Agribusiness Review - Vol. 7 - 1999 -
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International Developments and Sustainable Agriculture in Australia
Randy Stringer and Kym Anderson *
* The authors are grateful for helpful comments from the editors and referees and for financial support from the Land and Water Research and Development Corporation as well as ACIAR and ARC.
Key words: Sustainable agriculture, trade policy, WTO, environment, Australia
These long-term trends in agricultural expansion, intensification and specialisation have brought about extensive changes in the use of natural resources and environmental goods and services. While crop productivity growth has been sustained by ever-more intensive land use practices, by-products have been soil structure decline, wind and water erosion, and increased levels of soil salinity and acidity. A recent Prime Ministerial statement values Australia’s annual land degradation alone at $1.5 billion, or 6 percent of the value of agricultural production1. Dairy and beef activities (especially cattle feedlots in the Murray-Darling Basin) are becoming more intensive and more dependent on purchased feeds, causing waste disposal and contamination problems. Pork, chicken and egg production are even more like industrial activities, using little farmland directly but very dependent on purchased feeds and also producing waste disposal and contamination problems.
For years, domestic policies inducing Australia’s agricultural transformation were guided by socioeconomic objectives that seldom included explicit valuation of the environment, much less the concept of ecologically sustainable agriculture. Growth in production, enhanced producer income, stable prices for producers and consumers, and increased net exports of agricultural products tended to be the dominant objectives of farm policy in Australia. Policy instruments used to achieve these objectives included generous tax concessions for land clearing, publicly-funded capital works to expand irrigation, and large fertilizer price subsidies (Williams, 1990, especially Chs. 11 and 12).
During the past decade or so, however, increasing international economic integration and heightened environmental concerns abroad, as well as changing attitudes at home, have forced Australian farmers and policymakers to rethink the role agriculture can play in the economy and society and environment. For example, following the publication of the Brundtland Report in 1987 (World Commission, 1987), the principle of sustainable development gradually became a guiding principle for Australian agriculture. Agriculture is broadening its role beyond increasing productivity, expanding export earnings and enhancing rural incomes to include also evolving concepts of managing ecological processes and protecting environmental resources. In this, it is being accompanied by similar trends in other OECD countries and, increasingly, in middle-income countries as well.
This increasing emphasis on sustainability presents today’s farmers and agricultural policymakers with a set of new opportunities but also with some policy challenges. The latter include: how to amend appropriate market incentives, institutional structures and regulatory systems so that they not only are compatible with ecologically sustainable agricultural development locally and nationally but also are able to meet standards agreed to internationally; and how to promote public and private research efforts in ways that encourage the adoption of sustainable technologies and management systems in the light of these changing norms.
To address these tasks, producers, suppliers, processors, marketing bodies, industry associations, and governments need answers to two questions. First, what are the implications for the sustainability of Australian agriculture of international trade agreements? And second, what impact will recent or prospective international agreements with environmental and health provisions, and unilateral changes to environmental policies, have on Australian agriculture? These questions are considered in turn in the following sections.
2. Global economic growth, trade
agreements, and Australian agriculture
One reason countries are seeking outward-oriented development strategies and common policy reforms is to take full advantage of international economic integration possibilities. OECD countries, for example, are attempting to cut taxes, shrink public services, decentralise administrative functions, and balance budgets. Developing countries are decentralising public agencies, liberalizing domestic markets and pursuing macroeconomic stability, while transition countries are introducing market-oriented economies and privatizing state enterprises. A key aspect of reforms has been trade liberalization. The commitments made under the Uruguay Round and APEC umbrellas in particular are having very significant impacts on Asian-Pacific and global economies (Anderson et al., 1997a, b).
These trade and other policy reforms have important implications for Australia’s overwhelmingly export-oriented agricultural sector. On average, the sector exports more than two-thirds of its value of production each year -- accounting still for between one-fifth and one-quarter of all goods and services exports from Australia despite the more-rapid growth of non-farm exports in recent years. This dependence on exports means farmers are well aware that their competitiveness in international markets depends not only on Australia’s natural comparative advantage but also on policies at home and abroad, both farm and non-farm. In recent decades, few external events influenced Australian agriculture more than the farm price support provided under the European Community’s Common Agricultural Policy (BAE, 1985; Tyers and Anderson, 1992). European protectionism, plus the replacement of Commonwealth preferential trade treatment towards Australian farm exports by ever-higher EC agricultural trade barriers, help explain the reduction in Australian farm exports to Europe since the early 1970s.
Agricultural protectionism in industrial countries is a factor contributing significantly to the decline in the international price for farm relative to manufactured goods, and the fluctuation around that downward trend. Surplus production generated by these protectionist countries has been sold on world markets with the help of export subsidies, including in North America from the mid-1980s in retaliation for EC farm export subsidies. As a result, Australia has suffered doubly: from denial of access to markets in protectionist and subsidizing countries, and from lower and more volatile prices in the residual international market (Tyers and Anderson, 1992).
Recently, the long-run trend in this type of protectionism has been slowed, and in some cases reversed. Among the pressures forcing reductions in production and export subsidies are the Agricultural Agreement of the Uruguay Round of multilateral trade negotiations and a growing recognition of the linkage between agricultural subsidies and environmentally-harmful agricultural practices. There are signs, however, that farm subsidies may reappear in new forms. For instance, a European Union Council Regulation (No. 2078/92) allows certain environmental subsidies to agriculture, including subsidies to reduce the use of fertiliser and plant health products, to promote environmentally-sound production methods, to encourage extensive agricultural techniques, to maintain practices that are already compatible with the environment, and to assist organic farming. More recently, attempts have been made to justify calls for farmer assistance on grounds that agriculture has 'multifunctional' roles in addition to producing farm products (Anderson, 1998).
Accelerating international integration and growing global concerns about resource depletion and environmental degradation are bringing greater scrutiny of domestic agricultural policies and practices. Negotiations of multilateral trade and environmental agreements call for establishing international standards and harmonizing environmental policies that affect competitiveness in the international marketplace. A similar process has occurred within countries in the course of economic development: numerous local, state or provincial policies/standards have gradually been replaced by national standards and conformance assessment (National Research Council, 1995).
The aim of such harmonization is not just to reduce administrative and conformance costs; it is also motivated by concerns in high-standards regions that costs of production are higher in their region than in regions with lower environmental standards, causing them to be less competitive. These differences become ever-more important as traditional barriers to trade and investment between regions fall (eg. transport and communication costs and import tariffs).
Before focusing on how pressures for environmental policy measures will impact on Australia’s farm sector, it is useful to have a picture of the order of magnitude of changes that can be expected to influence the sector over the next decade as a result of on-going economic growth (at very different rates in different regions), of Uruguay Round implementation (without and with China and Taiwan joining the WTO), and of APEC-inspired additional trade liberalization (without and with the inclusion of agricultural policy reforms).
Australian producers spent a decade eyeing the Uruguay Round of multilateral trade negotiations, wondering how their international competitiveness would be affected. The negotiations represented an historical breakthrough for agriculture in the sense of being included high on the GATT agenda for the first time. That provided hope for at least some future progress towards greater market liberalization and reduced domestic support in agriculture through providing a framework for more discipline, stability and transparency in agricultural trade.
The GATT agreement on agriculture, to be implemented mostly between 1995 and 2000 2, has three main components: reduction in farm export subsidies, increases in import market access, and cuts in domestic producer subsidies. The fact that farm export subsidies are still tolerated continues to distinguish agricultural from industrial goods in the GATT, a distinction that stems from the 1950s when the United States insisted on a waiver for agriculture in the prohibition of export subsidies. Moreover, even by the end of this decade farm export subsidies must be only about one-fifth lower than they were in the late 1980s to comply with the agreement f.
A second distinguishing feature of the agricultural agreement is that it requires nontariff import barriers to be converted to tariffs, which are then to be reduced and bound. However, the extent of tariff reduction in bound tariffs by the end of the century is even more modest than for export subsidies for two reasons: the unweighted average tariff cut must be 36 per cent, but could be less than one sixth as a weighted average due to each tariff item needing to be reduced by only 15 per cent of the claimed 1986-88 tariff equivalents. And second, the claimed 1986-88 tariff equivalents were well above actual restrictions "dirty tariffication", so tariff bindings are in many cases far exceed applied rates and so will not "bite" during the implementation period.
Countries with import restrictions have agreed also to provide a minimum market access opportunity, such that the share of imports in domestic consumption for products subject to import restrictions rises to 5 per cent by the year 2000 under a tariff quota (less in the case of developing countries; 8 per cent in the case of rice in Japan in lieu of tariffication). But access is subject to special safeguard provisions, so that it only offers potential rather than actual access. Furthermore, it formally introduces scope for discrimination in the allocation between countries of these tariff quotas, and tends to legitimize a role for state trading agencies such as BULOG in Indonesia.
In terms of domestic producer subsidies, the Agricultural Agreement calls for the aggregate level of domestic support for farmers to be reduced to four-fifths of its 1986-88 level by the turn of the century. This too requires only modest reform in most OECD countries because much of that decline in support has already occurred. Moreover, many forms of support need not be included in the calculation of the aggregate measure of support, the most important being direct payments under production-limiting programs of the sort adopted by the US and EU. The use of such instruments, including environmental provisions, is likely to now spread to other countries and commodities as farm income support via trade measures become less of an option.
What are likely to be the net effects of these provisions and all the other agreements signed at the end of the Uruguay Round in April 1994? Since those agreements are to be phased in over a ten-year period, the only sensible way to answer that question is to have access to an empirical model of the world economy projected to 2005 without the Uruguay Round, and to compare that with a version of the model with the Round fully implemented. Such a study is reported in Anderson et al. (1997a,b). It assumes no changes in the things discussed in subsequent sections though (mutilateral environmental agreements, quarantine restrictions, or unilateral environmental policies), and so provides a base scenario for that later discussion. The study suggests the world economy by 2005 would be better off by $180 billion per year (in 1992 US dollars) because of the Round, or $230 billion if China and Taiwan join the World Trade Organization during that period. Economic welfare in Australia and New Zealand (hereafter ANZ -- the two are not separated in the study) is estimated to be $2 billion better off per year ( and 10 per cent more with China and Taiwan in the WTO), with their trade volume up 8 per cent. Net farm exports alone from ANZ are projected to be more than $3 billion larger per year because of the Round.
Without the Uruguay Round the share of agriculture in ANZ’s GDP is projected to fall 6 per cent over the next decade, but with the Round implemented its decline is expected to be negligible because of expanded agricultural and food export opportunities. Compared with 1992, those exports net of imports are expected to be $11 billion greater in 2005 in real terms, as are mining exports. That represents a proportionately greater rise for farm products (more than 50 per cent) than for other primary products or services (net exports of which are projected to be up $2 billion; the rise in manufactured net imports of $24 billion accounts for the rest, given the model’s assumed constraint of no change in the overall trade balance.) Of that $11 billion rise in net farm exports, $3 billion is due to the Uruguay Round and the rest to overall economic growth.
What impact would further liberalization in the APEC region make over the next decade? The answer depends heavily on whether or not agriculture is included in the move towards APEC free trade. If it is, and if APEC economies have halved their remaining post-Uruguay Round trade restrictions by 2005 in their drive towards free trade in the region by 2010 for developed economies and 2020 for developing economies, Anderson et al. (1997b) project world trade in agricultural products to be one-sixth greater in 2005 than it would be following full implementation of the Uruguay Round. On the other hand, if agriculture is not part of the APEC reform – as some East Asian economies are hoping – then world farm trade would be only 2 per cent greater and so Australian farmers would get much less joy from the APEC initiative.
In short, the relative decline in the importance of agriculture in the Australian economy could well be slowed over the next decade as the Uruguay Round is fully implemented, and even moreso if the APEC free trade initiative is taken up and includes reform of food markets -- and if a new 'Millennium Round' of WTO-sponsored negotiations succeed in lowering agricultural protection further (Anderson, 1999). While this is good news for Australian farmers, it is not the only set of international pressures affecting their future prospects 4. We turn now to some other influences that have to do with the environment and food, animal and plant safety.
international agreements affecting Australian agriculture
The Sanitary and Phytosanitary (SPS) Agreement of the Uruguay Round and international conventions on biological diversity, forestry, desertification and climate change are all examples of external events that will have far-reaching implications both direct and indirect for Australia’s agricultural sector for decades to come. For example, the climate change negotiations at Kyoto has led to carbon reduction initiatives being introduced or strengthened in many countries. This will have significant economic consequences, including for Australian agriculture. ABARE estimates that a domestic carbon tax aimed at achieving a 20 per cent reduction in greenhouse gas emissions from Australia’s broadacre agriculture would on its own reduce annual farm net incomes by 36 percent (Phipps and Hall, 1994). This is a partial result though; a complete assessment needs to take into account the impact of higher carbon taxes on all sectors and in all countries, as in recent studies by, for example, ABARE (1997b).
Australia's state and federal legislation and policy interventions to restrict environmentally-damaging agricultural practices have been growing in number and severity since the mid-1980s. This increase is largely a reflection of evolving environmental values in society, but it is also a consequence of greater scientific understanding globally of agricultural pollution and resource degradation. Australian policymakers must now answer to the growing power of international and national consumers, environmentalists and taxpayers whose converging interests in sustainable development incorporate desires for healthy food and water, for habitat protection, for rural landscape preservation and for preserving the diversity of our flora and fauna.
Several aspects of international agreements are likely to be of importance to farm incomes. One has to do with the environmental provisions contained in some trade agreements. Another has to do with the trade provisions in several international environmental agreements. Yet another has to do with the related attempts to harmonize various technical standards. And of particular importance is the Codex Alimentarius, especially as it is impacting on quarantine import restrictions as interpreted by the World Trade Organization’s (WTO) dispute settlement mechanism. Each of these is considered in turn.
trade agreements with environmental
It was one year before the publication of the Our Common Future, and well before the current build-up of international attention on sustainable development, that the Uruguay Round agenda was established (in 1986). Thus, trade and environment did not form a separate agenda item for negotiation, nor was an environmental impact assessment undertaken for the package of Uruguay Round agreements. But, at the signing of the aggreements in 1994, Ministers included a decision to establish a WTO Committee on Trade and Environment. This Committee’s tasks are to "identify the relationship between trade measures and environmental measures in order to promote sustainable development" and to "make appropriate recommendations on whether any modification of the provisions of the multilateral trading system are required, compatible with the open, equitable and non-discriminatory nature of the system." It is also significant that the Preamble to the agreement establishing the WTO describes part of its objective as:
Several recent events illustrate how Australian agriculture is affected by the entwining of trade and sustainable development issues. First, in 1992 the United Nations Conference on Environment and Development (UNCED) outlined a work program on trade and environment in Chapter 2 of Agenda 21 which was picked up by several agencies in which Australia is an active participant. The international organizations involved include the OECD, UNCTAD, and UNEP in addition to the WTO. For example, in 1993 OECD countries agreed on a set of Trade and Environment Guidelines with the aim of encouraging member governments to work towards establishing national trade and environmental policies that are more compatible and supportive of each other. A year or so later, OECD Ministers endorsed a major report on trade and environment intended to contribute to ongoing WTO discussions (OECD, 1994). That report included sector specific studies, including a report on the environmental effects of trade in agriculture by Runge (1994). It was followed in 1995 by a report specifically on sustainable agriculture (OECD, 1995). The OECD 1993 Guidelines and a summary of its 1995 Report are provided by the Council for International Business Affairs (CIBA, 1995).
Second, in 1993 Canada, Mexico and the United States signed an environmental side agreement to the North American Free Trade Agreement (NAFTA). This side agreement represents a significant international precedent, not only for NAFTA members but for the world community as a whole. This precedent, together with the fact that the agreement among OECD countries to subject trade policies and trade agreements to environmental review, suggests that future trade reforms by NAFTA countries are likely to require some type of policy mechanism by which growing environmental concerns can be managed. It also raises the spectre of trade reviews of multilateral environmental agreements.
Third, while multilaterally agreed trade liberalization makes it increasingly difficult for countries to protect their agricultural sectors overtly via import tariffs and production and export subsidies, it makes it increasingly tempting to use nontariff trade barriers. Environmental, plant, animal, food safety and health standards, in particular, can in fact be "captured" by protectionists to become nontariff trade barriers that are complex, illusive and difficult to challenge. For this reason, the WTO expresses a strong preference for international standards, especially in relation to food, health and environmental concerns, so as to minimize the potential for countries to develop national standards for use as nontariff barriers. Similarly, regional trade agreements and international environmental agreements have tended to encourage and sanction the use of international standards.
The Uruguay Round established new guidelines and principles governing sanitary (human and animal health) and phytosanitary (plant health) standards with an Agreement on the Application of Sanitary and Phytosanitary Measures (the SPS Agreement); and for governing non-tariff technical barriers with a revised Agreement on Technical Barriers to Trade (the TBT Agreement), previously known as the Standards Code. The revised TBT Agreement and the new SBS Agreement require international standards to be used as the basis for national standards when international standards exist. In particular, the SPS Agreement designates the food standards set out in Codex Alimentarius (Food Code) as the international standard to be applied to food safety.
The SPS Agreement establishes clear and detailed rights and obligations for environmental health and food safety issues, as well as measures to prevent the spread of pests or diseases among animals and plants. It outlines procedures for product inspection, treatment and processing, risk assessment and allowable maximum levels of pesticide residues and certain food additives. The TBT and SPS Agreements require the use of international standards over national standards when relevant international standards exit. The two Agreements also adhere to the principles of: non-discrimination against imported products; transparency in the development and implementation of standards; acceptance of equivalent technical standards of other countries; special and differential treatment for developing countries; and scientific justification as the basis for standards. The SPS Agreement further requires that scientific justification be based on risk assessment procedures and, where available, the risk assessment procedures developed by international organizations must be taken into account (Nairn et. al., 1996).
WTO members may establish measures which result in a higher level of protection than the relevant international standards only with appropriate scientific justification. This allows governments to challenge another country’s food safety requirements based on evidence showing the measure is not justified scientifically. Canada, for instance, recently successfully challenged Australia’s justification for sanitary measures banning salmon imports (WTO 1998). And the US has successfully challenged the EU over its ban on imports of beef that may have been subjected to growth hormones. In the latter case, the WTO’s Dispute Settlement mechanism called scientific witnesses for the first time. This is not to say that quarantine/SPS measures will no longer be used as a covert way to assist import-competing producers (James and Anderson, 1998), but it will discourage the most excessive abuses.
The TBT Agreement permits technical standards to affect trade only to the extent that they are the least trade-restrictive measures necessary to fulfil a "legitimate objective." Protecting human health and safety, animal and plant health, and the environment are all considered legitimate objectives.
environmental agreements with trade
Over time, international agreements to protect the environment have become increasingly specific, outlining detailed strategies and procedures, establishing measurable objectives and common standards, and setting dates by which signatories must comply. Compliance often requires raising production or processing costs through changes in national legislation, state and local regulations, tax policy or regulatory systems. For Australian agricultural producers, concerns over environmental agreements are analogous to concerns over domestic standards and environmental controls that influence production costs, shift relative factor prices, and, thereby affect short-term competitiveness.
This proliferation of multilateral environmental agreements (MEAs) raises questions about the legal relationship between them and existing and future national obligations in WTO and in regional integration agreements. Specifically, trade policy is being called upon to help achieve environmental objectives, either as a carrot to entice countries to sign or as a stick to ensure they abide by their obligations under a MEA when the free-rider problem arises.
One of the more obvious ways to reduce free-rider problems is to include trade provisions in MEAs, as was done in the 1987 Montreal Protocol on reducing the use of CFCs and halon to slow ozone depletion. To date, no GATT contracting party has formally objected to that particular use of trade policy. Nor has any of them objected to the ban on trade in ivory, rhino horn and tiger products that are part of the Convention on International Trade in Endangered Species (CITES). Conflicts may well arise in the future, however, if trade provisions are drafted into more contentious multilateral environmental agreements. That is why this matter figures prominently on the agenda of the new WTO Committee on Trade and Environment. Discussion on trade provisions and multilateral environmental agreements in the GATT/WTO have centred on the idea of providing waivers on a case-by-case basis. More recently, the idea of providing an "environmental window" for multilateral environmental agreements within the GATT exceptions clause (Article XX) has also been advanced by environmentalists -- and strongly rejected by supporters of the rules-based multilateral trading system (Anderson, 1997).
This expanding intersection of trade and environmental agreements points to other questions of importance for Australian agriculture. How are non-parties to treaties affected? How are new international agreements balanced with existing agreements? Which international organizations or body of international law should have authority over conflicts? Questions such as these are leading to calls by some environmentalists for a world environment organization to set rules, incorporate existing international agreements and negotiate new ones, monitor compliance and settle disputes over environmental policies -- in the same way that the GATT/WTO has presided over trade rules and policies for the past five decades (Esty, 1994).
Etsy argues that one advantage of a world environment organization is that it could redirect environmentalists’ attention away from the use of trade measures and toward the implementation of more appropriate policy instruments for achieving environmental objectives. It is claimed this approach could allow both sets of policies to contribute, in more effective and mutually supportive ways, to the common goals of sustainable development and improvement in the quality of life. Such an organization is not likely to form in the foreseeable future, however, given the trend towards smaller government spending, especially on international agencies.
national environmental standards
Reaching agreement on those standards is not easy though. On the one hand, by agreeing to an international food safety standard lower than the previous national standard, food-importing nations give up the ability to use domestic standards as a protectionist measure. Governments of food-exporting countries, on the other hand, may be reluctant to harmonize their standards upwards to an international norm when the costs, which fall narrowly on export producers, may exceed the national benefits to domestic consumers – unless a sufficient premium can be earnt abroad for compliance with the higher standard.
Environmental interest groups are divided in their views on harmonization. Some environmental groups mistrust harmonization since it may lower domestic standards. Other environmental groups perceive harmonization as a means of raising standards both at home and abroad. Developing countries often view it simply as another way for wealthier countries to impose high standards on poor consumers not yet able to afford that luxury, and/or to limit their producers’ competitiveness in rich-country markets.
In general, economists view harmonization of environmental policies as inconsistent with market efficiency objectives. Differences in country-level environmental standards reflect legitimate differences in tastes and preferences for environmental quality, in attitudes towards environmental risks, and in assimilative capacities (Siebert, 1985). Harmonization entails compromises that may or may not improve overall national economic and social welfare. The likely outcome from harmonizing emissions standards, for example, is that some countries produce an inefficiently large amount of pollution, while other countries produce an inefficiently small amount. The optimal market solution is to allow each country to create incentives to reduce damage at least to the level where the marginal cost of pollution reduction is equal to the marginal cost of damage caused. Since the willingness to pay for environmental quality is a function of income, and since assimilative capacities vary across and within countries, harmonization typically will not be the optimal policy for achieving socially efficient levels of environmental quality.
Ruttan (1971) equates environmental quality to a superior good to explain why national preferences for private versus public goods consumption is a key factor influencing production, consumption and trade patterns:
Recent empirical research confirms at least part of Ruttan’s statement. While economic growth involves increased pollution associated with production and consumption, rising per capita incomes mean (1) society demands more environmental quality, and (2) more income is available to protect environmental services (World Bank, 1992; Seldon and Song, 1994; Grossman and Krueger, 1995; and Hettige, et. al. 1998). This does not imply, however, that lower-income countries desire environmental quality less or have a low income elasticity of demand for environmental amenities, nor that income elasticity rises inexorably with income. But it is consistent with the fact that people in relatively wealthy countries have greater capacity to pay for more of everything, including higher environmental quality (Anderson, 1992).
Australia actively participates in international organizations which promote minimum but not excessive national environmental standards. It supports, for example, the WTO’s TBT and SPS Agreements, which state that "environmental product standards should be based on international standards to reduce the possibility of standards acting as protectionist measures."
Australia also supports the OECD’s effort to encourage member countries to pursue common policy approaches to sustainable development. It also supports the OECD’s harmonization activities related to agriculture focus on production and processing methods, product life-cycle management and, packaging and labelling regulations. The OECD harmonization program involves four activities: (1) review, registration or approval, including testing requirements; (2) mutual recognition of other countries’ legally manufactured products, which may extend to labelling; (3) "accepted equivalence" of two countries’ standards or technical "pre-market harmonisation" of administrative procedures for regulations, including environmental conditions; and (4) international standards achieved through multilateral agencies seeking acceptable standards for products or processes (eg., the WTO, which encourages the use of Codex Alimentarius for international food safety standards).
The three categories of harmonization with special significance for Australian agriculture are: product standards (food safety, ecolabelling, and regulatory processes for agricultural chemicals); production and processing methods (PPMs, including environmental control technology, harvesting methods, and certification requirements); and environmental performance standards (water, soil and species protection).
For example, international food product standards set limits on concentrations of additives, contaminants and pesticide residues in food. Agricultural and food chemical use in Australia is low by OECD standards, but ABS data indicate producers use 2,500 types of farm chemicals and 2,000 animal health products containing some 400 active ingredients to control 5,000 significant pests. Australian producers treat some 15 million hectares of land with herbicides, 3 million hectares with insecticides, and close to 1 million hectares with fungicides. Estimates of annual net productivity gains attributed to farm chemical use range from $2.5 billion to $5 billion (ABS, 1996).
Incidents involving residues in Australian beef highlight the economic consequences of trade-related food residue problems. For instance, in 1987 a ban on beef exports to the United States was avoided only after intensive cattle lot testing was introduced in response to organochlorine residues discovered in Australian beef. The testing procedures alone cost the cattle industry an estimated $50 million (Hill et. al, 1997). Other incidences include sulphonamides found in Australian veal exported to the United States in 1990; penicillin in Australian beef exported to Canada in 1991; organochlorines, organophosphates, synthetic pyrethroids, hormone growth promotants and antibacterials found in various export markets; and, the more widely know case of chlorfluazuron residues found in Australian beef in NSW in 1994.
Another example is cadmium residues in sheep meat. A large part of Australia’s sheep grazing areas are phosphate-deficient, but the superphosphate fertilizers to offset that contain cadmium. Australia’s maximum permissible level of cadmium in fertilizer is 350 milligrams per kg of phosphorus, while some European countries have much lower permissible levels (for instance, Sweden’s maximum level is 50 milligrams per kg – CIBA, 1995). Efforts to harmonize cadmium levels in fertilizers, or to phase out trade in goods containing cadmium, could have a significant impact on Australian livestock producers dependent on superphosphate fertilizers for their pastures.
Harmonizing PPMs has become another especially contentious issue for trade and environmental negotiators. In the past, trade rules disallowed countries from restricting imports of products because of how they are alleged to be produced. Environmentalists contest this approach, claiming that many production and processing methods cause severe environmental degradation. The famous case of tuna illustrate the complexities that can be involved. The US banned its fisheries from using tuna fishing practices which inadvertently catch and kill dolphin. Following that ban, Mexican fishing fleets expanded their tuna fishing in the same waters and exported tuna to the US. Dolphin lovers in the US demanded a ban on imports of tuna from Mexico and other countries that maintained fishing practices that killed dolphins. Even though only some of that imported tuna may have been caught in dolphin-unfriendly nets, all tuna imports were banned because their was no way of distinguishing the acceptable from the unacceptable. A GATT dispute settlement panel ruled the import ban illegal under existing trade agreements between the US and Mexico and a more-efficient solution has now been found: Mexican fishing techniques are monitored, and those catching tuna using dolphin friendly practices can label their cans accordingly, allowing US consumers to boycott cans without such a label if they so wish.
To contribute to this debate, the OECD established a research project on trade and environmental implications of PPMs. It attempted to identify the circumstances under which governments should restrict trade based on PPMs, what the appropriate restrictions should be given potential environmental and trade impacts, and what disciplines need to apply (OECD, 1994; Robertson, 1995).
The FAO also has produced two recent reports to address the growing importance of PPMs for agricultural trade and sustainable development. First, it developed a manual on quantitative assessment methodology of production-related environmental impacts (FAO, 1994). Second, it completed a series of studies on how PPMs relate to production and trade in basic foods (FAO, 1996) 5. These reports apply a life-cycle approach to assess environmental impacts of sequential stages of production and processing, and then assess the cost and trade consequences of environmental regulations. Of particular importance to Australia is the section on grains and livestock interactions. It concludes that harmonization of environmental regulations affecting grain production is likely to occur very slowly, beginning with the WTO’s SPS Agreement. It also suggests that the harmonization of PPMs for grains is more likely to raise environmental standards to a higher level than prevail currently in most countries. Overall, Australia’s existing high standards and practices suggest it is well positioned to take advantage of efforts to harmonize environmental standards upwards, since that is likely to raise the production costs of competitors relative to their own (Stringer and Anderson, 1999).
Alimentarius and the WTO’s SPS Agreement
Over time, the nature of food safety issues has evolved from broad commodity-based concerns (contamination, spoilage and adulteration) to establishing "horizontal" standards which apply across a range of commodities, such as maximum limits for pesticide residues and organically grown food standards (Campbell, 1994; Mahe and Ortalo-Magne, 1998; Henson, 1998). The CAC is increasingly occupied with establishing health and safety standards for food additives, pesticides, animal drug residues, contaminants and naturally occurring toxicants.
In addition to establishing labelling standards for food and nutrition, Codex has recently established food hygiene codes related to production and harvesting methods, processing facilities, personal hygiene, and hygienic processing requirements. The criteria to ensure controls are based on limits or characteristics which may be physical (time or temperature), chemical or biological.
Codex standards, guidelines and principles cover most aspects of food production and processing and include all principle foods distributed to consumers. The purposes of Codex are to facilitate food trade, promote fair practices in food trade, and organize food standards set by other international organizations. The SPS Agreement further highlights health aspects of food trade by specifically referencing Codex standards, guidelines and recommendations as they relate to health protection.
With respect to food safety, the WTO’s SPS Agreement covers only measures taken to protect human and animal health from risks posed by additives, contaminants, toxins or disease-causing organisms in food, beverages and feedstuffs. International trade can be restricted only when the available scientific evidence demonstrates that a restriction is necessary to protect human or animal health, and then only to the extent strictly necessary to ensure health protection.
Neither the WTO nor CAC determine levels of food safety and animal and plant health for member countries. Governments have the choice of assessing risks and determining the acceptable risk level or using the Codex standards. The SPS Agreement strongly encourages them to use the latter for food safety, the International Office of Epizootics for animal health, and the International Plant Protection Convention for plant health. Countries are not allowed to set higher standards for imported products than for domestic products. However, national standards can be higher than international norms without violating the SPS Agreement, but countries using their own national standards when relevant international standards exist are required to justify their higher standards should a trade dispute arise. Moreover, if an exporting country "objectively demonstrates" that its measures achieve the importing party’s level of protection, the importing party must accept the measures as equivalent even if they differ (Stanton, 1994).
Under previous GATT agreements, a country’s import restrictions to protect human, animal and plant life were difficult to challenge. The new rules under the SPS Agreement require a country’s sanitary and phytosanitary measures to be based on "scientific principles and not maintained without sufficient scientific evidence". It is telling that during the 47 years of the GATT, virtually no formal trade disputes on SPS measures arose. In the first 18 months of the WTO’s formation, by contrast, seven formal complaints had been lodged under WTO dispute settlement procedures. The SPS Agreement is thus likely to help those agricultural exporters who have been facing unduly restrictive barriers in potential export markets abroad, and to reduce returns to those producers who have enjoyed protection from import bans on quarantine grounds that cannot be scientifically justified. In the latter cases, removal of unjustified import barriers could boost domestic consumer welfare by more than it would harm domestic producer welfare, as well as boost producer welfare abroad of course (the usual gains from trade liberalization). From Australia’s perspective, reducing excesses in our own strict quarantine restrictions 6 would also make it easier for us to argue with other governments and in international fora for similar reforms abroad.
Economists have paid relatively little attention to this issue of technical barriers to trade. Now, however, is an opportune time for Australian economists to make amends, following the release of the Nairn Report (1996) which has brought the issue of quarantine at least under more of a spotlight in Australia. Risk assessment based on empirical evidence is being demanded increasingly in domestic policy debates and for the resolution of international disputes. The Nairn Report correctly stresses the role model Australia could play in developing state-of-the-art quantitative risk assessment procedures. But if those procedures do not include all the relevant economic effects, inappropriately high standards will result. This is because the main losers from excessive quarantine restrictions are -- as with traditional protectionism -- domestic consumers and exporters at home and overseas suppliers of the allegedly offensive product, all of whom are typically less influential than the industry (and sometimes environmental) groups lobbying for the import barrier. The building in of appropriate economic analysis in risk assessment procedures can help to correct that imbalance, to the benefit of Australia and in particular its consumers and exporters. Our exporters would be helped indirectly by less-excessive Australian quarantine restrictions potentially in three ways: (1) via the standard general equilibrium effects of reduced protectionism at home, (2) via the export to other countries and such institutions as the WTO’s Dispute Settlement Body of a more-complete risk assessment procedure that ultimately would lead to less-excessive quarantine restrictions to our export markets abroad, and (3) via the enhanced position of Australia’s trade negotiators who could argue in bilateral talks against excessive barriers to our potential export markets without appearing hypocritical.
Indeed, James and Anderson (1998) show that economic analysis at the outset of a quarantine inquiry might even eliminate the need for expensive technical risk assessment in some cases, for it might show that under no circumstances would quarantine restrictions be justified because the country would always be better off under free trade -- even if it caused the import-competing industry to close down. Just as was the case with the tariff review in the 1970s, perhaps it is time for Australia – for its own sake as well as to set a good example to its trading partners – to undertake a systematic economic review of all its existing quarantine restrictions on imports as part of the government's overall regulatory review process (James and Anderson, 1999; Productivity Commission, 1998). Both the Productivity Commission and ABARE are well qualified to undertake such a pro-active review, having recently been involved in reactive reviews in response to requests from our trading partners (see, for example, the assessments for New Zealand apples (ABARE, 1997a) and Canadian salmon (Industry Commission, 1996).
changes to environmental policies at home and abroad
The severity and mix of these environmental problems varies between and within countries, as have the public and private sector responses. A particular practice may have little or no environmental impact in one area, while in another area the same practice may have unacceptable adverse consequences. The role many agricultural policies play in contributing to harmful practices also is now widely acknowledged. For example, a decade of research has documented how agricultural price supports encourage over-exploitation of rural environmental resources and misuse of landscape amenities (Bonnieux and Rainelli, 1988; Young, 1989; Anderson, 1992b). With respect to farm inputs, it is clear from Figure 1(in the Appendix) that chemical fertilizer and pesticide applications are strongly correlated with producer price incentives. Countries with relatively low producer prices, such as Argentina, Australia and Thailand, use less than one-twentieth the amounts of chemical fertilizer per cropped hectare that high-priced countries such as Switzerland use. There is a similarly high correlation between producer price incentives and the use of farm pesticides. And within Australia, liberal farm income tax concessions for clearing natural scrub from farms encouraged excessive tree felling -- to the point where wind erosion and stock losses because of lack of shelter are now encouraging farmers to replant trees.
OECD countries have responded to these issues by reforming harmful policies, by introducing new policy measures aimed at protecting the environment, and by complementing or strengthening existing policies and regulations. These measures range from providing financial assistance to farmers who refrain from harmful practices in environmentally-sensitive zones, to reducing or eliminating investment subsidises that support intensive livestock production and wetland drainage. In Australia, they include the provision of more and better information on sustainable practices, particularly through the Landcare program.
Over the past several years, governments have been actively promoting sustainable practices in three ways in particular. First, environmental and sustainability concerns are being integrated into the formulation, planning and implementation of agricultural policies. Environmental units and divisions are being established within agricultural departments, and the policymaking responsibilities and autonomy of these environmental units has increased over time. Some states are beginning to design program to more fully integrate agricultural and environmental polices. In Victoria, for example, the agriculture department has been entirely subsumed in an enlarged Department of Natural Resources and the Environment.
Second, existing agricultural policies are being modified to reduce their negative consequences and to increase their positive effects. Research programs and policy analysis are now routinely monitoring the socioeconomic and environmental effects of agriculture.
And third, OECD countries are attempting to employ market-based incentives, to legislate stricter regulatory measures, to test experimental programs, and to redirect advisory services. A wide range of economic and market-based policy options are available, but limited experience to date with alternatives means that the optimal package of measures is unclear. Since, soils, climates, ownership patterns and market structures vary so widely between regions and countries, there is an urgent need to carefully assess potential impacts of the numerous options before choices are made.
One example of how OECD countries are responding to a common agricultural hazard in diverse ways is in their approaches to pesticides. Countries differ in both their requirements for crop protection and their strategy for pesticide registration. Some countries prefer registration approval of a wide range of specific products, while others favour a narrow list of products (OECD, 1995). Several OECD countries have made commitments and set targets to reduce pesticide use (Table 1), but supporting measures range from strict regulations to simply providing information and educational services.
Table 1. National targets for reducing agricultural pesticide use, selected countries
Source: OECD (1995) and UN-ECE (1992).
The European Union provides an example of a supranational effort to address sustainable agricultural issues. Regulations have changed the basis for receiving financial assistance, specifically restricting assistance for intensive pig, poultry, and egg producers; established environmentally-sensitive zones; set up programs for land set-asides, extensification and conversions; and introduced other programs to encourage and maintain production methods compatible with environmental and landscape management. Additional proposals include assistance for organic farming and the designation of nitrate vulnerable areas.
A recent OECD study reviews a number of national-level approaches promoting sustainable agriculture, including extension and education, research and development, certification and labelling, and monitoring progress in improving sustainability (OECD, 1995). This study outlines the types of inducements and supporting activities countries are funding to reduce harmful environmental impacts and enhance sustainable practices. Examples of these activities, ranked in decreasing order of budgetary expenditures, include:
The approach chosen by countries varies greatly. Austria, Finland, Norway, Switzerland and Sweden employ policies to encourage "low-impact’ agriculture as a part of a broad policy reform effort. France and Germany tend to promote a farm-level and regional approach. France, for example, initiated a Sustainable Development Plan with a pilot project involving 200 farms agreeing to adopt farm-level development plans based on principles of sustainability. Japan implemented a four-year program beginning in 1994, known as the Comprehensive Program for the Promotion of Sustainable Agriculture. This new program provides grants to local governments to help fund demonstration projects, information activities and facilities for recycling (OECD, 1995).
Much of the financial assistance provided in the above programs is a substitute for distortive price and trade policies that are now having to be reduced following the Uruguay Round. Cairns Group countries will need to keep pressure on the WTO’s Committee on Agriculture to ensure these programs do not become simply agricultural support policies in "green" guise (Anderson, 1999). The Cairns Group can also lead by example with more cost-effective environmental measures. For example, Canada and New Zealand, like Australia, are encouraging community-based, self-reliant approaches to sustainable agriculture. This concept involves organizing farmers and graziers into landcare groups responsible for managing water and land resources in their local areas.
Australia began developing its program for ecologically sustainable agriculture program as part of a nation-wide effort, the National Strategy for Ecologically Sustainable Development. Australia committed itself to a process of adapting sustainable development concepts, programs, and policies to domestic socioeconomic conditions and prevailing agricultural production, consumption and trade patterns (NSESD, 1992). Policies to ensure the protection of essential ecosystem functions from degradation by agricultural activities originated from domestic pressures from an increasingly environmentally-aware public, a growing scarcity of clean water and intact riverine ecosystems, and an expanding group of health-conscious food consumers.
On the first, the relative decline in the importance of agriculture in the Australian economy could well be slowed over the next decade as the Uruguay Round is fully implemented, and even moreso if the APEC free trade initiative is taken up and includes reform of food markets and if a new 'Millennium Round' of WTO-sponsored negotiations succeed in lowering agricultural protection further.
On the second, the surveyed international agreements with environmental and health provisions provide both new opportunities as well as challenges for Australian agriculture. Australia’s farmers and policymakers are placing much greater emphasis on the sustainability of agricultural practices. This shifting emphasis requires modifying existing ways of doing things so as to reduce their negative environmental consequences and increase their positive effects. This is being done by employing market-based incentives, designing alternative technologies and less-polluting inputs, establishing information campaigns, promoting voluntary best-practice codes, and redirecting advisory services. Since this shift in focus coincides with similar trends in other OECD countries and, increasingly, in middle-income countries as well, Australia will have to change at least as rapidly if it is to maintain its international competitiveness.
Meeting treaty obligations and national and local environmental legislation requiring a greater commitment to the sustainability of agriculture normally entails increased net costs for producers. But that does not necessarily mean lower profits for farmers, because foods and agricultural products that satisfy high health and environmental standards often bring premium prices. Food consumers, whether motivated by green concerns or by concerns for health and food safety, are increasingly interested in where food comes from and how it is produced, processed, packaged and distributed. Given the inexorable trend toward ‘greener, cleaner’ preferences for both products and production processes, it would be wise for Australia to keep emphasising its farmers’ reputation as low chemical users. Plant variety breeding aimed at building in pesticides using DNA, as is happening with cotton in NSW, is but one example of how researchers may be able to add to that reputation -- although opposition to genetically modified organisms of any kind is growing in Europe and elsewhere (Hensen, 1998). Research on combatting potentially imported diseases including through adapting disease-resistant exotic varieties also may have a high payoff in so far as it provides a low-cost alternative to draconian quarantine bans on food imports that may come under challenge at the WTO. Likewise, seeking more efficient ways to use irrigation water, most notably via pricing water more appropriately, also would be wise both from our own economy’s viewpoint but also to avoid being accused of implicitly subsidizing agriculture via cheap water charges.
While new opportunities are developing that have the potential to favour Australia's efficient, low-chemical farming industries, there are numerous ways in which those opportunities could be thwarted by policy responses in food-importing countries. The challenge will be to minimize that latter risk by being vigilant and active in the committees of pertinent international institutions, by maintaining our credibility through not ‘sinning’ with our own domestic policy choices, by astute agricultural research investment decisions so as to develop appropriate production methods and products that maximize farm profitability in the wake of ever-greener preferences of consumers at home and abroad, and by more economic research showing how to address environmental concerns most efficiently.
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Production foregone is a static measure of the extra value of production that would have been obtainable with current land uses had there been no degradation. This valuation ignores the following: accumulated net benefits to the community of past agricultural production; accumulated net benefits due to the productivity of farming activities in those areas where degradation occurs; and the degradation that may occur due to farming practices becoming more specialised even though land productivity increases. For these reasons, the production equivalent is not a true reflection of current degradation costs. See Gretton and Salma (1996) for more details. 2
For developing countries, the implementation period is ten rather than six years and the extent of reform required is two thirds that of developed countries. 3
While the budgetary expenditure on export subsidies is to be lowered by 36 percent from the base period, it is only the agreed cut in the volume of subsidised exports (21 percent) that is likely to bite since international food prices are expected to be considerably higher in the implementation period than in the depressed 1986-88 base period. 4
Another often-expressed concern is the finite resource base available to produce food globally, and its reputed degradation. However, careful assessments of the resource base suggest that in net terms it is not diminishing (see the survey in Rosegrant and Ringles, 1997). In fact what is diminishing is the relative economic importance of those resources in food production. 5
Australia is a member of the FAO’s Committee on Commodity Problems which requested the reports. The five reports cover rice, oilseeds, livestock, grains, and grain/livestock interactions. 6
As with the ban on banana imports, for example -- see James and Anderson (1998).
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