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EFFECTS OF FREE TRADE AGREEMENTS ON THE FOOD AND AGRIBUSINESS SECTOR
I. INTRODUCTION TO FREE TRADE AGREEMENTS (FTAS)
Definition and types of FTAs
Free Trade Agreements (FTAs) are one of the keys to globalization as they assure countries of
better access to markets since trade barriers between members countries are removed FTA is
underlined by the fact that it has difference in terms of coverage as well as detail but mostly has
the function to deliver positive contributions to existing levels of economic cooperation by
removing trade barriers in the form of tariffs, quotas and other measures of protection. Abbot and
Schmitz provide the historical backgrounds of FTAs, they categorize them into broad
classifications based on their comprehensiveness and level of Integration. These classes
include, Preferential Trade Agreement (PTA) which implies that a number of selected products
have a tariff which is lower than that of other products when imported in member
countries. Free Trade Areas also known as FTAs demand free tariff on almost all imports from
the trading partner but every member country has substantial autonomy on their trade relations
with the rest of the world. Customs Unions (CUs) provide a common external tariff hence they
provide policy coordination on matters concerning trade with the rest of the world as ear-marked
by Anderson and Martin (2009). Readily distinct from the previously mentioned are Common
Markets that specify freedom of movement for goods, services, labor and capital. The Economic
Union is considered the deepest level of economic integration because it embraces all sectors of
the common European market and includes all members’ monetary and fiscal policies Anderson
and Valenzuela (2008). There are various FTAs aiming for advancement of trade and cooperation
on economic change whose implementation is dependent on political and organizational targets
of the member states. For instance, PTAs can be utilized by those nations which have not
implemented the liberalization of trade deeply, while Economic union is predominantly utilized
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by nations which are eager on deeper integration of their economies. The choice of FTA is varied
and choice made is not only based on broad tendencies in FTAs, but depends on types of
tendencies in FTAs as such factors may be essential for such a sector as agriculture where
manipulations of trade have been obvious in the past decades (Anderson & Martin, 2009;
Anderson & Valenzuela, 2008). The need cannot be overemphasized to get a grasp of the
definition and types of FTAs as these underpin the repercussions within the specialty of food and
agribusiness.
Historical overview of agricultural FTAs
Analyzing the historical experience of Free Trade Agreements in the sphere of agriculture, it is
possible to state that despite the general view on trade policies as relatively slow and unyielding,
shifts that take place in this regard are rather considerable and can be observed even in the short
term. For a longer period continuing from the middle of the twentieth century, agricultural FTAs
went further in addressing distortions in trade due to numerous subsidies, tariffs and even the
NTBs. Anderson and Valenzuela (2008), have described that change in the agricultural trade
policies in mid-1955 to 2007 is largely influenced by the changes in the domestic economies of
the countries and the changes in their international trade relations. Initially markets opened for
agricultural produce were relatively less entrant, while competitive farming markets were greatly
dominated by government with an aim of promoting stable prices, most of those interventions
resulted in gross distortion of commerce, especially in agricultural produce as governments
sought to safeguard their farmers from globalization. Anderson (2008) political economy of
agricultural prices distortion view, is a view that addresses the political forces that wield different
sorts of agricultural trade policies and every other economic policies. The right to liberalization
was achieved at the close of twentieth century after the formation of an organization of the
general agreement on trade and tariffs (GATT) and later the World Trade Organization (WTO).
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GATT started the Uruguay Round in 1986 culminating in 1994 and had a powerful impact
leading to Agreement on Agriculture aimed at spearheading planned simple trade distorting
subsidies and tariffs. Baldwin in his article points out that the creation of the WTO resulted in a
monumental shift in the agricultural trade. But as far as liberalization in agriculture and
noticeable advancement is concerned, the Doha Development Round which started from 2001
was halted due to inequality concerns among the developed as well as the developing countries
leading to what some economists as well as trade specialists have classified as the ‘spaghetti
bowl’ effect since countries embarked on the negotiations of the B&RTAs in an attempt to steer
clear of the deadlock and engage in trade relations that depict more immediate
benefits. Although these agreements have been that different in regards to the amount of detail
and provisions made, one thing that has been evident in all of these global trade and agriculture
agreements is that they have all made significant strides towards liberalizing trade in agricultural
and other farm products thereby tearing down barriers and opening up opportunities for markets
for farmers and everyone in the agricultural business.
Rationale and objectives for FTAs
The roots of FTAs lie in the drive for raising the degree of integration, effectiveness of trade and
reduction of market inoculation, as Abbot & Schmitz (2017) highlights that it is requires to alter
domestic polices supporting agriculture as it imparts efficiency resulting in competitiveness,
articulate the basic rationale of FTAs. These are areas such as downward revisions in tariffs and
other trade barriers that are essential to open up markets for agri-food exporters and eliminate
unfair competitive advantages thereby challenging industrial stakeholders in agriculture to seek
efficiencies in production through innovation. Anderson and Martin (2009) stress significant
producer aid and major prejudice in numerous Asia nations, which elucidate how protectionism
functions and comes with welfare costs. The various FTAs assist in opening up the liberal trade
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practices, which bring about the domestic costs to match the corresponding world costs, thus
reducing the destruction caused by subsidies and barriers in trade, Anderson and Valenzuela
(2008) provided a comprehensive report on the incidence and impacts of distortion costs for half
a century globally but this paper uncovered almost all the country that protected this sector.
These distortions are balanced out by FTAs which remain instrumental in reducing the barriers of
trade and to also facilitate easy and more predictable trade than how it would be if the barriers
remained and helping to calm the markets and also reducing the volatility of the trade in
agriculture. Anderson (2010) examines the political economy of agricultural distorting prices in
developing contribution to policy reforms and on its rationale on FTAs, it extends its arms in
retrieval of economic factors and political factors. FTAs are adopted as countries seek to enhance
the extents of connectivity and economic relations within a region, strengthen political alliances
and attain more desirable conditions for trading. Baldwin (2016) WTO as well as through the
lens of multilateral agreements while and the dynamics of trade regimes through the agreements
has its focus and legal coverage but in FTAs the focus and approach is more specific, opportune
in addressing bilateral or regional trade issue. The reasons and aims of FTAs are to make trade
liberalization more efficient and integral for both goods and services, to remove trade distortions
and to build long-term partnerships with other countries for better trade relations and to re-
establish and improve the WTO’s agricultural trade policies for a competitive trade environment
in the global markets.
Major FTAs impacting agriculture (e.g., NAFTA, EU-Mercosur, CPTPP)
The withdrawal of quotas and several large Free Trade Agreements (FTAs) shifted and reversed
patterns and policies of agricultural trade. NAFTA that has reciprocally dismantled most of the
tariffs on agricultural product for exports and imports, for enhancing the economic integration it
also benchmarks the alignment of Sanitary and Phytosanitary Measures and reductions of Non-
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Tariff Barriers. The Comprehensive and Progressive Agreement for Trans-Pacific Partnership
(CPTPP) is one of the eleven countries in the Asia-Pacific region which aims to eliminate the
tariff barriers on horticultural products, provide greater market access and create a new, better
export market for the farmers (Anderson & Valenzuela, 2008). The specificity of the regulatory
cooperation and the ways of addressing the matters that make the trading environment more
predictable is another aspect of the agreement. The EU-Mercosur FTA, regardless of the fact that
it has not launched yet, shall liberalize most of products in agriculture by reducing ad valorem
tariffs and eradicating specific tariffs and enhance trade opportunities and competent trade
relations between the European Union and the Mercosur countries (Bureau et al., 2009). It
includes geographical indication, development & sustenance and sanitary and phytosanitary
regulation. Anderson (2010) opines that these FTAs are instrumental in the process of
liberalization of agricultural prices which is resultant of various policies, thus leading to better
utilization of resources with the formation of competitive markets.
II. THEORETICAL FOUNDATIONS OF FTA ANALYSIS
Trade creation and trade diversion effects
Trade creation and trade diversion are the concepts that hold significant value in analyzing the
influence of FTAs on trade globalization, trade diversion arises if FTAs replace higher cost
indigenous production by lower cost imports coming from member country for better efficiency
and welfare. For example, Carter and Smith (2007) used a suitable case of California’s
agricultural industries to show that increased import competition serves as a catalyst for
innovation and increased productivity. Trade creation is generally welfare enhancing as it leads
to more efficient use of resources and results in better prices and more variety for consumers, as
was seen by the discussion on the example of Israel’s citrus market. Trade diversion on the other
hand refers to a situation where the FTA favors imports from member’s countries instead of
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cheap imports from non-member countries hence resulting to trade. This effect can result to
inefficiency and possibilities of welfare losses as it affects the trade from efficient firms from
other countries to those firms benefiting from the agreement. In the post 1950 period, Clemens
and Williamson (2012) explain how policy-induced changes in tariffs and trade policies have
redistributed, though not necessarily created, trade and made gains from trade a matter of
tradeoffs which includes a discussion about the advantages and disadvantages of trade diversion.
The shift in the relationship of tariff and growth shows that although some regions benefited
from preferred status, other regions were harmed by shifted trade that benefited less efficient
suppliers. Coleman (2010) surveys the topic of adopting globalization in agriculture but provides
a nuanced analysis for the FTAs which indeed does prompt trade creation but also a huge trade
diversion. Policies in some manner must account for such effects to optimize on the total welfare
of the recipients. To build better trade policies for those industries and for the world,
policymakers should not only take into account FTAs’ trade creation effects but also carefully
consider potential trade diversion effects when designing FTAs for long-term trade liberalization
goals and for the sustainable growth of agriculture markets, analyzing these effects helps in
understanding the other macroeconomic effects resulting from the implementation of FTAs
which are vital in making positive contributions to the trade policies’ in world trade.
Static and dynamic effects of FTAs
FTAs dynamically create static effects in the sense that they lead to instantaneous changes of the
trade patterns and economic activities, hence improving efficiency and expanding markets.
Dynamic effects are realized gradually and help build sustained development, competitiveness
and innovations. Assessment of the comprehensive effects of FTAs on member economies
requires not only understanding of the static consequences but also dynamic effects as well as the
ability to look for the optimal solutions for maximization of advantages and minimization of the
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negative effects of FTAs. FTAs generate both direct and indirect impacts on the member
economy; these impacts are capable of altering the trade flow and realizing growth. The static
effects are the direct consequences after eradicating the barriers to trade and include alteration of
production, consumption, trade, and more. Coleman (2010) explains that in the short-term, FTAs
provide static gains through tariffs whereby this leads to a decline in the price of imports, hence
enhancing consumers’ surplus. Producers are advantage due to increase in demand and large
output while these advantages may at times dribble to some industries and areas. Contrary to
these dynamic effects happen over a period of time and pertain to long-term changes in economic
growth, productivity and investment. According to Davis and Wilf (2017), it is notable that
getting access to the markets through membership in the trade organizations such as GATT/WTO
also fosters the long-run institutional changes and economic integration. Dynamic effects usually
result in increased competition and innovation as the firms adapt to the new structure of a more
competitive market by acquiring new technologies and improved methods of production. As
Deardorff & Stern (2008) noted, liberalization in services that are frequently linked with FTAs is
critical for gaining dynamic benefits by increasing efficiency and productivity in the service
industries. Opening up services trade can be beneficial in improving the efficiency of resources
and the level of economic activity thus supporting the overall post-FTA favorable effects on
economy’s performance. Diaz-Bonilla and Thomas (2016) discuss how FTAs can affect food
security, among them it is noted that the impact of trade liberalization which is contingent upon
the country environment. While for some countries, FTAs helps in food security since it assists in
underlining the supply chain and lowering the prices of foods, for other countries, FTAs may
present some difficulties, as for example exposing the local farmers to competition.
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Computable general equilibrium (CGE) modeling
CGE modeling technique is one of the most important and frequently applied tools for analyzing
the effects of policy shifts, this kind of modeling involves the use of real economic data to
estimate how an economy could respond to different policies, technologies or other shocks.
Wong and Trewin (2016) identify the advantage of the CGE models in the assessment of food
security as describing the impact of trade policies and agricultural markets. Since CGE models
can offer a micro level analysis on the distributional impact of FTAs, it would be easier for the
policymakers to decipher how one or the other sector or region is likely to be impacted.
Estevadeordal, Freund, and Ornelas (2008) analyze the impact of RTAs on trade liberalization
towards non-members within the framework of the effects of RTAs on trade flows where the
authors employed CGE models for the quantification of the analyzed effects, such models
demonstrate economic effects of regionalism and the effectiveness of FTAs in generating or
rerouting trade. Unlike other models, the results of CGE models are based on different scenarios
and assumptions so that it is helpful to filter out the particular effects of policy changes as well as
become valuable in capturing broad based effects. According to Evenett and Baldwin (2020) the
reliance of CGE modeling can be helpful in restart of multilateral trade talk. CGE models are
important for the generation of empirical evidence to assist such policy formulation at WTO and
other similar organizations, these models help in visualizing the general impact of trade policies
so that better strategies can be employed during negotiations. CGE modeling is a valuable
instrument for the analysis of FTAs’ economic effects, enabling researchers and policymakers to
forecast the effects of a particular policy and strategize on how to achieve the best results with
the least drawbacks. CGE models have become essential in policy formulation since they provide
detailed information on economic status and complex economic theory to help in the formulation
of policies to support trade hence improving on the effectiveness and equity of policies.
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Gravity models and empirical estimation
In empirical trade research it is common to use the gravity model in order to capture the impact
of different variables on the bilateral trade of countries. These models are analogies of the
Newtonian gravitational model of trade flows depending on the volume of the two countries’
economic product, typically gross domestic product or GDP, and inversely proportional to the
distance between them, which signifies trade costs. Fajgelbaum and Khandelwal (2016) also use
gravity models to establish the extent of the gains from trade in unequal ways and explain how
the different trade policies affect various countries with regard to their characteristics and
relations. Fao and Martin (2004) use gravity models to analyze the effect that trade liberalization
of agriculture has to do with poverty in Sub-Saharan Africa, these arguments stress the
importance of factoring in geographical and economic perspectives in assessments of trade
policies since gravity equations efficiently capture the distance and size effects on the trade
patterns and results, gravity models also assists in explaining the ability of trade reforms to boost
economic development by lowering trade hurdles and opening up markets. Feenstra and Taylor
(2014) explain the general use of the gravity models for international trade focusing on its
reliability in empirical analysis, application of gravity models is helpful in measurement of
impact of trade liberalization, trade agreements, trade barriers such as tariffs and in the analysis
of other policies that may affect bilateral trade. The variables that are included in these models
include GDP of the countries, distance between the countries, if they share a common language
or not, whether they share a colonial history or not, which gives a full picture on the factors that
influence trade. Gravity models enable empirical estimation making it easier for the researchers
to have an understanding of the extent of given factors on trade volume and they are beneficial in
offering recommendations to the policymakers, gravity models are a critical asset when it comes
to measurement in trade analysis. They allow one to dissect the impact of such factors as
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economic size, distance and the flows of trade. Hence the works of Fajgelbaum and Khandelwal
(2016), Fao and Martin (2004) as well as Feenstra and Taylor (2014) reveal that gravity models
are useful tools in evaluating policy and reforms implications on the international trade and are
therefore a good reference point in this study.
III. IMPACT ON AGRICULTURAL PRODUCTION AND TRADE FLOWS
Effects on domestic production and specialization
FTAs have a direct impact on the domestic production and pattern of specialization amongst
member countries shifting the relative gains of different sectors, Gaisford and Kerr (2001) that
describes how FTAs compel nations to concentrate on the production of goods they are most
adept at due to the removal of trade barriers, this specialization results in better usage of
resources resulting to increased productivity and economic growth. In the agricultural sector,
countries may change the structure of their production, to focus on crops and products in which
they have a comparative advantage in the global market hence, higher yields and export rates.
Goldberg and Pavcnik (2016) also expound on the effects of trade policy on production within a
country. Some of them claim that FTAs result in a shift in production from the sectors that are
relatively less efficient as compared to the trading partners sectors, to sectors that are
comparatively efficient. This reallocation can therefore entail short-term adjustment costs, for
example through ’creative destruction’ whereby jobs are lost in protected industries, but in the
long-run it improves productivity and overall economic outcomes. The effect of trade policy
executed in the domestic production depends on the degree of mobility of the economy and the
workers to new competitive pressure. Grossman and Helpman (2002) look at the impact of
interest groups in the formation of trade policies and the impact on production. They argue that
although FTAs enhance general efficiency in the economy, the gains and pains are not well
spread out across the sectors and lobbies. Interest groups such as agricultural producers may
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push for protectionism to protect their businesses which in turn affects the level of trade
liberalisation. These dynamics suggest that trade policy is not static and its effects are varied on
the domestic production systems. Thus, FTAs facilitate shifts in production and specialization
within the nation through comparative advantage doctrine and resource allocation in the most
suitable areas, the shift usually entails some form of short-term cost but always proves beneficial
in the long run. To be able to understand these effects one has to take into consideration
numerous factors that relate to interest groups and flexibility of firms in the economies of the
countries. Gaisford & Kerr (2001), Goldberg & Pavcnik (2016) and Grossman & Helpman
(2002) shed some light on these dynamics, showing how these processes play out with the trade-
off between efficiency and the domestic actors’ positions.
Changes in import and export patterns
FTAs create dramatic changes in the import and export propensities because they change the
relative costs and benefits and the competitive environment of member countries. Goldberg and
Pavcnik (2016) explain the effects of trade liberalization under FTAs in that it decreases tariffs
and other barriers hence making imported goods cheaper and more competitive in domestic
markets. This is often accompanied by a rise in imports due to improved competition which areas
that are produced more efficiently by foreigners. At the same time, domestic industries, which
are oriented on competitive sectors, receive a new impulse to increase exports as a result of the
better access to the foreign markets and decrease of the trade barriers. The changes in the
structure of trade as pointed by Grossman and Helpman (2002) are also explained by interest
groups. Manufactures that gain from FTAs support free trade liberalization whereas those that
lose stand to gain from protectionism. These influence the strength and type of trade relations
and directly affect the movement of merchandise. For instance, the agricultural producers in
countries that have a comparative advantage in certain crops or livestock products can heavily
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export them, while sectors that receive steep foreign competition may see a decrease in the
production of domestic goods and a corresponding increase in importation. Gulati and Fan
(2007) has given a comparative analysis of how agricultural and rural reforms have impacted
trade in China and India. The aggressive liberalization of trade through the sort of policies such
as FTAs has seen the export and import of agricultural produce skyrocket in China. Thus,
China’s exports became more specialized in high value added and processed agricultural
products, while imports concentrated on commodities that China could not supply domestically.
India with relatively slower process of trade liberalization, has also witnessed changes in its trade
patterns though not as dramatic as the above-mentioned countries. The export base of the country
has now broadened and import has also risen in segments in which the country’s production
capabilities are still low. FTAs reconstruct the import and export relations because they bring
changes in the trade barriers and market access and promote competitiveness, the effects include
higher importation of goods that face competition from similar products from other countries and
the exportation of goods that face stiff competition domestically. Interest groups provide a key
element in such perspective since they shape trade policies in their favour. Goldberg and Pavcnik
(2016) Grossman and Helpman (2002) and Gulati and Fan (2007) works provides insight into
this process, the nature and interaction between trade liberalization and changes in trade flows.
Intra-industry trade and value chains
Of the analysis of the consequences of the intra-industry trade and value-chain on agricultural
production and trade movement, the following activities pop from the recent literature: Vertical
product differentiation trade specialization accounts for by far the most appreciation in the global
agriculture trade that exhibits intra-industry trade whereby importing and exporting countries’
product are related in that the import and domestic products may be differentiated differently in
quality, brands or any other variables (Gulati & Fan, 2007). This is especially observed in
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processed foods and other capital-intensive food products that are exported depending on the
degree of advantage of exporting countries and the consumers taste and preference (Headey &
Fan, 2008). Overextension of value chains across borders has facilitated extended differentiation
and efficiency in the manufacture of goods to make them more competitive to access new
markets for the participating countries Hertel & Winters (2006). But challenges persist for
instance; the need to gather the set legal statutes as well as standards of food safety and quality at
the international level among the countries (Josling et al., 2004). In addition, the movements of
the II trade also shed light that these forms of trade create negations particularly to producers and
thus expand intra-country and inter-country income disparities because trade’s gains badly
distribute wealth (Hufbauer et al., 2007). The WTO has the responsibility of ensuring that the
global market is conducted under set down rules and bringing down barriers to trade which
forms the core of providing adequate support to sustainable agricultural trade and any possible
negative externalities that may be as a result of increased competition coupled with market
hegemony (Hoekman & Kostecki, 2009; Ingco & Nash, 2004). Therefore, with continued GVC
and IT trade relations, there are policy requirements in nurturing the positive externality of such
relation, balancing where there is market power inequalities and safeguarding of FS&O
regardless of the status of the country as a developing or developed country.
Case studies of FTA effects on specific commodities
Analyzing the real-life examples of FTAs, it is possible to identify the positive and negative
impacts of the agreements on particular commodities. Hufbauer, Schott, and Elliott (2007)
analyze the effect of FTAs on agricultural goods stressing how liberalization increased the export
of specific vegetables. For example, the NAFTA deal helped to boost the shipments of corn from
the United States to its southern neighbor, Mexico, which was advantageous for the American
farmers but posed a problem for the local producers owing to the low-priced competitive corn
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from the United States. Ingco and Nash explain the impact of FTAs on rice in Asia according to
the given date of publication (2004), they argue that trade liberalizations under FTAs have made
countries such as Thailand and Vietnam to become leading rice exporters, these countries
optimized on their strengths, improving on the production and market openness. But as you have
mentioned, this increased the competition which in turn compelled domestic producers to change
with the demands of the market sometimes calling for stark agricultural changes. Concerning the
effect of FTAs on the dairy industry, the authors Josling, Roberts, and Orden (2004) focus on the
EU and the EU’s partners. The liberalization of dairy trade under FTAs have also resulted into
more exports of EU dairy products because of high standards and fairly cheap. While this
expansion helped the EU producer, it presented problems to the less competitive dairy industries
in partner countries due to the introduction of superior quality products. Kee, Nicita, and
Olarreaga (2009), the trade restrictiveness indices were used to establish the overall effect of the
FTAs on the various commodities, they explain that their analysis proves that FTAs have caused
a general increase in trade liberalization and market opening. For instance, the liberalization of
trade through the removal of tariffs and non-tariff barriers on sugar has been instrumental in
enhancing trade mainly by impacting the competitive successful producers such a Brazil and
exerting pressure on less competitive producers from other geographical locations. Therefore,
from the case studies discussed, it is possible to conclude that FTAs have a very significant
impact on the particular commodities which results in the enhancement of exports, efficiency and
market access for competitive players. That said, these opportunities are followed by a number of
threats for industries that are not as strong competitors, as the existent competition might be
much higher, and new strategies will have to be implemented.
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IV. IMPLICATIONS FOR FOOD AND AGRIBUSINESS FIRMS
Market access and export opportunities
Market access and export opportunity is the main consideration of the food & Agribusiness firms
which is regulated by Free Trade Agreement that has a crucial role in the dynamics of the trade
system of the world today. Kerr and Gaisford (2007) noted that through trade in FTAs, trade
liberalization aids in doing away with costs of tariffs and disease control measures such as quotas
to enhance access to markets for agricultural produce. Market access expansion will help firms
take advantage of new market entry and export growth to achieve economies of scale and
product differentiation, according to Kim and Spilker (2019), there is much force in the argument
that regional trade agreements perform an important role in reducing the cost of trading,
particularly for the food and agribusiness companies looking forward to export opportunities.
Reduced trade barriers make it easier for imported goods to penetrate the domestic market, and a
shorter time taken from the point of entry to the final destination is particularly important for
perishable goods like agricultural products. Moreover, regional integration as defined by Kreinin
and Plummer (2008) is a signal for FDI in regions around the agribusiness sector because of the
stability that comes with the regional liberalization as well as market access to the integrated
regional markets. The flow of such FDI helps to fund the enhancement of technologies and the
expansion of production capabilities, make export more competitive, according to Krugman,
Obstfeld, and Melitz (2018) The FTAs do not only a way of diversification of export destinations
but also allow firms to concentrate more on sectors that they have strength, innovation and boost
productivity of the high value-added agriculture foods, FTAs are essential strategic assets that
facilitate forward integrated market access and export opportunities for food and agribusiness
industries by connecting industries with new value chains and enhancing development and
growth through trade and investment liberalization.
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Competition and industry consolidation
FTAs encourage competition and industry consolidation in fertiliser and staple food sectors in the
same way as attrition pressure leads to firms’ reactions to adapt, to innovate, expand or merge
due to the increased global competition resulting from FTAs. Competitiveness of the markets and
industrialization are two of the most impacted areas primarily resulting from Free Trade
Agreements (FTAs) concerning the food and agri-business industries. According to Lamprecht
(2021), the FTAs intensify competition because the barriers to trade are gradually eliminated and
the producer or firm is forced to look at other ways of ensuring their market dominance through
productivity. This competitive pressure may lead to industry consolidation since the drive of the
smaller firms may cause them to be inclined to merge or be forced out of business by the large
outfits who are willing to expand their operations in their quest for greater economies of scale.
Mendez-Parra and Willem te Velde (2017) explain about how the liberalization of industry under
FTAs affect the industry in LICs and its impacts and they mentioned that while some sectors may
have higher exports other sectors might face competitive pressures and industry consolidation.
Within, Michalopoulos (2001), the author takes time to explain the analysis of the developing
countries within the WTO but in so doing MLS opine that FTAs are tools that may allow these
countries to penetrate global markets on the other hand they allow the opening up of their
economies to competitive forces that may prompt industry regeneration. According to Milner and
Kubota (2005), there is a relationship between democratic government and trade policy reaction
to competition and argue that democratic government is more concerned with free trade
agreements meant for enhancing increase of competitiveness.
Regulatory harmonization and standards
FTAs lead to the harmonization of regulations which in turn help the food and agribusiness
companies gain market access and operational efficiency in an international framework that
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supports their integration into global value chains, ultimately enhancing economic growth and
development, the regulation of standards and measures are also pertinent when it comes to FTAs
since compliance with these rules can be beneficial especially in the food and agribusiness trade
since it helps in the access of markets and in operations. Min and Goletti (2000) provide an
excellent example of how promulgation of regulations in compliance with FTAs can facilitate
rice trade by removing barriers and associated costs for exporters, this harmonization increases
also the degree of market integration and competition because participants can be certain that
their products meet the respective standards of any of the participating countries. Mitra and
Ranjan (2010) discuss that while the process of regulatory harmonization has further
implications, the standardization of the regulations can reduce barriers to offshoring and increase
the flexibility of the labor market. This is pertinent for the agribusiness firms whose operations
are involved in the global supply chains, where it is easier to work under a standard procedure in
order to avoid some of the potential risks arising from the difference in the regulatory
environment. O’Rourke and Williamson (2002) history state that the process of globalization was
fueled by the attempts to synchronize regulations and standards across countries and borders in
order to improve trade processes and economic integration. They explained that this process has
been further boosted by the FTAs in that the latter compel countries to adopt similar regulatory
systems that facilitate trade while protecting consumers and the environment.
Investment and foreign direct investment (FDI)
Stock and FDI are important factors affected by FTAs especially regarding agriculture and agro-
food and related chains. According to Orden and Roberts (2007), the FTAs affect the investment
by eliminating subsidies and trade barriers and thereby enhancing the FDI in the agriculture. The
liberalization in sectors under FTAs usually invites the multinational firms to invest in the
countries with the right trade environment for business thus promoting technology, infrastructure
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and employment in the agricultural sector. In the paper ‘Trade and Aid in Development Policy’
Page (2006) explores the idea that FTAs can assist with the use of foreign aid by being a mode
for growth through investment and trade liberalization. fostering sustainable development
objectives by aligning private capital with public efforts. In their paper, Peterson and Orden
(2008) focus on the impacts of trade liberalization on agricultural trade in developing countries
and stress on the fact that, while experience from FTAs seems to be rather positive in terms of
theoretical models, the problem is that in practice, there might be issues with implementation and
adjustment costs that might hinder the positive effects of the FTAs. It stresses the necessity of
coherence between policies and the enhancement of institutions so that FDI on agriculture under
FTAs can yield its full potential, it can be concluded that FTAs are an important means to
increase the influx of FDI to the agricultural and agribusiness industries through the removal of
barriers to trade and the provision of stable legal framework for investment. Same with Page
(2006) and Orden and Roberts (2007) as well as Peterson and Orden (2008) noted that FTAs
have a bi-fold effect on increasing investment flows and improving market access for agricultural
products for the achievement of growth and development.
V. NON-TRADE ISSUES IN AGRICULTURAL FTAS
Environmental and labor provisions
Environmental and labor requirements as the non-trade issues have emerged as important aspects
of FTAs that relate to agricultural sectors, as the society became more concerned about
environmental and labor aspects. As Ray and Sinha suggested (2015), in the South Asian
countries like India and Sri Lanka, the FTAs are written to contain environmental provisions for
dealing with the adverse effects of agricultural trade on the environment, such provisions may
include those on sustainable farming, conservation of biological diversity and measures on the
utilization of agrochemicals for sustainable use. Such regulatory frameworks are actually
P a g e | 19
intended to not only establish the common set of environmental standards globally, but also
ensure that trading partners follow the proper course of agriculture. According to Reimer and Li
(2010), trade costs determine the extent of labor provisions in agricultural FTAs. Some authors
claim that the decrease of trade costs by means of FTAs can improve labor standards as it creates
incentives for adhering to the international standards and the promotion of the fair labor relations
in the sphere of agriculture. Rodrik (2018), in response, supports the balanced trade approach
while suggesting that labor issues should be incorporated into FTAs to avoid cases of
exploitation and enhance cooperation, he opines that integration of compulsory labor standards
in FTAs can elevate job standards, enhance workers’ rights and advance social change in features
of the agriculture industry, even though FTAs are mainly concerned with the issue of
liberalization of the trade in agricultural products, the integration of environmental and labor
measures points to an increasing awareness of the effects of trade on sustainability and equity.
Ray and Sinha (2015), Reimer and Li (2010), and Rodrik (2018) have identified a changing role
of FTAs in dealing with issues other than tariffs, the design of agricultural policies for
sustainable development, and welfare objectives.
Intellectual property rights and biotechnology
Biotechnology measures and intellectual property rights (IPR) are sensitive issues that are
generally associated with FTAs especially in the area of agriculture since the two are major areas
that invariably involve innovation and technology. Biotechnology is an area of IPR protection
that Sanders (2014) notes is affected by FTAs in that they determine innovations policies
concerning agricultural trade. Some of the FTAs’ clauses are those that create coherence of the
IPR rules to be followed in the member countries and thus give adequate protection to
biotechnological inventions and create suitable conditions for carrying out research in
agriculture. Schnepf (2006) provides insight into the trade and policies of agricultural products
P a g e | 20
involving USA and FTAs that contributed to the biotechnological development by improving the
IPRs, the discussed agreements help to transfer agricultural biotechnologies from one country to
another and contribute to the development of both developed and developing countries as far as
increasing agricultural productivity and achieving food security are concerned. In her work
looking at the effects of the WTO on IPR provisions worldwide Rose, (2004) notes that higher
form of protection will encourage investment into biotechnological advancement and increase
the trade in agriculture. FTAs are vibrant actors in setting up IPR systems that underpin
biotechnological developments in agriculture and, therefore, the global agricultural
biotechnology industry that is encourage innovation while at the same time ensuring necessary
access to agricultural technologies for the benefit of all countries. Another study of Sanders
(2014), Schnepf (2006) and Rose (2004) revealed that influence of IPRs, biotechnology and
agricultural trade through FTAs demonstrate positive potentials in advancing the agricultural
technology and economic growth.
Sanitary and phytosanitary (SPS) measures
Sanitary and phytosanitary measures are highly important in FTAs because they are geared
towards protection of human, animal and plant life through regulation of sanitary standards of
products and protection from pests and diseases in the trade of agriculture products. Rodrik
(2018) also talks about the issues of regulation of SPS measures within FTAs with reference to
the fact that these measures serve a twofold purpose of encouraging trade, as well as protecting
health and other standards in the various societies. These FTAs are normally developed with the
provisions that regulate SPS measures and aim at reducing barriers that hinder mutual
recognition of safety certifications. Rose (2004) brings into focus the WTO and the effects of
international trade and the author’s view is that standardized measures in SPS assists in
decreasing transaction costs and improving market access for agricultural products. In the paper
P a g e | 21
by Sanders (2014), the author considers the issues of US policies within trade in agriculture and
how SPS measures under FTAs affect the domestic agriculture and global market competition.
Some of these measures can either help or hinder market access, depending on their compliance
with the international standards as well as the Trading partners’ regulatory capabilities. Schnepf
(2006) offers the study of the trends and policies of the agricultural trade of the United States
America emphasizing the importance of SPS measures in determining the trade and market
integration, it elaborates how FTAs deal with SPS issues to foster agricultural export by putting
in place standard measures that are clear, evidence based and which does not compromise
consumer health for trade. Thus, SPS measures in FTAs remain important for agricultural trade
since they guarantee food safety, control the introduction of pests, and diseases, and align the
regulatory services to the principles of fair and efficient access to the markets. These works by
Rodrik (2018), Rose (2004), Sanders (2014), and Schnepf (2006) point out the several ways in
which SPS measures affect agricultural trade within the FTAs’ context while stressing their dual
purpose of regulating and promoting trade.
Dispute settlement mechanisms
DSMs are the key components of FTAs and their purpose is to address the trade disputes in the
most appropriate manner. Peterson and Orden (2008) elaborate on how DSMs in FTAs affect
agriculture in developing countries by being a framework whereby trade issues concerning trade
restrictions and aid in the sector are addressed. These mechanisms assist in managing
unpredictability and legal issues associated with uncertainties enhancing stable trading
relationships as well as investment on agriculture. Ray and Sinha (2015) employ South Asian
FTAs for the analysis of functioning of DSMs specifically in cases of trade regulation and
disputes over agricultural products between India and Sri Lanka, DSMs increase the level of
openness and compliance to the trade partners and ensure that trade partners adhere to the agreed
P a g e | 22
terms of trade. Using data from Reimer and Li (2010), determines the effect of trade costs on
agricultural trade, arguing that efficient DSMs lower transaction costs in cases of trade disputes
expanding market access of agricultural goods. Rodrik (2018) speaks about the effective DSMs
as for them the states should respect law and order in the international trade; the author insists
that proper DSMs make the FTAs more credible that leads to commercial stability and growth.
Rose (2004) looks into the WTO’s DSM and its effect on global trade, especially its
responsibility in settling and avert trade tensions that may distort markets for agricultural
produce. DSMs have a great responsibility of protecting the interest of the agricultural sector in
determination and timely and unbiased settlement of trade disputes in the frame work of FTAs.
Peterson and Orden (2008), Ray and Sinha (2015), Reimer and Li (2010), Rodrik (2018) and
Rose (2004) studies indicate that efficiency of the Dispute Settlement Mechanism plays a crucial
role in improving the predictability of markets, lowering barriers to trade, as well as promoting
healthy long-term relationship in the international agricultural trade relations.
VI. FUTURE TRENDS AND CHALLENGES
Proliferation of bilateral and regional FTAs
Bilateral and regional FTAs have increased in number and they both offer prospects and threats
to the future of agricultural trade. Schnepf (2006) notes that a rising number of FTAs and
especially the ones that contain provisions concerning agriculture exemplifies the trend towards
regionalization of the economy and especially in the agricultural sector. These agreements’
objectives are to liberalize trade and ease market access, which is advantageous for agricultural
exporters as it increases demand from buyers and competitive advantage. Swinnen (2007)
postulated that the increase of FTAs also brings about a new set of issues, particularly on the
policy coherence of the regulatory rules which are placed under the trade agreements. This is
because different standards can lead to confusion and will be costly to the producers especially
P a g e | 23
the small holder farmers in the developing countries hence might compound the inequality in
trade in agriculture commodities. Tangermann (2006) captures on the impact of FTAs on the
multilateral trading system as it stresses the increase in trade and economic growth in regions
through the use of FTAs but, at the same time, the weakening of the rules of multilateralism
where the Doha Development Agenda is a testimony, these challenges include the possible
fragmentation of international trade rules that are dispersed across the various FTAs and
concomitant implications for the attainment of comprehensible and coherent global trade rules
for agricultural trade negotiations for all the countries in the world. The global agricultural trade
has more opportunities for growth and economic integration through bilateral and regional FTAs,
however, it requires more attention to reconcile, simplify, and involve in its management system
with other country members. These works of Schnepf (2006), Swinnen (2007) and Tangermann
(2006) explain the dynamics and weaknesses that characterize the new FTAs emphasizing that
sound international cooperation is required to seize new opportunities of regionalism while
facing its challenges.
FTAs and the role of the WTO
Analyzing the future prospects of the international trade governance, which means the future of
FTAs and the role of the WTO, the following trends and challenges can be identified. Globally,
FTAs have mushroomed to indicate that differentiation and integration on regional basis has
become the trend (Schnepf, 2006). They are tasked with the role of lowering trade barriers and
opening up markets; however, they present challenges that include the challenge of having to
coordinate measures across different agreements (Swinnen, 2007). In this case the WTO which
was aimed as the pillar of the trade rules and discipline, seems to lose its centrality due to the
emergence of the series of FTAs that may have different sets of rules and different regime of
enforcement as noted by Tangermann, (2006). Rodrik (2018) opines that major trends that have
P a g e | 24
evolved over the years call for WTO to embrace in order to continue playing the role of a setting
trade standards globally. Also, the conclusion of FTAs together with WTO agreements presents
issues on the consistency and openness of trade regulation rules (Peterson & Orden, 2008).
However, as the FTAs start opening up areas that are beyond the conventional commerce like
IPRs and environmental facets, the WTO steps in to provide a standard setting role
internationally (O’Rourke & Williamson, 2002). However, some difficulties are still seen as
regards to the support of the FTAs as helping to augment rather than to hinder the multilateral
trade talks within the WTO framework (Rose, 2004). Nevertheless, the main concern in the
future is to integrate the increase in the number of FTAs with liberalization of multilateral trade
as a major task that will require cooperation between the states within the framework of the
WTO. The changing environment therefore calls for the WTO to redefine and strengthen its
function as an institution responsible for the settlement of trade disputes and the establishment of
the rules governing trade in the world that is characterized by multitude of bilateral and regional
agreements (Mitra & Ranjan, 2010). Measures to improve the transparency, coherence and
inclusion in the management of the global trade will be crucial in addressing these challenges
and making sure that liberalization of trade benefits are spread across the economies (Rodrik,
2018, Schnepf, 2006, Tangermann, 2006).
Mega-regional agreements (e.g., RCEP, TTIP)
In the future, the mega-regional agreements like RCEP and TTIP are expected to play a very
crucial role in the future of global trade. These agreements are some of the grand strategies that
have been developed by the participating countries to enhance the level of economic cooperation
that can open up new and large markets and supply chain linkages (Mitra & Ranjan, 2010).
However, there are difficulties that are associated with the issues of compromise of many distinct
regulatory systems and problems of the sensitive sectors such as agriculture (Orden & Roberts,
P a g e | 25
2007). For instance, the RCEP seeks to liberalize and transform the trading environment and
lower tariffs in a wide range of economy from East Asia to Oceania, therefore holds the potential
of triggering significant economic benefit, nevertheless, the process would present significant
political and economic disparities (O’Rourke & Williamson, 2002). Likewise, TTIP aims at
regulating the policies of the EU and the US whereby it may open doors to new opportunities but
also face controversies regarding matters such as data protection and the environment (Peterson
& Orden, 2008). These agreements can be seen as a manifestation of regionalism on the
backdrop of threats of vertical fragmentation and horizontal exclusion due to multilateral trading
system (Page, 2006). However, it is imperative that the agreements that are signed for the
implementation of the green supply chain have enforceable and efficient dispute resolution
clause and strict compliance with the commitments made for the fair distribution of the benefits
among the stakeholders (Mitra & Ranjan, 2010). Gradually, these mega-regional agreements are
altering the global trade governance, and the position of organizations such as WTO; thus, this
makes it necessary to constantly monitor such agreements so as to avoid profound negative
implications and promote the concept of inclusive development (Peterson & Orden, 2008; Page,
2006). Finally, the optimization of economic benefits between geopolitical factors and domestic
policies constitutes a key question for mega-regional agreements in the context of further
development of the global trade system (Orden & Roberts, 2007; O’Rourke & Williamson,
2002).
Implications for sustainable agriculture and food security
As for the future, the prospects causing sustainable agriculture and food security to face several
key issues and trends in the international trade environment are expected to emerge. First of all,
the RTA like CPTPP and RCEP might result in a higher level of competition and market access
for agricultural products (Kee et al., 2009; Lamprecht, 2021). Such agreements usually contain
P a g e | 26
provisions that are meant to coordinate existing and new regulation and standards to enhance or
constrain sustainable agricultural practices depending on the level of strictness and
implementation of these provisions (Kim & Spilker, 2019; Mitra & Ranjan, 2010). Secondly,
with the deepening of economic integration through RTAs there are questions and speculations
on the consequences of increased production and trade in agricultural products on the
environment and the planet through the loss of biological diversity and increase in carbon
emissions (Peterson & Orden, 2008). Furthermore, the interdependency between trade
liberalization and food security is still a burning topic because while the liberalization leads to
improved access to food through trade flow, it also results to local system vulnerability (Rodrik
2018; Sanders 2014). Thirdly, new dynamics of supply chains brought by RTAs might have
changed or impacted on production and distribution systems of agricultural products thus
affecting the smallholder farmers and those living in the rural areas in one way or the other
depending on the region (Swinnen, 2007; Schnepf, 2006). Finally, in the light of these shifts,
there is a need to improve the physical protection of agricultural systems from climate change
effects and natural disasters with polices that incorporate trade agenda with sustainable
development goals (Reimer & Li, 2010; Ray & Sinha, 2015). To overcome these challenges, it
will require proactively constructed policies that encourage sustainability, the fair access to
markets and achieving food security within an ever-shifting global trade landscape (Mendez-
Parra & te Velde, 2017; O’ Rourke & Williamson, 2002).
P a g e | 27
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