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EFFECTS OF EXPORT SUBSIDIES ON AGRICULTURAL TRADE FLOWS
1. INTRODUCTION TO AGRICULTURAL EXPORT SUBSIDIES
1.1. Definition and Types of Export Subsidies
Export subsidies are direct payments given by the government to domestic sellers to allow them
offer their products in the markets at cheaper price. These subsidies can range from cash rewards,
tax exemptions, and cheap credits to cash rebate and marketing support by the government. Thus,
the main objective of export subsidies is to increase the competitiveness of domestic products in
the international markets through lowering their cost thus expanding the market share of
domestic producers (Anderson, 2016). There are different export subsidies which can be
categorized depending on how they are provided: specific subsidies which depend on the amount
of exports, ad valorem subsidies that are determined by the value of exports and subsidized
export volume, subsidies with links to export performance of a firm or a sector among others
(Bagwell & Staiger, 2016). Also, other non-direct subsidies such as governmental research and
development, or infrastructure backing can also enhance the export capacity of the domestic
industries. Various forms of subsidies as explained above are capable of distorting the
international trade, as well as the prices of goods and services, as well as the effect of
competitiveness of producers in other countries that are not offering the subsidy (Bouët, Laborde,
& Martimort, 2017). For example, direct cash payments enable producers to cut the price of their
goods below cost and tax breaks decrease the cost of managing export activities, low-interest
credit makes capital required for production enlargement cheaper. Marketing assistance provided
by the government aids the domestic producers to market their products in the foreign markets
more easily. The direct subsidies like subsidization with necessary inputs like research and
development aim at producing innovation and quality products that have the domestic producers
better off than the international counterparts. Physical facilities such as the construction of
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harbors and other communication means in exporting countries cuts down the transport costs
thus making exports cheaper. Despite the fact that these subsidies are intended to support
domestic industries, they cause controversies in the international trade forums because they are
considered to distort the principles of fair competition. Non-subsidizing countries might have
issues since their producers are unable to compete with the artificially low prices of imported
products; this may cause trade wars. Thus, although export subsidies may present considerable
benefits to domestic industries, their general impact on trade globalization is still questionable.
1.2. Historical Context of Agricultural Export Subsidies
Agricultural export subsidies have been in use for the past few decades and gained most or their
popularity after the Second World War when most of the countries aimed at reconstructing their
economies and stabilizing markets for agricultural produce. At first they were used for scrapping
off excess production, maintaining stable prices domestically and to assist the farmers with their
revenues (Bakhshi & Kerr, 2015). This was especially the case soon after the Second World War
when food supply and farmers’ sustenance were significant issues. In the 1970/1980’s
agricultural export subsidies transformed from being a measure of supporting agricultural
exports to a strategic weapon for obtaining competitive advantages on the global markets.
Europe and the United States was the primary beneficiary of these subsidies which often
introduced large distortion on international trade in agricultural products (Bhagwati &
Ramaswami, 1963). This kind of subsidies enabled these countries to set low prices that enabled
them to capture some markets and this created trade conflicts with other nations, particularly
those who were in a similar capacity to subsidize their own farmers. The very important change
in the regulation of these subsidies came with the Uruguay Round of the General Agreement on
Tariffs and Trade (GATT) in 1994. This resulted to formation of World Trade Organization WTO
besides agreement on Agriculture AoA where efforts were made to reduce to zero export
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subsidies (Anderson, 2016). The AoA prescribed definite periods with strict guidelines on the
phasing down of subsidies while attempting at establishing fair trade for agricultural products at
the international level. Still, some countries did not cease to search for loopholes and exceptions
that would allow them to sustain their subsidy programs: ongoing negotiations and reforms
within the WTO framework followed (Bakhshi & Kerr, 2015). For instance, some of the
countries have changed the nature of their subsidization and favored some of the less direct
subsidies or have redefined their programs to come under WTO permissible categories. This has
led to sustained process of negotiations to strengthen the rules and standard and to shut the legal
backstage to level the playing field in world agricultural trade. Timeless issue of promoting
domestic agriculture while maintaining fair trade practice continues to be one of the most
difficult issues in the international trade relations.
1.3. Objectives of Implementing Export Subsidies
Export subsidies are adopted by governments to attain several economic and strategic goals.
Among the objectives, there is an attempt to improve export competitiveness and promote
economic development by decreasing the export costs of domestic producers and increasing their
market share (Anania et al. , 2019). Because the subsidies help lower the cost of the domestically
produced goods, it makes them cheap in the international market hence elevate exporters’
volume of sales. Export subsidies also try to balance income of internal agricultural industries to
guarantee farmers’ stable income and decrease the adverse effects of market fluctuations and
price variations (Anderson, 2016). This financial stability is important for sustaining the life of
farmers and avoiding rural poverty especially during a time of an economic downturn.
Furthermore, these subsidies may aid a country to attain other objectives of trade policies for
example, food security, employment of people in the rural areas and attaining self sufficiency in
production of very important agricultural products (Bouët et al. , 2017). Hence, countries will be
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able to manage their food security and be less reliant on imported food products if they would be
able to source for the basic necessities for the people. At times, export subsidies are a vehicle of
international policy since it becomes a way in which nations can create demand for their
products and subsequently gain influence in certain regions. For instance, offering subsidies to
export to the developing nations can open up economic relations as well as diplomatic friendly
relations. Nevertheless, despite such aims having positive outcomes in the short term, these goals
entail negative repercussions including distorting markets, the generation of unfair competition
and provoking countermeasures from trading partners (Carter & Steinbach, 2020). Such a market
distortion puts producers in countries that do not subsidize such outputs at a disadvantage
resulting in imbalances and trade disputes. Sanctions that include tariffs or counter subsidies are
likely to lead to a trade war and thus, instability in the world economy. Therefore, although
export subsidies are useful for attaining national economic and strategic objectives, they present
a number of problems in relation to promoting fair and balanced international trade which must
be taken into account and regulated within the framework of international trade.
1.4. Major Countries and Commodities Involved
Traditionally, several of the leading countries have been using agricultural export subsidies. Out
of all the regions, the European Union has been one of the most active users of subsidies using
them to fund its agricultural exports and its Common Agricultural Policy (CAP) among others
(Bureau & Swinnen, 2018), the CAP makes it its major goals to stabilize the agricultural
markets, guarantee farmers a decent income and the food security, which makes export subsidies
an important instrument to achieve the goals. Export subsidies are also widely employed by the
United States; the country has practiced them especially in the sales of food staples such as the
wheat, corn and soybeans so as to ensure it remains competitive in the global market. The U. S.
subsidies these basic food crops which in turn keeps the price of its agricultural produce
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affordable and thus helping the farming communities and related businesses. Other countries
such as Canada, Japan and Brazil have also applied export subsidies in assorted agricultural
products. For instance, Canada has supported its dairy products while Japan has supported rice,
Brazil have subsidized sugar and meat products, resulting in trade friction and WTO
consultations and negotiations as the affected countries formulate strategies to offset the impacts
of such subsidies. Export subsidies are usually applied to the sensitive products such as grains –
wheat, corn, rice; dairy products, sugar, and meat products (Anania et al., 2019). These subsidies
can alter the global price structure and trading patterns and harm producers in non-subsidizing
nations while pushing for a stricter regulation of MEAs (Bagwell & Staiger, 2016). For instance,
when a country subsidizes its wheat export, it floods the market with cheap wheat which pegs
down the price and hampers producers from other regions to penetrate the market, this results in
difficulties in the financial situation of farmers in those areas and also influence the balance of
agricultural trade on the international stage.
1.5. Overview of International Regulations on Export Subsidies
Export subsidies are regulated at the international level mainly by the WTO’s AoA though it was
adopted in the Uruguay Round. The AoA brought in obligations for export subsidies with the
intent to phase them out in order to eliminate trade distorting measures in agricultural exports
(Bakhshi & Kerr, 2015). Specific to the requirements of the agreement, volume and value of
subsidized exports were to be cut in a given manner and schedule depending on the country in
question (Anderson, 2016). These commitments were meant to ensure that all member countries
slowly and steadily started discarding export subsidies because they distorted the international
trade environment. Further rounds of negotiations like the Doha Development Round aimed at
strengthening these undertakings and closing the loopholes that enabled use of subsidies to
continue. These negotiations sought to fill perceived loopholes that countries may use to
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continue subsidising under other forms of cover, other WTO agreements like the SCM agreement
contain rules concerning the use of export subsidies and procedures for handling complaints
concerning their application (Anania et al., 2019). The SCM Agreement specifies under which
circumstances it is allowed to provide subsidies and includes information regarding the methods
of handling disputes if one country considers that the subsidized exports of another member have
a negative impact upon it, these regulations are meant to encourage fair competition and to
counter the effects of what has been described as subsidized exportation. However, there are still
enforcement issues and differences in compliance among the member countries, which remain
the major obstacles to the effective regulation of export subsidies (Carter & Steinbach, 2020).
For example, some countries have failed to reduce the amount of subsidies to the required levels
while others have come up with strategies of how to rename subsidies in a bid to bypass the
rules. Furthermore, the WTO has a dispute resolution mechanism that is time consuming, hence;
it is not easy to address the infringement of rules. These enforcement issues reveal the fact that
there should always be constant supervision and constant bargaining to make sure that the goals
of the AoA and other related agreements are met to the letter so as to foster a balanced world
trade system.
2. ECONOMIC THEORY OF EXPORT SUBSIDIES
2.1. Supply and Demand Analysis in International Markets
Understanding the effects of export subsidization is another important area that can be effectively
analyzed with the help of supply and demand modeling, export subsidies often lead to an
increase in the quantity of the exported products through offering subsidized products in the
international markets, making the products cheaper and more accessible (Chavas & Holt, 2019).
Aimed at domestic producers, the artificially lowered costs lead to enhanced production and
exportation resulting in an increase in supply in global market thereby moving the global supply
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curve to the right and therefore leads to a lower equilibrium price so long as demand is constant.
On the part of the demand side, lower prices just imply that there will be an increase in the
quantity demanded. However, subsidies are an interference that creates inefficiencies in the
world market in that they foster overproduction. These impacts are even more severe for goods
with an inelastic demand, meaning that prices do not affect the demand for the particular good or
service much. This can result in the accumulation of surplus and fluctuating markets (Clapp,
2017). Essential foods such as wheat and corn are examples of crops whose demand can be
considered inelastic since people’s consumption of them does not rise substantially even when
their prices are reduced. This can cause huge surpluses that negatively impact markets, extend
the existing low price range downwards and exert pressure on storage and distribution networks.
Further, the use of export subsidies also creates a reaction from other nations, which is not
healthy for the international trade relations processes and may lead to trade wars, subsidies harm
the countries that receive them and the affected countries may apply countervailing duties or
approach WTO for redress leading to prolonged negotiation period as well as trade wars which
are detrimental to the economies of the trading partners. These mismatches are not only
detrimental to the countries involved but also create instabilities in the global economies, export
subsidies can harm the producers who originate from the non-subsidizing country since they
cannot compete with the subsidized products translating into vast economic differences among
the people. Export competitors, especially small scale farmers in developing countries who
cannot compete against artificially low prices of subsidized goods will be the hardest hit, thus
increasing poverty and social inequality. Export subsidies are a useful tool when it comes to
short-term national economic goals and interests, their effects on international trade in the long-
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run must be thoroughly analyzed before being encouraged or prohibited to protect fair and
sustainable market practices.
2.2. Partial Equilibrium Models of Export Subsidies
Partial equilibrium analysis concentrates with the impacts of export subsidies on a particular
market assuming that the other markets are at a state of equilibrium. These models are useful in
eliminating the influences of other factors and establishing how subsidies affect certain
commodities, for example, in the agricultural markets, partial equilibrium analysis can be useful
in depicting how subsidies influence the supply and demand of commodities such as wheat, corn
or sugar (refer to Devadoss and Ridley, 2014). This usually results in a surplus in the subsidized
market since producers tend to expand output in response to what is, in essence, higher prices.
Such a surplus has to be sold on the world market, this often means selling at a lower price, thus
reducing producers’ incomes in countries that do not subsidize production (de Gorter, Drabik, &
Just, 2015). The consequent changes in prices also impact consumer surplus in importing
countries because prices are lower for consumers but deleterious for domestic producers, these
models offer a specific vision of the distortions of the market due to export subsidies which
emphasize distributional consequences and possibilities of a market share. Partial equilibrium
models are very effective as they focus on one particular market and help the analyst explain
how subsidies lead to the formation of surpluses, decrease the international prices and influence
the producers as well as the consumers in both regions. This targeted analysis is useful in
discovering the first-round effects of policy changes on a specific commodity without the overlay
of other interrelated markets which is the case in the general equilibrium models. Therefore,
partial equilibrium models play the crucial role in the policy analysis, providing rather
unambiguous picture of the direct effects of export subsidies on the economy, as well as the
directions to follow to prevent negative repercussions from the international trade.
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2.3. General Equilibrium Effects and Welfare Analysis
In the general equilibrium models, the export subsidies are analyzed taking into account its
impact on more than one market and sector, and hence, implementing all the interconnections
between them. Export subsidies in one sector may trigger impact on other sectors in the economy
with consideration to employment resources and other products (Costa et al. , 2009). For
instance: subsidies in the agriculture sector could lead to resource drain hence affecting the
production and competitiveness of related products from other sectors. General equilibrium
analysis also looks at welfare consequences, determining the effects of subsidies on welfare.
Normally, the export subsidies are detrimental to welfare because they cause market distortions
through inefficient resource allocation and altering of production incentives (Disdier & Marette,
2010). Such losses are incurred on the side of subsidizing countries in terms of taxes and non-
subsidizing countries producers in terms of unfair competition. Thus, by presenting a bird’s-eye
view of the economy, general equilibrium models draw attention to various costs and trade-offs
that result from export subsidies, they show how subsidies distort markets and alter the allocation
of resources both inefficiently and with externality costs on the rest of the economy. For
example, an agricultural subsidy results in overproduction of agricultural products while at the
same time it hinders the production of other products hence, creating imbalance in the
production. This approach is very beneficial in guiding the policymakers to make better
decisions since they are given all the possible impacts economically, it is for these reasons that
general equilibrium models used to evaluate the various effects of export subsidies on economic
activity of sectors and the economy at large, as well as, the means of correcting negative impacts.
2.4. Impact on Terms of Trade and Exchange Rates
These subsidies may exert a profound impact on the terms of trade, a ratio between export and
import prices, it has become obvious that cheap export prices can be achieved using subsidies
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thereby enhancing the competitiveness of a country in the global market. However, it often
implies a deterioration in the terms of trade because the exporting country gets a lower value of
imports in exchange for its exports (Elobeid and Beghin, 2006) leading to a decline in national
income and a deterioration in the balance of payment situation. Also, export subsidies can have
an effect on exchange rates since by increasing the supply of the subsidized exports, a country
can manipulate the rates to its advantage. If a country subsidises exports, for instance, and
doubles the volume of its exports, the demand for its currency might shoot up hence causing an
appreciation of its currency. On the other hand, subsidies may again cause trade imbalances, and
such imbalances may call for depreciations (Ervin & Mill, 1985). The aggregate impact on
exchange rate can be positive or negative depending on the size of the subsidies given and the
elasticity of trade which is important in order to foresee the macroeconomic effects that export
subsidies will bring. Export subsidies work in a way that puts a positive pressure on the price of
exported goods and this may enhance export levels when prices are reduced. This uplift in flows
can improve the short-term measurable macroeconomic performance but it negatively impacts
long-term terms of trade. Export revenue is reduced which can act as an issue for national coffers
and deteriorate the balance of payments which refers to net economic value that accrues to a
country through trade. Exports stimulation through subsidies may lead to exchange rate
fluctuations which is an issue of economic policy management. Appreciation of the currency
may pose a threat to other export-oriented industries due to high international costs of their
products, while the depreciation of the currency, facilitated by imbalances in trade can lead to
higher cost of imports and inflation. When enacting export subsidies policymakers must weigh
these outcomes in relation to obtaining the competitive advantages against the risks of
macroeconomic instability. This understanding on the relative gains from trade helps in setting
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the right trade policies to enhance the national welfare on one hand, and global trade relations on
the other hand, so as to unlock the benefits from export subsidies without compromising the
countries and global welfare.
2.5. Comparison with Other Trade Policy Instruments
Export subsidies fall under the trade policies category of second-generation policies meant to
affect international trade. While tariffs shield local producers by increasing the cost of imports,
subsidies that seek to increase export volumes work to reduce the price of exports. Both
instruments can distort trade but in opposite directions: According to the earlier classical writers
like Bhagwati and Ramaswami (1963), tariffs decreases import while subsidies increases export.
Another policy instrument is import quotas that allow fixed quantities of goods to be imported
into the country hence regulating the supply of foreign products in the market. While tariffs and
quotas work to limit imports, export subsidies push exports, and may even create such extremes
as imbalance of exports over imports. Subsidies are more politically correct compared to tariffs
or quotas because they are portrayed as support to domestic producers (Filipe Díaz-Bonilla,
2017). Nonetheless, they are normally condemned for promoting unequal competition as well as
forming the basis for trade disagreements. Export subsidies raise the degree of competitiveness
of domestic goods in the foreign market, since they establish the foreign prices of the domestic
goods, this can result in high production and exports to the foreign markets, boosting the local
industries. However, the given practice may contribute to the utilization of counter measures by a
trading partner including counter subsidies or tariffs; this may result into trade wars that may
alter international relations. Moreover, export subsidies sometimes result in inefficiency due to
over-application and misuse of resources. On the other hand, tariffs that make imported goods
costly to consumers restrict imports which in turn safeguard domestic firms from competition
from foreign firms but at the same time they can cause high prices for consumers and even
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instabilities in markets. While import quotas are set directly at the specific amount of foreign
goods which can be imported, they also lead to a higher price for foreign goods and restricted
consumer choice. These are trade-offs that the policymakers ought to balance by conceptualizing
the short-term gains in terms of economic impact and the potential effects on the global relations
on trade and the stability of the markets. Trade policy formulation involves balancing between
protecting home-based industries and formulating policies that can foster equitable and
sustainable international trade practices.
3. GLOBAL TRADE AGREEMENTS AND EXPORT SUBSIDIES
3.1 GATT and WTO Provisions on Agricultural Export Subsidies
The liberalization of agricultural export subsidies has been one the most sensitive topics under
the GATT and WTO agenda, GATT sought to liberalize trade by lowering trade barriers, but
agriculture tended to be a protected sector, and so excluded from liberalization. However, export
subsidies in particular were problematic since they constitute a type of trade interfering measure
since they artificially depress prices in foreign markets. The GATT Article XVI also permits
member countries to continue providing export subsidies provided that a number of conditions
are met, which has led to creating market instability and in a way placed unsubsidized producers
at a disadvantage (Gaigné & Gouel, 2018). The Ur, as it is known, Uruguay Round (UR) of
GATT under WTO made many changes. The Agreement on Agriculture (AoA) was created in
1994 with the goal of averting and over time, eliminating export subsidies because they disrupt
the stability in the world market. However, implementation has been a slow process and to some
extent incomplete, developed countries such as EU and US have been accused of subsidizing
their exported agricultural produce (Glauber, 2018). These subsidies continue to be provided
even after the countries involved signed up to agreements in the Uruguay Round, thereby
showing that more work has to be done to open up agricultural trade liberalization. The AoA
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made provision for particular commitments a departure from the previous more general
commitments to reduce the volume and value of subsidized exports without eradicating the
distortive nature of subsidies. Blending the factors of economic and political power, developed
countries have not remained oblivious of the fact and have resorted to chicanery to reinstate
subsidies in form of what they term as re-classification or re-categorization. The sustenance of
subsidies continues to be inapposite to the AoA’s aim and contributes to unfair trade in
agricultural products globally. However, developing countries are still at the receiving end as it is
known that their farmers are able to compete with the agricultural produce from the developed
world due to subsidies given to their farmers. Some of these challenges have been tackled as
follows; Measures have been put in place such as improved enforcement measures and enhanced
definitions to eliminate any grey areas. The Doha Round which began in 2001 was meant to
build upon the themes of the previous Round with regard to liberalization of agricultural trade
and reduction of export subsidies. Bureaucratic issues and the distinct standards of different
countries make it difficult to achieve general changes to international trade politics. However,
increasing market access for agricultural products remains a priority for many WTO members,
and this demonstrates the need to sustain dialogue and bargaining.
3.2 Uruguay Round Agreement on Agriculture (AoA)
The Agreement on Agriculture (AoA) can be regarded as a major step in the regulation of
agricultural trade within the framework of the GATT/WTO, its main goal being to subject
agricultural products to the rules of the organization in a manner that would encompass all key
aspects. Neighboring this is the three limbs, namely; Market Access, Domestic Support, and
Export Subsidy which aims at reducing the distortions in agricultural trade over time. Notably, in
the AoA, reduction commitments on export subsidies were provided, as well as disciplines on
their use, with the objective of their complete elimination in the future (Grant & Boys, 2012).
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However, the actual follow-through of these commitments have been less than consistent. Many
developing countries fail to adhere to the rules because they lack the resources and technocracy
needed to do so, and many developed countries remain to provide subsidies to their agricultural
exports under various ERMs and exceptions. These include redomiciling subsidies from
nonpermitted categories or creating other types of support that were not specifically prohibited in
the initial treaty. As a result, there is a continued split between developed and developing nations,
while the former carries on to enjoy competitive edges in international agricultural markets. Such
an uneven application has stirred controversy and urged for change to make the AoA serve its
intended goals and prevent distortion of trade as much as possible. There is however the present
difficulty of developing an even better trading relationship that will see all countries reap from
fair and equal trading in agricultural products.
3.3 Doha Development Agenda Negotiations
The Doha Round that started in 2001, incorporated a vast focus on agriculture as part of the DDA
to address the discrepancies and unfairness of the AoA. One of the critical points of concern
during the DDA negotiations was agriculture, particularly export subsidies aimed at reducing
them significantly and, in the long run, deleting them (Hanrahan & Schnepf, 2007). But, thereby
the pace has been slow due to major differences which emerged between the developed and
developing nations with regard to the degree and intensity of the reforms. Some of the
developing countries have strongly advocated for deeper cuts in subsidies provided to the
developed countries so as to address the existing trade imbalance and expand the export
possibilities for their agricultural sector (Hertel & Winters, 2006). Continued provision of large
subsidies by developed countries distorts the level playing field and hampers the ability of these
countries to enhance export competitiveness and increase the growth rate of their agricultural
sectors, it has even been difficult for developed countries to adapt to rapid change because they
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want to protect their farm markets and control domestic politics. This stalemate has prevented the
progress of the basic goals of the DDA, which has partially and continuously renegotiated the
global agricultural trade system. The developing countries therefore call for an equitable opening
of the worlds markets while rejecting barriers to trade established through subsidization of their
counterparts in the developed world. They also note that large subsidies have an effect of
influencing price and they cannot compete well in their agriculture products. At the same time,
developed countries also stress the need to sustain support for their domestic farmers to
guarantee food security and income in the rural areas. The nature of these negotiations can be
seen as more deeply revealing of the nature of global economic power relations as well as the
ongoing efforts to reform a global trading system that is increasingly viewed as unfair, this
means that, measures to ensure these disparities are resolved must entail unique approaches that
will need cooperation from all the stakeholders. Long-term objective is to provide the general
framework of free and fairer trade opportunities that are equally beneficial to all the nations
involved in agricultural trade for the development of sustainable world economy.
3.4 Nairobi Ministerial Decision on Export Competition
The Nairobi Ministerial Decision making (2015) can be noted as the significant turn within the
WTO focusing on the export competition concerns in the areas of agriculture. It committed
members to remove export subsidies on agricultural outputs, prescribing specific time for this
shift, thus reversing the normative trend of previous negotiations (Glauber, 2018). Nairobi
Ministerial decision provided evidence of a shift in the perception of the World Trade
Organisation in response to prevailing global concerns of the distortive impacts of export
subsidies and sought to align WTO rules on trade in agriculture to the emerging international
standards seeking to eliminate the subsidies that have been in practice to favour the exporters of
agricultural products for years and bring an equality in trade for agricultural producers all over
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the world. When making this decision, its purpose was to reduce such subsidies so as to reduce
market distortions, as well as to prevent prices from being volatile and to increase the
competitiveness of producers in the developing and least-developed countries. Further, the
elimination of export subsidies was supposed to encourage the growth of sustainable agriculture
by decreasing incentives to produce crops in excess and unload them in world markets at low
prices, re-affirming the need for sustained global cooperation for reforms of trade related to
agriculture, the decision responded to the issues of both the developed and the developing
nations. Subsidy elimination was made definite by setting up an ultimate framework to address
the problem and put pressure on the nations to provide a level playing ground to agricultural
trade. Appreciated by farmers, trade representatives as well as policy-makers this decision was
considered as a prod of sequential step towards fair international trade. However, the question of
full implementation, and, more importantly, dealing with new types of trade restraint measures
that may take the place of traditional subsidies remained open. This decision therefore marked a
significant step in the WTO’s desire to fight for fairness in the agricultural trade liberalization
and more so a display of willingness to fashion out a better tomorrow for the global agricultural
market. WTO has shifted its agenda to advocate for trade justice, improving the structure of the
markets, and inclusion of sustainable development for different diversified economies to ensure
that all global markets are fair and just in giving out trade and affecting a balanced distribution of
the international economy.
3.5 Regional Trade Agreements and Export Subsidy Provisions
Export subsidies have always been associated with bilateral, regional, and multilateral trade
agreements, although more recently regional trade agreements have been used to address export
subsidies among other general trade concerns. Some of the provisions that are often provided in
RTAs are those that either restrict or ban export subsidies among the member countries, thus
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implying agreement to fair competition and less trade distortion (Garmann, 2014). Many of these
agreements supplement WTO regulations by offering other sets of rules that govern the use of
export subsidies or the conduct of agricultural trade in a more predictable manner, similarly,
while it has been pointed out that RTAs have been increasing, there are apprehensions that they
are likely to create multiple layers of rules in the global trading system and hence making it
difficult for the formulation of a single reform for universal agriculture trade. Export subsidy
provisions in RTAs are designed to facilitate improvements in the agricultural sector of member
countries by eliminating the distorting subsidies that result in lower prices for exported goods.
This approach helps to level the competitive field within the regional bloc and offers improved
market access for all producers helping producers within the member states, to this extent, RTAs’
negotiation of export subsidies implies that they work towards promoting equilibrium and
stability in global markets. However, the increasing RTAs have eventually created a hierarchical
structure of multiple layered trade rules and commitments which may cause certain incongruities
in the existing trade regulations. These cleavages could potentially erode the unity of the WTO
system that has been developed, as separate standards and obligations may be established in
various RTAs and lead to confusion and legal vagueness. Additionally, although RTAs can offer
more specific and prompt responses to individual trade challenges, they can also pull focus and
funding from multilateral approaches toward improving the liberalisation of trade in agriculture.
On the one hand, RTAs can provide a boost to the global trade and on the other they may cause
complications to the global trade hence the need to embrace a harmonized approach towards
trade policies. Coordinating in the RTAs and the WTO framework, thus, is fundamental in
achieving enhanced, mutually beneficial comprehensive agricultural trade reforms. In this way,
through the coordinated action of regional and multilateral organisations, policymakers can
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attempt to work towards the formation of a more progressive and just global trading environment
that encompasses the various needs and issues affecting agricultural producers across the world.
4. EMPIRICAL EVIDENCE ON EXPORT SUBSIDY EFFECTS
4.1 Case Studies of Major Subsidizing Countries (e.g., EU, US)
The EU and the US are among the leading countries that support their respective agricultural
industries through subsidies which have had far-reaching consequences in the global trade. The
Common Agricultural Policy (CAP) of the EU in the past has provided significant subventions to
sustain its producers through monetary transfers, market operations, and export subsidies
(Josling, 2015). While these policies were designed to sustain the agricultural production and
farmers’ income, they participated in distorting international markets by subsidizing exports and
depressing prices at the international level, the United States has many programmes of support
for agriculture and some of the programme include direct payments, crop insurance and export
subsidies for crops like wheat and corn among others by Koo and Kennedy (2006). These
subsidies affect production decisions in the domestic markets and bring down the prices in the
international market due to the supply of heavily subsidized products into the markets.
Opponents claim that such actions distort the competitiveness of producers who are not
subsidized in the developing countries hence worsening the inequality in the international market
of agricultural produce (Martin & Anderson, 2012). Subsidies have been a major bone of
contention in many trade liberalization negotiations such that the EU and the US have been
identified as primary culprits of market distortion through the provision of such subsidies. This
shifts the world supply curve upwards through the subsidized exports from these regions and
puts a lot of pressure on developing country farmers and hinders their chances of economic
development and eradicating poverty, specifically, the CAP has been singled out for criticism for
having highly bureaucratic and less transparent subsidy schemes, that has been alleged to have
P a g e | 19
resulted in the welfare of large and wealthy farmers and agribusinesses, to the detriment of
small-scale famers. The subsidies of the agricultural products are provided by the Farm Bill, a
law passed in the US every few years, which contains substantial funds for different subsidy
programs; the programs are beneficial for the American farmers but violate the trade equality.
Previous attempts at changing these policies have been hampered by political pressure from
powerful agricultural groups and perceived necessity to shield home-based agricultural
producers. However, the current controversy of agricultural subsidies still continues, which
shows that there is an urgent need to address distortions in trade and provide a capable platform
for a fairer agriculture system in the international level.
4.2 Impacts on Global Commodity Prices and Price Volatility
The effects of AE on international commodity prices and uncertainties can be very significantly
affected. The subsidies from main exporting countries result into excess production and
subsequently cheap export prices that unpredictable and disruptive in the markets (Liapis, 2012).
Regarding the effect on food prices, subsidies invariably worsen price volatility by artificially
increasing the supply of food available when there is global food price increase hence sharp
declines in food prices when subsidies are either removed or cut. Export subsidies distort the
market and thus, has consequences on both the importing and exporting country. The former
might experience diminished stimulation for local farming or investment because of flood market
with cheap Barrier products; the latter could face counter measures or trade bard campaigns from
other nations who feel that subsidized products are giving their competitors unfair advantage
(Laborde & Martin, 2012). These dynamics have implied to enlighten the rationale for collective
international mechanisms on subsidies and market transparency thus important factors that
would help to solve problems of food price volatility and global food insecurity.
P a g e | 20
The high production caused by export subsidies that are grouped in supplying countries affects
the supply and demand chain not only in the supplying country but also in the entire export
market. This usually leads to prices coming down, as observed when subsidies enhance supply of
a certain good or service without a corresponding improvement in the demand side; this puts a
lot of pressure on producers who do not enjoy such subsidies, especially those from the
developing world, besides impacting stability in the markets, there are heavier repercussions over
the long term about agriculture and rural development. The very low prices obtained from export
subsidies will demotivate domestic farmers in the importing country from investing and
expanding on their agriculture production. This lack of investment slows down the advancement
of the agricultural business in these countries, making the countries continue to import cheap and
government subsidized products that in turn compromises the food security of the respective
countries.
Exporters’ countries that enjoy large market share and low costs through subsidies are
vulnerable to retaliation in terms of trade restrictions and lawsuits. These trade tensions may
increase and hence causes further economic implications and also interferes with the underline
structure of trade relations. This is further compounded by the ups and downs experienced in the
levels of subsidy where by changes in subsidies leave uncertainties in the world market and it
becomes very difficult for farmers and the companies in agriculture to budget and invest. In
order to tackle such problems, it becomes necessary that bodies such as WTO put in place
measures that will help to curb the usage of export subsidies. Transparency in the
implementation of subsidies and cooperation among countries can stabilize commodity prices
and reduce the fluctuations that are usually experienced in the market as this can enable
P a g e | 21
increased food security in the world for the benefits of all the global citizen by making sure that
the agricultural trade affects all the concerned parties in a balanced way.
4.3 Effects on Market Share and Competitiveness
The matter identified with agricultural export subsidies is the disproportionally consequential
impact on market shares and competitiveness where developing countries are most vulnerable.
Main exporters, especially the developed countries such as the EU and US, use subsidies to flood
global markets, thus, competing out the products from the developing countries (Hoekman &
Nicita, 2011). This leads to low export revenue realized by the developing countries most of
which relay on agriculture as their major source of revenue and employment. Subsidized
products may depress import cost in importing countries hence posing a threat at the local
agriculture-based economy and slowing the performing of economic transformation (Matthews,
2014). Unfortunately, many countries lack the financial muscle to reciprocate subsidies given by
developed countries, thus continuing the unfair trade and encouraging dependence on imported
basic foods. A similar disadvantage realized by the developing nations because of the crowding
out effect of subsidized exports is that market access is limited. Subsidization cuts into the
competitiveness of agricultural products from the developing nations by making the prices lower,
thus the reduced market share. It does not merely address the present export earnings but also
thwarts development for exports in the foreign markets in the future. Loss of export market share
has socio-economic effects such as incline in the level of poverty and unemployment in countries
that rely on agriculture as the main source of income. In the importing countries the dumped
goods in form of cheaper subsidized products can have a great impact especially on the local
producers in the agricultural products markets. This has raised a concern that small scale farmers
cannot compete with the cheap products coming from the subsidize imports which affects their
income and may lead to pulling out from farming. This particular scheme counteracts any
P a g e | 22
attempts at promoting the improvement of rural regions and food security as domestic agriculture
is limited in its feasibility. Moreover, reliance of imported subsidized goods also hamper the
prospects of structural transformation because most of the resources and investment are locked
within agricultural sector and not diversifying to other sectors. Emerging countries are not able to
extend the same amount of support to their agricultural departments as a result of their
constrained budgets. Inability to subsidize their exports in the same proportion as the developed
and the highly industrialized countries has a way of compounding the already existing trade
imbalance leading to the otherwise unachievable level playing field. The continued employment
of export subsidies in the developed countries perpetuates these disparities resulting to
continuous importation of agricultural produce and the inability of developing countries to
develop a prosperous agricultural market. To solve such problems, more attention should be
given to international level to sentence fair trade policies and promote the agriculture aspect of
the world’s impoverished countries.
4.4 Consequences for Developing Country Agriculture
Overall, for the developing countries there are several negative impacts often associated with
agricultural export subsidies. These subsidies cause distortion in market structure hence
inhibiting the development of local agricultural industries, and thus the poor chances of cutting
down rural poverty (Huang et al., 2015). Inexpensive imports erode the implementation of
improvement and innovation to agricultural productivity and food market in order to remain
reliant on food aid from the developed nations. This situation hinders innovation and investment
in domestic agriculture, and thus these economies fail to become food secure and sustainably
developed. This distorts income equality and, therefore, causes inequalities in the distribution of
economic activities resulting in social inequality that results in rural revolt (Kerr, 2018). Meeting
these challenges requires radical policy changes both at the country and global level, laws
P a g e | 23
created to reform markets in these ways should limit the degree of distortion in marketplaces,
and advance sustainable agricultural systems in the local regions and integrate the standards of
fair trade. Multinational integration is important here in attempts to enhance leveled ground
competition environment so that the developing countries of the world are given leeway to
venture into the international markets. To support the sustainable agricultural development, one
must invest funds, expertise and knowledge sharing employing service and development
programs most appropriate for the growth of developing world’s economy. The measures could
assist in developing strong agricultural systems capable of supporting countries’ economic
growth, moreover, improved servants in the preponderant stake system entail complete execution
of the global trade policies as well as eradicating the origins of the trade imbalances resultant
from subsidies. Dutiful policy implementation on sustainable development and equity regarding
agricultural trade can effectively contribute to actualized development prospect, thus offer
chances for the developing countries to gain less depend on the external aids and strive for a
sustainable food secured and economic well-being society.
4.5 Methodologies for Measuring Export Subsidy Impacts
In assessing the core areas of export subsidies, it is possible to identify methods of analysis
which include economic analysis, social analysis and environmental analysis. While it
mainstreams economic effects of subsidies on production volumes, the distribution of exports
and imports and global market prices, impacts of subsidies on market relations and
competitiveness are described (McCorriston & MacLaren, 2012). These models also embrace the
second order consequences including change on land use, pollution, and distribution of income
among regions and economic activities. Impact assessment in this case is mostly centered on the
welfare effects for the key players such as farmers, consumers, and government finances
concerning how subsidies alter the distribution of income and availability of cheap food to
P a g e | 24
consumers (Martin & Anderson, 2012). Subsidy impact assessments on agricultural practices
performance are useful when focusing on the sustainability criteria assessing the inputs that
affect factors such as greenhouse gases emissions, water use and biodiversity decline, it is critical
to advance both these approaches to enable the formulation of efficient policies on subsidy
reforms by reducing the costs on the government structure, while considering equity and
environmental preservation aspects as well. Thus, with the improved comprehension of these
effects, nations should previously attempt to build better and socially fair agricultural structures,
which are significant for global food security and meet the intent of sustainable development
initiatives.
5. SECTORAL AND COMMODITY-SPECIFIC ANALYSES
5.1 Dairy Sector and Export Subsidies
The export subsidy is prevalent in the dairy sector and all over the world especially in the
developed countries such as the EU and the US. These subsidies have the objective of helping
the dairy farmers by allowing them to penetrate international markets at lower costs than what
would be possible if there were no subsidies, for instance, the EU Common Agricultural Policy
has had features such as dairy export subsidies helping EU remains relevant in the global market
(OECD, 2019). Nevertheless, these subsidies have been regarded to bias trading by provide
cheaper prices by put offing the little dairy producers in non-subsidizing states. Export subsidies
in the dairy sector also affect the price stability as well as market insecurity; this is due to the fact
that export aids may trigger sale of large volumes of exports to international markets whenever
domestic producers have surplus amounts of supplies in the market (Meléndez-Ortiz et al.,
2009). This situation is not easy for dairy farmers across the globe because they face income risk
and planning difficulties. Furthermore, widespread use of export subsidies contributes to creating
P a g e | 25
unfair and non-sustainable dairy trade relations in the global level, thus the need for constant
reform processes in the WTO.
5.2 Grain and Oilseed Markets
Grain and oilseed markets are considered as one of the important commodities in the
international agricultural trade which is still dominated by export subsidies by developed
countries for their own producer’s benefits such as United States and Canada (Rude & An, 2015).
These subsidies have the objective of increasing production and preserving cost competitiveness
in international markets leading to higher producing quantities and lower export prices, export
subsidies affect the grain and oilseed prices since price supporters are within the markets in the
same way that bumper harvests or economic strife displays volatility in price (Peltzman, 2000).
These variations cause the exporting as well as the importing countries to be in a state of
turbulence which in turn affects food security as well as economic stability. In addition, export
subsidies distort market incentives whereby exports are encouraged at the expense of sustainable
agricultural innovation that can increase the productivity of the sector as well as efforts aimed at
enhancing environmental sustainability. Hence, despite their intended purpose of encouraging
domestic farming, these subsidies’ wider incidences call for reflective appreciations of their
potential impacts on the global markets and sustainability outlooks.
5.3 Sugar and Sweeteners
The sugar and sweeteners market especially displays high level of government interferences such
as subsidies in productions in EU, US and Brazil. The subsidies for exportation in the sugar
sector are affected with an intention of supporting the domestic producers and ensure they
competitive within the global markets (Orden et al., 2011). However, these subsidies have been
receiving criticism because they act as a disruptive force to the world trade systems. Hence, by
flooding the global market with artificial sugar supply and reducing the prices, especially on the
P a g e | 26
developing countries that rely more on the product, it distorts the market cycles for prices
(Schmitz et al., 2010). It does this while at the same time making it difficult to distinguish
between what constitutes fair trade and renders sugar markets unstable. However, this
dependency of subsidies continues throw challenges to the enhancement of market transparency
and loss of incentives in sustainable practices for agricultural produce including those for the
sugar industry hence affect the objectives of environmental and social sustainability greatly.
5.4 Meat and Livestock
Meat and livestock markets are hugely affected the export subsidies that are mainly used by the
developed countries like US and EU to support their meat exports to set up the production cost
and price that compete in the international market effectively (Peterson & Orden, 2008).
Although these subsidies are meant for subsidizing domestic producers, they cause factors such
as overproduction, imbalance in markets and negative impacts on environment due to intensive
meat production. This paper argues that export subsidies in the meat sector influence the global
food security in terms of supply and price changes of such food horticulture necessities
especially proteins that are essential for the human body (Panagariya, 2005). The importing
countries, particularly the developing nations which more often than not, struggle to feed their
populace, are struggling to compete with, and experiencing even higher food insecurity as a
result of the flooding of the international market with cheaper meat due to its exportation by the
developed nations. Finding ways to increase the production of meat while at the same time
boosting the sustainability of the environment continues to be a contentious issue when it comes
to governing the flow of meat in the international markets. Solving such issues needs extensive
policies that would include protection of equitable trade, reasonable farming procedures and
handling of the negative consequences of subsidies in exportation to the local and the global
economy.
P a g e | 27
5.5 Fruits and Vegetables
The fruits and vegetables sector receive mixed effects from export subsidies as compared to
other commodities of agricultural production, although the use of export subsidies is
comparatively low in this sector. Still, some countries provide export subsidies for fruits and
vegetables to make sure that their market is not saturated for producers who are affected by
international trade (Moschini et al., 2008). Such subsidies can impact supply chain and market
access by producers’ native country when they are not given such subsidies on their products.
Subsidization in exportation of fruits and vegetables promotes market instability and
fluctuations. Relationship between export subsidies in fruits and vegetables to market insecurity
and unstable prices depending on season of production (Meléndez-Ortiz et al., 2009). Food
availability and food access, as well as rural development, in both exporting and importing
countries are affected with potential consequences for people’s sustenance and vulnerability.
Solving these issues calls for enrolment of fair trade and sustainability measures towards the fruit
and vegetable trade internationally. Export subsidies have multifaceted effects for various sectors
of agriculture and also reveal the challenge of the complexity of exports and exports governance
to frame balanced policy to meet sustainable development goals.
6. POLICY IMPLICATIONS AND FUTURE OUTLOOK
6.1 Alternative Policy Instruments for Supporting Agriculture
WTO regulation and the pressure put on government through global trade requires that most
policies thereof be put in place through other than the use of export subsidies Hence
Governments have adopted various policy instruments to support agriculture. The most issued
solutions include direct payments and income support measures which aimed at delivering
financial certainty to farmers whereas exporting at higher prices and thus not distorting the
foreign markets by market prices (Swinnen, 2018). These programs seek to increase food
P a g e | 28
production, food availability and income in rural areas and they need to do so while respecting
WTO rules and guidelines on subsidies that are considered trade distortive. Also, relatively large
amounts of resources committed to agricultural R&D, physical and human capital improvement
in agriculture and extension services can also act as policy instruments. Such investments help
improve the agricultural productivity and its stability to the perennial outcry of market
fluctuations (Vercammen, 2020). Diversification of support mechanisms can meet the particular
needs of certain sectors and individual regions which can help balance the economic
development, not to mention making the systems stronger when it comes to shocks and stresses.
The precedence ushered such multifaceted approaches under the fold of agriculture policy which
underlines integration of agricultural policies with general economic development and trade
liberalization towards sustainable agriculture for development throughout the world.
6.2 Domestic Support Measures and Their Trade Effects
Domestic support measures refer to all the subsidies that are provided to farmers basically to
support the production of agricultural produce, income standardization, and rural development
programs that are within a country. Such policies are basically different from export subsidies
these contain input subsidies, price supports, and crop insurance programs in order to hedge
production risks and income volatilities (Valdes & Foster, 2012). However, they can affect the
pattern of international trade by giving direction to production decisions and market signals, thus
putting the un-subsidized players at a disadvantageous position in international markets. Thus,
effects of domestic support measures on trade differ from one country to another and from one
sector of agriculture to the other. Large support levels may result in carry-over of stocks which
translate to sales surpluses and a bumper export that to a large extent may trigger dumping and
market instability (Sumner, 2005). Balancing the support to domestic farmers and the
multilateral trade commitments is still the key concern for the policy makers and requires the
P a g e | 29
development of coherent and clear policies that ensure a fair competition and promote
sustainable development worldwide.
6.3 Food Security Concerns and Export Restrictions
Economic insecurity necessitates some countries to impose export controls in the situations when
there is either a shortage of certain food items or their prices are higher at home. These measures
include export taxes or quotas in order to guarantee an adequate steady consumption of the
domestic supply and the stabilization of prices, but are counterproductive when it comes to
fluctuations which in the international markets and the unpredictable disruption within the sphere
of the food trade (WTO, 2015). Many of the aforementioned countries rely on food imports to
feed their growing populations, and they are vulnerable to these measures often because they
allow the developed countries that export the foods to dictate terms of trade. Controlling export
fluctuations for food security purposes are not an easy task as it has both positive and negative
impacts, which main challenge being the balancing between the short-term policy goal and the
long-term sustainable economic development (Tangermann, 2011). It is necessary that countries
of the world collaborate through cooperation and that trade policies are open in order to reduce
harm and inequalities which export restrictions cause to world food security; for helping
agricultural sustainability.
6.4 Environmental Implications of Export Subsidy Elimination
Eradication of export subsidies presents some profound environmental impacts most especially
on the aspects of land, water and/ or endangered species. These subsidies lead to the use of
comprehensive technologies that cause social cost by polluting the environment through issues
such as deforestation and soil erosions, as observed by Yu et al. , (2011). DiMauro stresses that
taking out these subsidies can encourage improved soil health, decreased emissions of
greenhouse gases, and the improvement of ecosystems. , negative side effects may emerge: for
P a g e | 30
example, land use may be given up in less productive areas, or higher environmental impacts
may be accepted to offset reduced earnings (Schwartz and Parker 1988). Policy actions should
involve environmental factors into agricultural trade liberalization and promote sustainable land
use, agro-ecological practices and resource conserving agriculture technologies/systems
(Tothova, 2011). Integrating trade policies with environmental objectives ensures compatibility
between agricultural production and environmentalism; therefore, agricultural advancement
contributes effectively to the environmental conservation objectives
6.5 Emerging Issues in Agricultural Trade Policy
Contemporary trends in agricultural trade policy pertain to concerns and developments defining
new forms of the world food map. Some of these are; digital agriculture, enhanced
biotechnology, climate change and new consumer trends towards sustainable and responsibly
sourced products (Sheldon, 2012). Authorities and decision-makers must consider these factors
in order to achieve positive impacts of trade policies for food security, environment and people’s
equity, however, global trade protectionism, geopolitical tensions, and the COVID-19 crisis have
highlighted the weak parts in the global food supply chain and the agricultural trade policies to
strengthen (Wise, 2009). These emerging issues have to be solved with flexible policies that can
promote the usage of new technologies, regulate cross-border transactions, and strengthen the
food chain throughout the future risks and shocks (OECD, 2019). And therefore it will require
the united effort of governments, international organizations, and other relevant stakeholders to
steer through all these challenges and to unlock opportunities for sustainable development of
agriculture and for realization of the desired and much-needed global food security for all.
P a g e | 31
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