-mental, consumer, animal welfare, water, andclimate change issues has greatly broadenedthe focus of agricultural trade analysts. Recentconcerns over the impact of price spikes onfood security and of the use of agriculturalcrops as biomass for fuel have kept agricul-tural trade issues high on the internationalagenda.

Rapid growth in processed and high-valueagricultural and food products, and a revolu-tionary spread of retail supermarkets accom-panied the “second wave” of globalization inthe modern era, so that it is no longer fancifulto talk of a global market for farm prod-ucts. Some economists focus on WTO issues,which have become a significant subfield ofagricultural trade research and analysis. Oth-ers take a development view: Much empiricalwork on agricultural trade now is done by thoseexamining developing-country issues, includ-ing questions such as the use of trade policyas an element in food security or antipovertyprograms. Still others study regional or bilat-eral trade arrangements in all their glory,pondering the balance between the benefitsof partial liberalization and the costs of giv-ing preferred access to high-cost producers.Many contributions are now made by thoseworking in (or with) multilateral institutions(such as the World Bank, the Organisationfor Economic Co-operation and Development[OECD], and the United Nations Confer-ence on Trade and Development [UNCTAD]),

8 However, trade negotiations have continued to pivot on thethorny issue of liberalization of farm product trade, as evidencedby the current problems in the WTO’s Doha Round.

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often in collaborative studies. This seems toreflect a shift in the way in which agriculturaltrade research has been organized, a topic towhich we return at the end of the paper.

As a way of highlighting the ways in whichthe profession has responded to these chang-ing events, we organize our subjective surveyaround six areas. Each area is an example of acumulative advance in understanding, startingwith one or two articles and books and devel-oping into a body of more or less acceptedwisdom.

Contribution #1: Understanding the behaviorof international commodity prices

One of the most persistent questions in agri-cultural trade is whether there are consistentlong-run trends in international market pricesfor agricultural commodities. On the one hand,supply constraints (limited land area) in theface of demand growth (population and percapita income) could push farm product pricesever higher. On the other hand, as consumersspend a high share of rising incomes on non-food items (the Engel effect),economic growthwill cause a shift in demand away from basicfoods. Relatively rapid agricultural productiv-ity growth will lower the costs of farm produc-tion and hence tend to lower farm prices. Theevidence for much of this century appeared topoint to a declining price trend.9 However, thesignificance of this trend became a matter ofconsiderable controversy in the 1960s.

The variability of prices has also been amajor topic for investigation over the years.High prices in the early 1970s brought this issueto the fore, and a more recent price spike in2007–8 has renewed concerns about the corro-sive economic impact of market instability. Pri-mary product prices in international marketsare notoriously more volatile than prices forother products. How much of the price volatil-ity is due to the characteristics of markets (e.g.,supply shocks from weather or disease) andhow much to government intervention becamea subject for study in the 1970s and 1980s.

Commodity Prices and the Terms of Trade

The behavior of prices of agricultural com-modities on world markets has been anunderstandable obsession with economists. Ofspecific interest to agricultural trade analysis is

9 This is in contrast to recent evidence for the period from thelate eighteenth to the early twentieth century (Williamson 2008).

the trend in the relative price of agriculturalproducts compared with nonagricultural prod-ucts. The terms of trade for agricultural (andother primary) products have featured promi-nently in debates about the possible bias ofthe trade system toward particular groups ofcountries.The debate on whether the economicsystem generated outcomes that were stackedagainst developing countries was highly visiblein the 1960s. Prebisch (1950) and Singer (1950)had come independently to the conclusion thatthere was a structural reason for the observeddecline in the price of agriculture relativeto manufactured goods, reinforcing the ten-dency due to the different income elasticities.Imperfect markets in industrial goods allowedmanufacturers to retain much of the benefitsfrom productivity increases rather than pass-ing them on to consumers,whereas agriculturalproductivity gains were passed directly to con-sumers (or at least processors) in the formof lower prices. As a consequence, the termsof trade turned progressively against the rural“periphery” in favor of the industrial “center.”The concept proved powerful in political termsand was a major motivation for the foundingof UNCTAD in 1964 and the calls for a NewInternational Economic Order by developingcountries in the 1970s.

The Prebisch/Singer hypothesis has donebetter as a political call to arms than as a statis-tical conclusion. A major revision of the datathat had originally been used was publishedby Grilli and Yang (1988), which broadly con-firmed a downward trend.10 But other analystsdisagreed with the interpretation of the data:Trends in prices over the past 100 years areby no means smooth. There have indeed beensharp declines in agricultural prices (particu-larly in 1920) but also periods where the trendis upward (over the first part of the twenti-eth century), when it disappears (from 1920until the late 1970s), and when a strong down-ward trend begins (until 1990) (Ocampo andParra 2002). Cashin and Mc Dermott (2002,2006) confirm these results and reject boththe existence of a long-run trend and theevidence of structural changes in the seriesused. The past decade has seen a recovery ofprices, and many argue that the trend maybe upward for at least a few more years tocome. Moreover, the link between terms oftrade and economic development has become

10 Their data have since been updated to 2000 by Pfaffenzeller,Newbolt, and Rayner (2007).

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more blurred. Identification of “primary prod-uct exporters” with “developing countries”looks increasingly dated: For many key farmcommodities, high-income countries are themajor exporters, and for many developingcountries—especially in Asia—manufacturedgoods now dominate their exports.

The recent revival of the idea that agricul-tural prices may be on a long-term upwardtrend owes much to three phenomena: rapidgrowth in emerging countries, particularly inChina, India, and Brazil, with its implicationfor dietary improvements; the extraordinaryincrease in oil prices in 2007, which raisedenergy costs in agriculture and led to gov-ernmental mandates and subsidies for biofu-els; and the apparent stagnation in technicaladvance in agriculture as a result of declin-ing research expenditures. Contributions to theunderstanding of these price movements havebeen somewhat contradictory. Some find a sig-nificant role for speculation (Gilbert 2008);others for biofuel policies (OECD and Foodand Agriculture Organization [FAO] 2008).But what seems generally agreed is that agri-cultural commodity prices now have a directlink with the price of petroleum,once it exceedsa threshold level at which biofuels become aprivately profitable substitute for fossil fuels.

International Price Shocks

The importance of commodity price fluctua-tions and of the domestic policy responses tothem was made apparent in the 1970s. Thequadrupling of petroleum prices in 1973–74and their doubling again in 1979–80, when theOrganization of Petroleum Exporting Coun-tries (OPEC) coordinated major reductions insupply, triggered a renewed focus on analyzingthe consequences of such nonfarm shocks forthe agricultural sector. Initially the focus of thisliterature was on analyzing the impact on con-sumers and firms, as producers faced sharplyhigher energy costs. But the magnitude of thepetroleum price stimulated massive and rapidexploration for and exploitation of new energyreserves. Such supply reactions were incorpo-rated in the analysis of price impacts, leading towhat became known as the “Dutch Disease”literature that sought initially to explain theeffects on other sectors of the Dutch economyfollowing the discovery and exploitation of nat-ural gas fields off the coast of the Netherlands.

Gregory (1975) made an early contributionto this literature on the impact of nonfarmsector booms: He found that the direct effect is

a rise in the demand for labor in the boomingnonfarm sector that will initially draw workersfrom other sectors to the booming sector butthat this is followed by an indirect impact onagriculture and other sectors as the change inreal income in the economy affects the demandfor all products.

The same core theory has been used to ana-lyze the inter- and intrasectoral and tax policyimpacts of agricultural commodity price boomsand busts. In the context of sub-SaharanAfrica,it was common practice for governments totax away windfalls from export price booms,either for depositing in a stabilization fund tobe drawn on to support farmers during periodsof price collapses or to boost treasury coffersso as to allow the boom to be shared withthe rest of the society, including nonboomingfarm industries. But recent analysis has castdoubt upon the ability of governments to effectsuch transfers.

Trade economists have also been concernedwith the impact of storage policies on inter-national market price stability and on theoptimal storage policy for an open economy.The early theoretical work on stabilization wasstimulated by Hueth and Schmitz (1972), whoshowed the distributional effects in both aclosed and an open economy from price stabi-lization brought about through storage. Feder,Just, and Schmitz (1977) analyzed storage poli-cies under trade uncertainty and showed caseswhere trade would be greatly reduced under ahigh degree of uncertainty. Just et al. (1978)analyzed the welfare implications of storagefrom an international perspective using non-linear assumptions, and Newberry and Stiglitz(1981) expanded the framework for optimalpolicy intervention under instability for openeconomies.The persuasive nature of their argu-ments, that private and public storage are code-termined and so the latter might just take theplace of the former, together with the return tolower prices in world markets, has effectivelydropped the topic of intergovernmental stor-age agreements from the policy agenda sincethe 1980s.11

Domestic Policies and Market Instability

The argument that governments may exac-erbate international market fluctuations bytheir own attempts to stabilize domestic prices

11 The topic did not totally disappear: Williams and Wright(1991), for instance, added additional insights into the welfareimpacts of commodity storage in both trade and no-trade situations.

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emerged largely as a result of the impact of thepolicies of the EU in the early 1970s.The instru-ments of the CAP included variable leviesand variable export subsidies (“restitutions”)to avoid the importation of instability frominternational markets. Economists in Europepointed out that the implication of such poli-cies was to kink the import demand curve andexport supply curves at the chosen domes-tic stabilization price. This in effect reducedthe extent to which the EU participated inthe absorption of shocks from the rest of theworld and increased the extent to which its owndomestic shocks were transmitted abroad.

The point was made in a broader contextby D. Gale Johnson when he argued that gov-ernments use a variety of instruments to addstability to domestic markets, resulting in aless stable international market, which leads tofurther unwillingness to trust that market forreliable supplies (Johnson 1975). Exporters arelikely to compete in aggressive ways to offloadsurpluses from the domestic market, causingprices to fall below the level that should clearthe market.This argument has been recognizedin the adoption in the Uruguay Round of ruleslimiting governments to tariffs rather thanquotas and variable levies, and to committingto never raise those tariffs above negotiatedbound rates. But the issue is still of consid-erable interest to trade modelers, who mustchoose the degree of price transmission fromworld to domestic prices.

Contribution #2: Demonstrating the linkagesbetween agricultural trade and exchange ratepolicies

In times of large global imbalances, fluctuat-ing exchange rates, and other macroeconomicinstability, it has become clear that such macroprices as exchange rates, interest rates, andinflation matter greatly in determining nationaleconomic welfare and the competitiveness andprofitability of individual sectors. However,the importance of exchange rates to agricul-tural trade was for many years neglected inthe literature and in policymaking, perhapsreflecting the fact that exchange rates werefixed for long periods of time in the pre-1969era. The 1970s disabused economists of thenotion that agricultural trade can be studiedin isolation from the broader economic envi-ronment. Macroeconomic conditions clearlyhad an impact on foreign demand as wellas on the domestic market. Agricultural sec-tors competed with each other on an unsteady

playing field with the goal posts and sidelinesin constant motion.

The U.S. Dollar and Agricultural Trade

The large exchange rate realignments thatoccurred worldwide in the early 1970s, result-ing in a significant devaluation of the U.S.dollar, drew the attention of agriculturaleconomists to the influence that monetarydevelopments could have on agricultural mar-kets. The outstanding contribution was thatof G. Edward Schuh (1974), who drew atten-tion to the implications of the exchange ratefor trade flows and domestic markets in agri-culture. What motivated Schuh’s analysis washis impression that the many explanations ofthe U.S. farm problem that had been providedhad overlooked one crucial element, i.e., thedollar exchange rate. Schuh argued that thedollar exchange rate had indeed significantlyinfluenced the economic fate of U.S. agricul-ture in the post–World War II period. Morespecifically, Schuh claimed that the U.S. dol-lar had been overvalued for a considerablepart of the period and that this misalign-ment had contributed to depressing prices fortraded agricultural products on the domes-tic U.S. market. This had reduced output offarm products below, and stimulated their con-sumption above, what otherwise would havebeen the case. In short, the overvalued dollarexchange rate had acted as a disincentive toU.S. agricultural exports.

Schuh did not limit his analysis to the directinfluence of the exchange rate on prices andquantities in a static context. He noted thatin spite of this price depression, U.S. agri-cultural output continued to expand, and sohe extended the analysis to include dynamicfeatures. Starting from de Janvry’s expositionof induced technical change and the con-cept of an innovation possibility curve, Schuhshowed how an overvalued exchange rate,through its influence on both product andfactor prices in domestic agriculture, couldaffect the speed and nature of technologicalprogress. He argued that the negative effect onfarm profits resulting from the overvaluationof the dollar induced a more rapid adoptionof productivity-enhancing technical progress.Coupled with higher land prices,brought aboutby acreage retirement policies, and the result-ing shift in factor proportions, this in turnaccelerated the outmigration of labor fromagriculture.All of these developments changed

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sign as the dollar began to depreciate under thecurrency realignments of the early 1970s.

The introduction of macroeconomic devel-opments into the analysis of agricultural mar-kets and trade, further developed in Schuh(1976) and McCalla (1983),firmly established awider set of factors to be taken into account bythe profession when considering the economicconditions of agriculture.This applied to devel-oping countries too, especially after many ofthem began to liberalize their markets for for-eign exchange in the 1980s (Schiff and Valdés2002). Chambers and Just (1981) demonstratedthe deficiencies in some of the models used andcame up with their own version of a dynamicquarterly econometric model of the U.S. wheat,corn, and soybean markets. Their results showsignificant market and trade effects of dollardevaluations.

European Exchange Rates and the CAP

Meanwhile, Europe’s agricultural economistswere busy studying a very European exchangerate issue, that of “green” money. When a uni-fied agricultural market was created across themember states of the newly established Euro-pean Economic Community, support pricesunder the Common Agricultural Policy wereset not in the currency of any member state,but in a virtual unit of account, equal in value(originally) to the U.S. dollar, and from thereconverted into national currencies throughthe prevailing exchange rates. However, soonafter prices had been harmonized across mem-ber states in 1967, exchange rates began tochange, with the deutschmark (DM) reval-uation and the French franc devaluation in1969. Keen to keep prices in national cur-rencies unchanged, agricultural policymakersdecided to maintain the old rates for convert-ing support prices from the unit of accountinto national monies. Thus, in effect, they cre-ated new specific exchange rates for agricul-tural policy purposes, dubbed green rates. Inorder to prevent arbitrage trade from under-mining the resulting price differences betweenmember countries, policymakers also had tointroduce border taxes and subsidies for bothintra- and extra-Community trade in agricul-tural products (called monetary compensatoryamounts). The system soon became technicallycomplex, with disastrous implications for eco-nomic efficiency. The agricultural economicsprofession in Europe, though, benefited fromit, as the regime provided many opportuni-ties for analysis and critique. An early example

was Josling (1970), who analyzed the impactof the DM and franc realignments on farmersand calculated the compensation that would beneeded to German farmers. This was indeedpaid through a rebate of tax revenues. Therefollowed a rich literature on the green moneysystem: Heidhues et al. (1978) contributed oneof the more comprehensive investigations intothis specific European exchange rate issue inagriculture. This aberration to the EU’s singleinternal market in agricultural goods surviveduntil the establishment of the euro in 1999 inthe context of EU monetary union.

Contribution #3: Introducing market powerand industrial organization into agriculturaltrade analysis

The “pure” theory of international trade wastypically premised on arms-length exchangebetween atomistic firms and consumers, eachidentified by their “country” of business orresidence. Thus it became common to referto countries as “importers” or “exporters” ofa product, even though they were essentiallystatistical aggregations of the actors involved.Two developments in trade theory moved theanalysis away from this view of countries asthe traders in a competitive marketplace. Onedevelopment was toward incorporating inter-mediate goods into trade models, a trend thataccelerated as it became clear that much tradewas among firms and between different partsof the same firm. A second development wasto incorporate a degree of market power intothe analysis, on either the exporter side orthe importer side, such that monopoly andmonopsony rents could be captured by the(private sector) actors. This complicated thebasic results of trade theory but improvedthe credibility of the analysis based on suchconcepts.

A major advance consistent with these devel-opments was made in Krugman’s (1979) articleon a “new” theory of trade, where the decisionto trade is developed within a context of thetheory of the firm. He created a general equi-librium model of “noncomparative advantage”trade. Such trade is driven by economies ofscale, which are internal to firms. Because ofthe scale economies, markets are imperfectlycompetitive. Thus the structure of the sectorand the relation between the actors became amatter of relevance.

This advance was taken up by several agri-cultural economists who had become uneasywith theories that rested on the notion that

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competitive conditions applied when manycommodity markets appeared to be less thanperfectly competitive. Large corporations pre-sumably had market power in the grain trade,and many markets were dominated by statetrading firms. Later, the growing complexity ofsupply chains added a new dimension where asingle firm might have many suppliers in for-eign countries and possibly also be exportingthe resulting final products to other parts ofthe world.12

Marketing Boards and Export Cartels

The early work on market structure and agri-cultural trade focused on market instability,storage, tariffs, and marketing boards. Thewheat market offered an important example ofwhere marketing institutions did not fit easilyinto the competitive model, and several influ-ential studies focused on this product. McCalla(1966) developed a cooperative duopoly modelof world wheat pricing where Canada and theUnited States are the duopolists, with Canadabeing the price leader. The article suggestedthat price stability in the world wheat mar-ket from 1956 to 1965 was due mainly to thestabilizing actions of Canada and the UnitedStates. In a follow-up article, McCalla (1979)generalizes the strategic choices facing primaryproduct marketing agencies.

Bieri and Schmitz (1973) analyzed exportinstability in the presence of market power.They found that the welfare consequencesof price instability for internationally tradedgoods critically depend on whether tariffs ormarketing boards are present. For example(unlike the free trade case), when the sourceof price instability is external, the importingcountry prefers price stability where trade isrestricted by tariffs. The opposite is true, how-ever, when trade is restricted by marketingboards. Just, Schmitz, and Zilberman (1979),extending the optimal tariff literature, developa model that consisted of four sectors: com-petitive producers, competitive consumers, thegovernment,and noncompetitive internationaltrading institutions. In the model, a market-ing firm with both monopoly and monopsonypower is considered where the firm oper-ates independently from producers and con-sumers to maximize its own profits. They alsodeal with international transactions carriedout by producer cartels. If the activities of

12 A full discussion of these developments is given by Karp andPerloff (2002).

international marketing institutions result innoncompetitive pricing, domestic price con-trols do not result in the optimal allocation ofresources.

In the early 1980s, this work was extendedas political interest focused on issues of exportcartels. Sarris and Schmitz (1981) analyzedtrade in an imperfectly competitive setting anddemonstrated how a cartel could have broughtabout a competitive solution. There is a signif-icant change in income distributions from con-sumers to producers under cartel conditions.The theoretical foundation and extensions forcartels and applications were developed bySchmitz et al. (1981). Karp and McCalla (1983)extend this to make use of the emerging devel-opment of game theory as a way of examiningtrade policies.

Industrial Organization

For a number of commodities, internationaltrade has for decades been dominated by multi-national corporations. More recently, retailfirms and food processors have developedextensive supply chains for food products,raw materials, and ingredients. Therefore, itbecame necessary for economists to under-stand the vertical and horizontal linkages thatexist among markets. Standard tariff theorydoes not deal specifically with vertical mar-kets that include producers, processors, andwholesalers: For that, one needs to incorporatesome insights from the literature on industrialorganization and market structure.

Agricultural economists have responded ininnovative ways to the challenge of model-ing international trade under imperfect com-petition. Some of the major studies includethose of Paarlberg and Abbott (1986), Karpand Perloff (1989), McCorriston and Sheldon(1991), Schmitz and Gray (2000), and Schmitz,Schmitz, and Seale (2009). The prevailing con-clusion from these papers is that the degreeof market power, which can take several forms,has a significant impact on prices and commod-ity flows.

Contribution #4: Quantifying the trade effectsof agricultural policies

Trade distortions from agricultural protectionwere treated as a fact of life for much ofthe twentieth century. A valuable contribu-tion to the understanding of the longer-termtrends in agricultural protection was made byMcCalla (1969). But it has been in only the past

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thirty years that there has been any consistenteffort to quantify the impact of protectivedomestic and trade policies of developed coun-tries on world markets. Meanwhile,as develop-ing countries became independent, they beganto discourage their agricultural sectors directlywith export taxes and indirectly with protectionfrom import competition for their infant indus-trial sectors and with overvalued exchangerates. This disarray in world agriculture, asD. Gale Johnson (1973) described it in the titleof his seminal book, meant there was over-production of farm products in high-incomecountries and underproduction in more needydeveloping countries. Johnson also stressed thefact that both groups of countries added to theantitrade bias of their policies by varying theextent of their trade barriers so as to stabilizethrough time domestic prices and quantitiesof food. In so doing, that insulating behavioradded to international price instability.

While Johnson did not provide comprehen-sive empirical estimates of the economic effectsof these price- and trade-distorting policies,the past three decades have seen major con-tributions by other analysts emerge to fill thislacuna. This section discusses the direct effectsof price-distorting farm policies on producerand consumer incentives, the indirect effectson farmer incentives of nonfarm trade andexchange rate policies, and the attempts toestimate the effects of those distortionary poli-cies on national trade and economic welfareand on prices and quantities traded in theinternational marketplace.

Direct Effects of Price-Distorting FarmPolicies on Incentives

Haberler’s (1958) expert group report to theGATT called for a comprehensive measureof support to capture the various ways inwhich governments influence incentives to pro-duce. Attempts to measure comprehensivelythe extent to which farm policies distort pricesand trade began with analyses conducted forthe Food and Agriculture Organization of theUnited Nations (FAO 1973) by Josling withassistance from Earley and Hillman.13 Thiswork calculated estimates of producer and con-sumer subsidy equivalents (PSEs and CSEs)of policies in 1968–70 for five products infive high-income countries: Canada, France,

13 The 1973 study was heavily influenced by Corden (1971), whodiscussed the subsidy equivalence of tariffs and cited calculationsfrom Canada and Australia of these equivalents.

Germany,the United Kingdom,and the UnitedStates. That series was extended to 1974 foreleven high-income countries by the FAO(1975). Around the same time, an officialannual series of nominal and effective ratesof assistance began to be estimated for Aus-tralia (reported for the 1970s by the IndustriesAssistance Commission 1983), using a general-ization of the nominal and effective protectionconcepts developed by Balassa (1965, 1970)and Corden (1966, 1971). But it was not untilthe mid-1980s that more complete time seriesestimates of distortions to agricultural incen-tives began to appear. A series for advancedand newly industrializing economies from 1955is reported in Anderson and Hayami (1986).The Economic Research Service (ERS) of theUSDA began to calculate PSEs for their trad-ing partners. Then a regular exercise of moni-toring all high-income countries’ farm policiesbegan at the OECD Secretariat with the annualpublication of empirical indicators for the pre-ceding year of farm sector support (now calledproducer and consumer support estimates, butstill abbreviated as PSEs and CSEs). Thesemeasures reveal a break in the long-run trendof agricultural protection growth for some ofthose countries since the late 1980s, althoughsome of their price-distorting measures havebeen replaced by more direct forms of incomesupport that are more or less decoupled fromproduction. The OECD PSEs and CSEs havebeen used widely (if sometimes incorrectly) asrepresenting a proxy for the sum of domesticand border policy measures in trade models.

As for countries outside the OECD, a majoreffort was launched by Krueger, Schiff, andValdés (1988, 1991) under the auspices ofthe World Bank that involved the creationof empirical indicators of producer price dis-tortions for eighteen developing countries forthe twenty-five years to the mid-1980s (dis-cussed further below). Few comparable timeseries estimates were generated for develop-ing countries in the following two decades.To fill the gap, a team led by Kym Andersonfor the World Bank recently developed theDatabase of Agricultural Distortions, whichcomplements and extends those efforts bythe OECD and Krueger, Schiff, and Valdés.Summarized in Anderson (2009), it buildson them by providing similar estimates forother significant (including many low-income)developing economies, by taking estimates forOECD countries back as far as the mid-1950sand by developing and estimating new, morecomprehensive policy indicators. The findings

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from this latest World Bank effort at trans-parency are very consistent with those fromKrueger, Schiff, and Valdés, but when moreproducts and more countries are includedin the sample, the estimated extent of pastdiscrimination by governments of developingcountries against their farmers is even greater(Anderson 2010). However, the new estimatesindicate that from the mid-1980s, more andmore developing countries have begun toreform their farm policies. As for high-incomecountries, the study also reveals that the highlevels of direct assistance to their farmers inthe mid-1980s was the culmination of threedecades of agricultural protection growth, con-sistent with the earlier findings of Andersonand Hayami (1986).

Indirect Effects of Nonfarm Policieson Farmer Incentives

Nonfarm policies have had significant impactson agricultural incentives too. Drawing on thetheoretical insight from Lerner (1936) that tax-ing imports has a similar effect on the exportingsector as does taxing exports, Krueger, Schiff,and Valdés (1988, 1991) sought to estimatefor their eighteen developing countries theadverse effect on farmer incentives resultingfrom each country’s manufacturing protec-tion policies and overvalued exchange rates.They revealed that there was indeed an addi-tional anti-agricultural bias in those countries’price-distorting policies and that these indi-rect effects of nonfarm policies were evenmore debilitating than the direct effects of agri-cultural policies. They also revealed a strongantitrade bias, with the exporting subsectorbeing much more harmed than the import-competing part of the agricultural sector. Themore recent World Bank study again confirmsthat tendency up to the mid-1980s, but doesso by estimating a so-called relative rate ofassistance (RRA), a function of the nominalrate of assistance both for agricultural trad-ables and for nonagricultural tradable goods.The estimates of the RRA averaged around50% for developing countries as a group dur-ing the 1960s and 1970s. For the period sincethe mid-1980s, however, that severe disincen-tive to produce farm products gradually disap-peared on average, although there remains awide dispersion of RRAs across the spectrumof developing countries. Roughly half of thechange in the average RRA is due to reformsin nonagricultural sectors of those developingcountries, suggesting that general reforms that

brought down manufacturing protection ratesand removed multiple exchange rate regimeswere at least as important for reducing the anti-agricultural bias as were reforms to agriculturalpolicies themselves (Anderson 2009).

Modeling the Effects of Price-DistortingPolicies on International Trade

Myriad partial equilibrium studies have beenpublished over the past century reporting esti-mates of the market and welfare effects ofindividual farm commodity programs, and noattempt is made to survey them here. Until themid-1970s, economists had incorporated tradeinto commodity models mainly through theaddition of an export demand or import supplyfunction to the domestic demand and supplyframework. As Thompson (1981) pointed outin a useful survey, such models have only lim-ited use for trade analysis, as they do not ingeneral allow for specific policy changes inthe rest of the world. Following Samuelson’s(1952) formulation of spatial price equilibriummodels and the work by Takayama and Judge(1964), other agricultural economists began toquantify the impact of policies on bilateraltrade flows in a more systematic way.

With the provision of comprehensive esti-mates of the level of protection and the subsidyequivalent of domestic policies, the opportu-nity opened up to develop multiproduct mod-els covering the agricultural sector as a wholefor trading economies. An early static modelthat captured the interactions between live-stock and feed markets globally was devel-oped by Roningen (1986) for the USDA.Around the same time, a dynamic and stochas-tic model of world food and feed marketswas built to provide ex ante estimates of theeffects of farm policies in the lead-up to theUruguay Round of multilateral trade negoti-ations (Tyers and Anderson 1986). This wasused in the World Bank’s World DevelopmentReport 1986 to indicate, among other things,the extent to which developing-country farm-ers were discriminated against not only by theirown governments’ agricultural policies but alsoby those of high-income countries, and theextent to which international food price insta-bility in the 1980s was due to policies thatlowered the transmission of price movementsbetween domestic and international markets(World Bank 1986).

Such sectoral studies suffered from theinherent limitation that they did not include allfarm products and did not capture the effects

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of distortions in other sectors of each econ-omy. The possibility of economy-wide analysisemerged from the pioneering work of Leontiefand others in input-output analysis and linearprogramming and then of Johansen (1960) indeveloping a multisector model of the Norwe-gian economy. That, combined with advancesin computing hardware, led to a revolution incomputable general equilibrium (CGE) mod-eling for policy analysis, not least because suchmodels were admired for their theoretical com-pleteness in linking factor and product marketsfor all sectors of the economy.

The first national government to fund thedevelopment and sustain the routine use ofsuch a CGE model in agricultural and otherpolicy formulation and reform was that ofAustralia (see Dixon et al. 1977). Among thepioneers of CGE modeling in the UnitedStates was Sherman Robinson, who in coop-eration with economists at ERS produced aCGE model specifically for focusing on agri-cultural policy analysis (Robinson 1990;Robin-son, Kilkenny, and Hanson 1990; Kilkenny1991). Robinson later moved to the Interna-tional Food Policy Research Institute and fora decade led a team there that produced manynational CGE models for food and other policyanalyses of various developing countries.

With the inclusion of agriculture high onthe agenda of the GATT’s Uruguay Roundof trade negotiations from its launch in 1986,there was a demand from governments foreconomy-wide analysis of multilateral tradeand subsidy reform. To that end, the Aus-tralian government funded the developmentof a global CGE model (SALTER) in whicha replica of the national ORANI model wasused as the prototype for the other nationaleconomies represented in that global model(Jomini et al. 1991). Tom Hertel’s sabbatical in1990–91 at the University of Melbourne stimu-lated an effort to build a global CGE model(which is open source) and global databaseupon his return to Purdue University. Fromthat humble beginning, he created the GlobalTrade Analysis Project (GTAP) and in partic-ular its model and associated global database(Hertel 1997). That model now has thousandsof users in more than 150 countries, thanksto the training courses offered by Purdue’sGTAP Center over the past fifteen years. Itsdatabase is also used in most other mod-els of the global economy. The fact that theGTAP model was housed in an agriculturaleconomics department, and was heavily usedat the outset for analyzing agricultural policy

reform, meant that it retained a considerabledegree of product disaggregation within theagricultural sector.

Global CGE models have been used forestimating the benefits of trade liberalization,including the removal of domestic farm sup-port that distorts trade flows. They have beenespecially successful in providing ex ante simu-lations of trade negotiations, both regional andmultilateral. Examples include analyses of theUruguay Round at the beginning of its ten-year implementation period (see, e.g., Martinand Winters 1996) and of the WTO’s DohaRound at the time of the Hong Kong Min-isterial Meeting in late 2005 when the mostcomprehensive proposals were being discussed(see, e.g., Anderson and Martin 2006). Thosemodels have also been successfully used topoint out that agricultural policies currentlyaccount for around two-thirds of the cost tothe world of all merchandise trade-distortingpolicies, even though agriculture accounts forless than 7% of global output and trade ingoods and services (Anderson and Martin 2006;Anderson 2009).

Contribution #5: Understanding the PoliticalEconomy of Agricultural Trade

Agricultural trade and its interaction withnational policies is a domain where agricul-tural economists have always been keen toprovide advice to governments, and sometimesthis advice has actually been heeded. At thesame time,the preponderance of political inter-ests in agriculture imposes tight constraintson the extent to which economic reasoningcan determine the choice of policies. Agricul-tural economists have always been aware ofthis tension. For example, Theodor Heidhues(1979) emphasizes that as a wider and grow-ing set of policy objectives is brought intoplay and the role of governments changesas they are torn between domestic concernsand international pressures, the policy choicesbecome more complex. These involve simul-taneous attempts to achieve security of foodsupply, market stability, solutions to domesticadjustment problems,and macroeconomic bal-ance. For Heidhues, the conclusion is that aseconomists we need to understand the realmof politics and to be modest in striving for eco-nomically rational directions for internationaltrade policies.

The understanding of the political contextin which agricultural trade takes place ledeconomists to attempt to model such political

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behavior. Sometimes they used the insights ofpolitical science to assess the strength of lobbygroups, the interplay of political ideas andideologies, and the linkages among seeminglydiverse issues that is common in democracies.Robert Paarlberg, a political scientist, has beena productive contributor to this part of the liter-ature both in conjunction with economists andin his own right. His analysis of the UruguayRound negotiations as a two-level game hasbeen particularly insightful (Paarlberg 1997).At other times economists have used the morehomegrown framework of political economy,the rational behavior of political actors inpursuit of some goal, to understand trade pol-icy.

Rent Seeking in Agricultural Trade

Anne Krueger’s (1974) seminal paper on rent-seeking behavior underlies a considerablebody of empirical work in international agri-cultural trade. In many agricultural settings,significant sums of money are spent by thosewho gain from protectionism to lobby govern-ment for tariff and nontariff barriers to trade.Thus rent seeking is visible and pervasive.

Several studies have made use of the con-cept of rent seeking to explain policy actions.14

Carter and Schmitz (1979) quantified the roleof EU wheat tariffs and suggested that theEuropean Union may have followed a strategyof using optimal welfare tariffs for the better-ment of producers. Rausser (1982) sought toexplain the coexistence of agricultural policiesthat hurt with ones that boost a national econ-omy or even an individual industry. Bredhal,Schmitz, and Hillman (1987) considered bor-der disputes between the United States andMexico in tomatoes. They demonstrated theimpact of both cooperative and competitivepolicy strategies and concluded that the UnitedStates had been pursuing a competitive strat-egy. Later, the United States adopted a coop-erative strategy in the price agreement withMexico in early 2000. Rent-seeking behav-ior continues to be studied by agriculturaleconomists, particularly in the area of tradestrategies and trade conflicts.

14 Studies have also focused on how regulations affect tradeflows and comparative advantage through the eyes of rent-seekingbehavior. For example, Ulrich, Furtan, and Schmitz (1987) showhow a variety-licensing regulation totally stopped the adoption ofa yield-increasing technology that had the potential to increaseeconomic rents flowing to western Canadian farmers by 15–25%.Canadian farmers lost some of their edge in the international wheatmarket due to increased competition from other exporters.

Cross-Country Studies

The 1980s and early 1990s was an active periodin the development of political economy ofagricultural trade policy, particularly in broadcross-country comparisons. Economists drewon emerging general theories of the economicsof politics that were coming out from theUniversity of Chicago and from the publicchoice and collective action schools. Also stim-ulating this research was the arrival of newdata, such as the developing-country datasetassembled by [Krueger, Schiff, and Valdés(1988, 1981) and the high-income and newlyindustrialized economies’ dataset compiled byAnderson and Hayami (1986) as discussedabove.

After the early 1990s, research interest inthe political economy of agricultural policieswaned, but it is beginning to flourish onceagain—and for similar reasons to the first wave,namely, new data and new theoretical develop-ments. In addition to the new World Bank Dis-tortions dataset, there is a new and expandingdataset on some (potential) explanatory vari-ables in the World Bank’s Database of PoliticalInstitutions (Beck et al. 2001 and subsequentupdates).

Applications of these new theories haveaimed at explaining the evolution of distortionsto agricultural incentives, and new economet-ric testing using the recent panel datasets canbe expected over the next decade or so toaddress such questions as:How important havedomestic institutional and political reformsbeen in explaining agricultural and trade pol-icy reforms since the 1980s? What has been thecontribution of changes in international orga-nizations and international trade agreements,including the Uruguay Round Agreement onAgriculture, the establishment of theWTO,EUenlargement, and preferential trading agree-ments such as the North American Free TradeAgreement? And why have countries been sowilling to undertake unilateral reforms andsign preferential trading agreements and yetso unwilling to conclude the WTO’s currentDoha Round of multilateral trade negotia-tions in which agriculture is a major stumblingblock?

Contribution #6: Studying the roles ofinternational institutions

Agricultural trade economists have con-tributed in several ways to our understanding

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of the roles that international institutions canplay and have played in fostering agriculturaltrade. This section focuses on internationalcommodity market management, multilateraltrade negotiations, preferential trade arrange-ments, international organizations, and theemergence of ad hoc institutions to stimulatetrade analysis.

Management of International CommodityMarkets

Recent large swings in commodity prices haverevived interest in what can be done to calmdown global markets for agricultural raw mate-rials. The theme has always attracted the atten-tion of agricultural economists,and their amplecontributions to the literature on internationalcommodity arrangements provide examples ofpractical contributions to the design of interna-tional institutions. One such contribution wasmade by Joseph S. Davis (1942), who focusedon what role there might be, if any, for com-modity agreements in the postwar world, fol-lowing the maxim “In time of war, preparefor peace.” Starting from a set of assumptionson how the world might look once the warwas over, Davis provided a detailed picture ofthe activities through which the U.S. adminis-tration and the British government preparedfor that much hoped for peace period. Pro-vision of food, not the least for the Germanand Austrian peoples, was a central concern,as expressed in the slogan “Food will win thewar and write the peace.” But Davis warnedagainst expectations that restrictive commod-ity agreements might work. He pointed tothe unsatisfactory experiences made with sev-eral past agreements, and concluded that “[b]yand large, they have constituted elements inan increasingly complex system of restrictionson production, international trade, and con-sumption” (p. 400). While not fundamentallyopposed to thinking about what could be doneto make commodity markets work properlyin the interest of the international commu-nity, Davis warned that in practice, “stabi-lization of prices commonly means boostingprices above equilibrium level, not moderat-ing fluctuations around an economic level”(p. 401).

While such warnings by skeptics like Daviswere widely accepted, other economists weremore favorably disposed to bringing someform of policy to bear on international com-modity markets. Commenting on the debatesthat had taken place at the 1943 Hot Springs

Conference on Food and Agriculture, StanleyS. Tsou and John D. Black (1944) stated “threeimportant purposes that may be served byrationally conceived commodity arrangementsof one form or another, namely, securing awider distribution of food and similar products,adjustments in the direction of a better orderedproduction, and the dissipation of chronic sur-pluses. Attaining any of these will at the sametime contribute to better price structures andmore rational price movements”(p. 540). How-ever,Tsou and Black did not have any illusionsregarding the dangers of price manipulation.While considering it desirable to assist read-justment in an industry suffering from“chronicsurplus” production, they warned that “[t]o dothis by raising prices in any one country abovethe export level will rarely be good strategy;and it may be equally dubious strategy, exceptin limited degree, on an international basis. Ifthere are to be subsidies, they should be inthe form of income payments, rather than ofprice supports; and they best take the formof specific aid in shifting production to otherlines” (p. 546). Seemingly “modern” conceptssuch as decoupled payments and adjustmentassistance have apparently been around forsome time.

In the 1960s, commodity issues did indeedbecome the subject of international action,mainly in UNCTAD, but in other fora aswell. In addition to price volatility, an imputedsecular deterioration in the terms of tradefor commodity-exporting developing countries(discussed above) and related concerns regard-ing the distribution of welfare between richand poor countries appeared to many gov-ernments to call for remedies. In addition tocommodity arrangements of the more tradi-tional manifestation, new schemes of compen-satory financing had also been tried. VernonL. Sorenson (1975), however, warned that anyincome transfer to commodity-exporting coun-tries under schemes such as commodity agree-ments “means that the greatest amount of aidor income supplements go to those who sellthe most. This is not necessarily the best wayto redistribute income, either domestically orinternationally” (p. 173). Here again, the par-allel between international and domestic pol-icy conclusions is striking. International com-modity agreements dropped from the tradepolicy agenda after the failure of the UNC-TAD Integrated Programme for Commodi-ties to incorporate any agreement except onefor tin under its administrative and financialumbrella.

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Multilateral Negotiations on Tradein Farm Products

Political factors are, of course, particularlyprevalent when it comes to internationalnegotiations on agricultural trade, be it atthe multilateral, regional, or bilateral level.The ability to combine institutional knowl-edge, a feel for political economy and soundeconomic analysis is one of the objectivesof agricultural economists, and it is particu-larly useful in this domain. While the TokyoRound of GATT negotiations was under wayin 1976, Warley provided a wealth of informa-tion on the nature and implications of agricul-tural policies in rich countries, on approachesto international policy coordination in theGATT and other fora, and on the agricul-tural component of the previous round ofGATT negotiations, i.e., the Kennedy Round(Warley 1976a). He emphasized the closelinks between domestic agricultural policiesand the international agenda and the neg-ative spillovers from agricultural protection-ism to the international economic order over-all. Warley’s invited address to the AAEAof the same year, “Agriculture in Interna-tional Relations,” also firmly placed agricul-tural issues in the wider context of global eco-nomic and foreign policy issues. He pointedlyremarked: “It is a cause for both surprise andconcern that so few agricultural economistshave chosen to make a sustained commitmentto the study of the international dimensionsof national agricultural policy or of interna-tional commodity policy” (p. 827) (Warley1976b).

This criticism certainly did not apply toJames P. Houck, who published an insight-ful explanation of the Toyo Round of GATTtrade talks (Houck 1979) and followed this witha widely used textbook on agricultural trade(Houck 1986). Nor did it apply to Dale E. Hath-away: His 1987 book Agriculture in the GATT:Rewriting the Rules explained the objectivesof the Uruguay Round of GATT negotiationswhich had recently been launched. For the firsttime in the history of multilateral trade nego-tiations, a serious attempt was to be made tocome more effectively to grips with the distor-tions that plagued agricultural trade, by rewrit-ing the GATT rules for agriculture (Hathaway1987). Like Warley and Houck, Hathaway pro-vides ample factual information on the struc-ture and development of agricultural trade intemperate zone products and the policies pur-sued by major nations. He also spelled out the

GATT’s existing rules in agriculture. But thecore of Hathaway’s perspective was that theUruguay Round could achieve a reduction ofsubsidies and import barriers while leavingenough flexibility for national agricultural poli-cies. Interpreting the process and outcome ofthe agricultural negotiations in the UruguayRound, against the background of past GATTnegotiations, Josling, Tangermann, and Warley(1996) showed how fundamental the changewas that the Uruguay Round brought to theGATT’s dealings with agriculture. The difficul-ties now faced by the agricultural negotiationsin the Doha Round mirror the fact that govern-ments know that the teeth generated throughthe Uruguay Round Agreement on Agricul-ture are now expected to bite, and they fearthe pain.15

Understanding Agricultural Trade Issues inRegional Integration

Bilateral or plurilateral trade negotiations aim-ing at preferential treatment within (oftenregional) trading blocs have always hadan ambivalent relation with the multilateralapproach to trade liberalization. Is the posi-tive effect of opening up trade between mem-bers of the trading bloc worth more than thenegative implication of discrimination againstoutsiders? McCalla (1992) addresses regionaltrading blocs and agriculture and looks atthat question. Reviewing a large body of lit-erature on preferential trade, following fromViner’s pioneering work on customs unions,McCalla finds that there is no unequivocalanswer to this question—as in other cases ofsecond-best policies, it all depends on the cir-cumstances. Things become even more compli-cated if one moves from a static to a dynamicview of the world. However, McCalla findssomewhat less ambiguous results in his reviewof numerous empirical studies on the issue,most of which found the positive trade cre-ation effects of preferential arrangements tohave been larger than the negative trade diver-sion implications. As McCalla clearly pointsout, agriculture serves as a notable exception.Trading blocs tend to provide high levels of pro-tection to their agricultural producers,the EU’sCommon Agricultural Policy being the major

15 For a fuller treatment of the contributions of agriculturaleconomists to the area of trade negotiations, see Sumner andTangermann (2006).

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case in point.16 Hence, for countries outsideany of the trading blocs, seeing more and morediscriminatory trading blocs being establishedis not a happy affair, in particular if they haveimportant export interests in agriculture. Forthem, multilateral liberalization remains thepreferred option.

A more optimistic picture is painted byJosling (1993), who focused on the agricul-tural policy dynamics within trading blocs.While agriculture always creates political dif-ficulties in negotiating the establishment, orenlargement, of a trading bloc, once the blocis established, agricultural policies can beginto change. Since many products are relativelyhomogeneous, agricultural commodities lendthemselves easily to arbitrage across membernations of the trading bloc, which tends toundermine the intended functioning of manyinstruments of national agricultural policies inthe bloc’s member countries, for both borderand domestic measures. However, the politi-cal dynamics resulting from common financingand limited parliamentary control may welllead the bloc to develop a more protectionistpolicy than the average of its member countriesmight have had in the absence of a commonpolicy.

Research in International Organizations

While this review has focused on individualcontributions to the literature on agriculturaltrade matters, it would not be complete ifit were to neglect the work done in inter-national organizations, where documents andreports produced are typically attributed to theorganization rather than to individual authors.These organizations include the InternationalMonetary Fund, with a long history of stud-ies on commodity prices, the World Bank, withextensive support for global models and tradeanalysis, and the FAO, with a range of studieson commodity policy and trade. A particu-lar contribution has been the work done onagricultural policies and trade in the OECD.Over the years, and in particular since its 1982Ministerial Trade Mandate, the OECD hasdeveloped a strong and consistent paradigmon the benefits of market-oriented agricultural

16 There is a large body of literature on the EUs Common Agri-cultural Policy, including its effect on both internal and externaltrade. We have chosen not to review that literature here, thoughmany of the problems faced by countries at a multilateral level arealso found at the level of integration of economies in a customsunion.

policy reform and trade liberalization and hasprovided a platform for dialogue among gov-ernments on how to put that paradigm intopolicy practice. One of the strengths of theOECD’s work is that it is based not just onphilosophy, but on hard evidence, generatedthrough a host of quantitative analyses of thenature of existing policies and the implicationsof reforming them. Work done in the OECD,firmly grounded in the premise that govern-ments should be able to pursue their domesticobjectives, but in a way that minimizes inter-national spillovers and trade distortions, hascontributed to promoting among policymakersconcepts such as decoupling and targeting ofagricultural support, in the interest of allow-ing trade to respond as much as possible tomarket forces rather than government inter-vention. The OECD has also helped to dispelthe myth of multifunctionality of agricultureand the related calls for allowing trade policiesto respond to nontrade concerns.

Ad Hoc Institutions and the Reformof Agricultural Trade Policies

It is understood in the political science litera-ture that institutions can arise in an ad hoc wayas groups with similar interests and approachescongregate and share common experiences.An example of such an ad hoc institution (orepistemic community) that has been activein the area of agricultural trade, in theory,analysis, and policy, is the International Agri-culturalTrade Research Consortium (IATRC).Founded in 1980 by six agricultural economists,the membership has since grown to about 200economists from academia, government, andother research institutions in 31 countries, forwhom it serves as a platform for discussingand publicizing their research, advancing thefrontiers of knowledge on agricultural tradeand trade policy, and informing both policyformulation and public debate. Core fundingfor the IATRC has been secured over theyears from the USDA (both the ERS and theForeign Agricultural Service) and from Agri-culture andAgri-food Canada.The IATRC hasplayed an important and effective role in creat-ing an international community of researchersinterested in agricultural trade matters and inovercoming the dearth of work on agricul-tural trade issues in the profession, as earlierbemoaned by Warley. It has also contributedsubstantially—and not the least through itsseries of Commissioned Papers and TradeIssues Papers—to the global pool of knowledge

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on options for, and implications of, interna-tionally agreed disciplines for agricultural andtrade policies. Many of the papers cited in thispresent article first saw the light of day aspresentations at the IATRC.

There have been times when policymakersfaced with choices regarding trade policies inagriculture have turned to economists for anal-ysis and advice. The IATRC has been instru-mental in bringing economists together on atleast two occasions to explore policy choicesand provide an impartial analysis of an issue.These issues included the use of embargoesand various methods of surplus disposal bythe United States and the “rebalancing” ofprotection by the EU among commodities.17

Conclusion and Future Directions

It is clear from this selective survey of the workof agricultural economists on matters relatedto international trade that the issues of the dayact as the driver of demand for professional ser-vices. The theoretical constructs and analyticaltechniques,gleaned largely from the wider pro-fession of international economics, provide thetechnology available; and the supply of studiesis governed by the funding of university andgovernment research. But even though agricul-tural trade economists mainly react to currentissues, they have also contributed incidentallyto the advance of theory and empirical method-ologies used by the international economicsprofession. This has provided an externality oftrade work done by agricultural economics, tothe benefit of the wider study of internationaltrade.18

One obvious but important aspect of thenature of international trade specialists is thatthey work in an arena with professionals from

17 The study “Embargoes, Surplus Disposal, and U.S. Agricul-ture” was commissioned by Congress (USDA/ERS 1986). In asituation of economic stress for U.S. agriculture, resulting fromdepressed markets, the question was asked whether a number ofU.S. agricultural export embargoes beginning in the early 1970swere among the causes, but also whether disposal of surplusesthrough export subsidies might be one of the solutions. The othergroup study,“Disharmonies in EC and USAgricultural Policy Mea-sures” (Koester et al. 1988), was done on behalf of the Commissionof the European Communities, which was looking for an assess-ment of one aspect of its position (its request for “rebalancing”protection levels) in the Uruguay Round negotiations.

18 These theoretical contributions have not been given fullweight in this article. Many of them have involved students andfaculty at the major centers that focus on agricultural trade, includ-ing UC Berkeley, UC Davis, Minnesota, Purdue, Saskatchewan,Guelph, Florida, and a similar number of institutions in Australiaand Europe.

other countries. This adds to research costs butalso broadens the range of contacts and assiststhe spread of ideas: The common apprecia-tion of problems and the sharing of solutionsensures a high payoff globally from such inter-national research. It also ensures that traderesearch is less tied to production patterns thanmany areas of agricultural economics. To besure, export-market development will be ofimportance to individual states (and countries)with export capacity. But beyond the analy-sis of market potential, there is likely to belittle interest in the more systemic aspects oftrade; and research on imports is not likelyto be a high priority for farm states. Thisleads to a system of communication withinthe profession that is less regionally basedand more likely to cross borders. The suc-cess of the IATRC as discussed above hasshown that trade researchers both benefitfrom and contribute to a collective epistemiccommunity.19

Trade research is by its nature data intensive.This has been perhaps the biggest challengethat has faced those wishing to model tradeand trade policy for groups of countries of theworld. The situation is rapidly changing. Largevolumes of comparable and carefully scruti-nized data are now available (most notablythrough GTAP), although there is still a longway to go in terms of improving the qual-ity of data for developing countries. Whilethe partial and general equilibrium modelingcommunity has moved forward by leaps andbounds in the past two decades in terms of pro-viding estimates of the likely economic effectsof agricultural price and trade policies, thereare more than 100 smaller developing coun-tries for which no such models have yet beenbuilt. Even in countries for which models areavailable, their data refer to a base period thatis several years old.

There is still a demand by governments andadvocacy groups for simple indicators that canbe used for up-to-date monitoring of the tradeand welfare effects of farm or trade policies.The estimation of distortions to agriculturalincentives for developing countries needs tobe institutionalized in the way it has for high-income countries at the OECD Secretariat.20

19 The scholars that have used GTAP (G-tappers) also constitutean epistemic community.

20 A promising start has been made to do that for Africa, witha new grant from the Bill and Melinda Gates Foundation to theFAO (in collaboration with the OECD) to update and expand theestimates of historical distortion indicators.

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Better coverage of countries and their policieswill be crucial to improving the understand-ing of the benefits of open trade. The issues ofmeasuring and understanding trade distortionsare far from settled. And, as always, theoreti-cal and analytical advances will be needed toguide the empirical studies.

Emerging Trends and Issues

In this regard several new trends are emergingthat will give agricultural economists adequateemployment for the next few decades.

• There is evidence that developing coun-tries are increasingly providing protectionto the import-competing subsector of theiragricultural sector. This suggests that theswitch from taxing to subsidizing agri-culture relative to other tradable sectorsin the course of economic development,clearly observed in the newly industri-alized countries of East Asia, may bespreading to later-developing countries.Moreover, in both developing and high-income countries, the dispersion of assis-tance rates across industries within thefarm sector has not diminished over time,even though the sectoral average rate ofdistortion has been falling.This means thatthere are still resources wasted as coun-tries support some of their least competi-tive farm industries, thereby contributingto the relatively slow productivity growthof the sector.

• Many trade barriers are hidden amongthe regulatory processes that accompanyinternational commerce. Databases onstandards affecting trade, such as sanitaryand phytosanitary measures and thoseaffecting genetically modified products,are still lacking, and their incorporationinto models is still at an early stage. Coop-eration among agencies and institutions inthis area needs to be expanded.

• Significant challenges face the trade mod-elers in representing the new reality ofworld trade. Global economy-wide simu-lation models need to capture the vary-ing extent of imperfection in competitionalong the food value chain as concentra-tion increases in farm input supplies, pro-cessing, and supermarket retailing. Moreattention is needed to the activities ofmultinational agricultural firms, includingthe significance of patent arrangements

that might restrict trade and the purchaseof farmland abroad.

• Account needs to be taken of consumerconcerns for food quality, food safety,and the environment, especially for high-income countries. Environmental con-cerns affecting such things as the disposalof packaging or the carbon footprint asso-ciated with transport of goods need to becarefully modeled. Increasing numbers ofconsumers wish to know how products areproduced on-farm and processed, so asto assess whether they are causing envi-ronmental damage, given that many envi-ronmental externalities are not correctlypriced.

• The continuing preference of someconsumers to avoid foods containinggenetically modified organisms (GMOs)remains a challenge to agricultural tradeeconomists. This consumer concern hasalready led to significant governmentbarriers to trade based on productionprocesses, and to constraints on domesticproduction. Now that traceability infor-mation along with other attributes canbe stored on barcodes, those concernscan get reflected in the demands thelarge supermarket chains place on theirsuppliers.

• Biofuels policy has added another dimen-sion to the equation of how crude oilprices influence food prices. With new bio-fuel technologies coming on stream overthe coming decades, thereby lowering thethreshold price of crude oil at which foodprices become linked to it, the speed ofthat development will be faster and gov-ernments will continue to subsidize andmandate the use of biofuels. Will this leadto further trade tensions?Are we incorpo-rating the demand for biofuels adequatelyin trade models?

• Finally, much more attention will beneeded in the coming decades to the tradeeffects of climate change mitigation poli-cies, as well as to the benefits that tradeoffers as part of the process of adapta-tion. A first step will be to improve andmake publicly available the necessary dataand projections on the impacts of cli-mate change and of possible endogenouspolicy and technological innovations onagricultural production. It would includean analysis of water markets so as tobe able to explore the combined effectsof water policies and climate change on

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the aggregate level and location aroundthe world of production of various farmproducts. Modelers are beginning to movein this direction, but a great deal moreresearch is needed.

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