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The causes of trade imbalances

The globalisation of the food trade

Not only did the industrial revolution mean that there were new tools for food production, but it created faster methods of transport. This meant a great expansion of international trade.

Food trade has grown considerably in the past 40 years. To take trade in cereal products as an example, industrialised countries have tripled their exports while exports from the poorest countries have dropped by 40% from 2.8 million tonnes to 1.6 million tonnes. (see figure 9):

Oxfam has calculated that if Third World countries could increase their share of world exports by only 1 per cent, the income they would earn could relieve poverty for 128 million people.

FAO statistics show that poor Third World countries have increased their imports of cereal products at a far greater rate than Western countries. Imports of cereal products to the West have more than doubled, while the increase of imports into poor countries has been 8-fold from two million tonnes to nearly 17 million tonnes.(see figure 10):

Both protectionism and liberalisation can lead to inequity in the trade between rich and poor countries.

Figure 9 (Source FAO database)

Protectionism is the attempt to shield producers from price competition. This is usually introduced during an industry downturn or during a widespread depression. For example, during the worldwide depression of the 1930’s, the UK abandoned free trade and introduced tariffs to create greater economic independence. The United States likewise began restricting trade and applied selective tariffs.

Today, subsidies are used by the governments of some developed countries to protect their own farmers. They give financial assistance and the farmers can then afford to sell goods for less. Food exporters can then lower the price on the international market, which can then lead to what is known as dumping. In turn, this can lead to economic ruin and unemployment in less developed countries that cannot compete with the lower prices. For example, in 2002 the Bush government signed a farm bill that will raise subsidies to 80% per year over ten years. There is concern that this will lead to overproduction and more dumping of U.S. produce on the world market. So far, export earnings by corn growers in Mexico and cotton farmers in some West African countries have suffered from cheap U.S. products. The loss of income from exports directly affects the country’s ability to repay its debts to the International Monetary Fund (IMF) and other institutions.

In the developed economies of the West, the cost of agricultural subsidies is estimated in several billions. Currently the European Community spends £2.26 billion (US $3.7 billion} per year on subsidies to its farmers. Between 1995 and 2002 the U.S. Department of Agriculture spent a grand total of US $114 billion subsidising both farmers and agricultural companies.

Figure 10 (Source FAO database)

The General Agreement on Tariffs and Trade (GATT) was formulated by the UN in the 1940’s. For many years this was the prime instrument for regulating world trade but the GATT did not include a formal agreement on agriculture. In 1995, the World Trade Organisation (WTO) succeeded the GATT. The WTO is still working towards an Agreement on Agriculture which is due to be completed by 2005. The WTO does not prohibit dumping but countries can take measures to protect themselves by applying import duties to raise the price or by agreeing that future imports will be at a certain minimum price. It does allow some subsidies but not to the extent that they distort trade. WTO operates on the principle that all trade partners should be treated equally but more recently has made some concessions to poorer countries: industrialised countries are to reduce their tariffs and subsidies while developing countries will be allowed more time to do so. The poorest, i.e. least developed countries, will not be required to do so at all.

Trade liberalisation is where countries open their markets by removing or lowering import tariffs and removing local subsidies. At times, this has been imposed on less developed countries by the IMF as a condition for a loan. For example, in the mid-1990’s Haiti was obliged to open its rice market to imports and the resulting flood of cheap U.S. rice led to Haitian rice farmers going out of business.

Globalisation in agricultural trade has led to the development of agribusiness, where the aim is to produce as much food for as low a cost as possible, with little regard for the environment. Agribusiness uses large-scale plantation crops or monocultures in order to maximise economic efficiency. In order to be low cost, very large tracts of land are used which affects the amount of land available for small farmers. The small farmers are often forced to farm on marginal land with poor soils and nutrients. Both the agribusiness ventures and the small farmers in some countries have cut down forests and cleared the land, creating soil erosion and near-desert conditions. The cattle industry, in particular, uses large amounts of land not only for grazing but for the production of cattle feed. A good example of this is Brazil.

Another effect of the globalisation of food trade is the use of fossil fuels in transportation and the resulting environmental impact. For example, the environmental benefits of growing organically produced food are negated if that product is transported around the world for thousands of miles.

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