International Agricultural Trade:
An Overview

Background

International agricultural trade has been described as inexplicable, exasperating, and the most distorted segment of the global economy. Nevertheless, it is important to agricultural producers, and that importance grows as production surpasses domestic demand. The U.S. Department of Agriculture's (USDA's) Foreign Agricultural Service (FAS) reports that the United States is the world's largest agricultural exporter with nearly one quarter of farm cash receipts coming from export markets. International agricultural trade is a complex subject that involves many different facets of international and domestic law, including international treaties and agreements, domestic trade laws, and general policy decisions. This overview focuses on these broad concepts in the large, intricate subject area of international agricultural trade.

International Treaties and Agreements

General Agreement on Tariffs and Trade and the World Trade Organization

The General Agreement on Tariffs and Trade (GATT), adopted in 1948 following World War II, created a multilateral trading system that established rules between participating nations in order to assure the smooth and predictable international trade of goods. It also fostered the liberalization of trade through the reduction of protectionist policies. GATT was intended to be a provisional measure until the International Trade Organization (ITO) could be ratified. However, the ITO charter was never adopted, and GATT operated until the World Trade Organization (WTO) assumed control of the multilateral trading system in 1995. The GATT is still used by the WTO as the principle source of rules and agreements for the trading system.

The WTO's rules and agreements that provide the legal framework for international trade were generated by negotiations between the member nations of the WTO. The WTO also provides a forum for resolving trade disputes between nations.

The GATT originally applied to the sale of goods, including agricultural products. However, many exceptions and exemptions for agriculture allowed protectionist policies to continue in the agriculture sector. This resulted in international agricultural trade becoming distorted through the use of policy tools such as import quotas and export subsidies. At the Uruguay round of GATT negotiations in 1994, which also created the WTO, member nations produced the Agreement on Agriculture in an attempt to reduce trade distortion in the agriculture sector.

Agreement on Agriculture

The Agreement on Agriculture focuses on market access, domestic support, and export competition. Market access is addressed by tariffication and the reduction of tariffs. Tariffication is the process where non-tariff restrictions on trade are replaced by equivalent tariffs. The Agreement then calls for the reduction of tariff rates. These reductions are phased in over a period of years. Developed countries must reduce their tariffs more quickly and to a greater degree than developing countries, and least-developed countries are not required to reduce their tariffs. Special safeguards are also in place to protect countries from imports that fall below a set price and sudden surges of imports.

Domestic support policies that distort trade are also reduced under the Agreement. Trade distortion is defined as higher or lower prices and higher or lower quantities of goods being produced, bought, or sold than would exist in a competitive market. Because some policies affect trade and others do not, they are often categorized by commentators as "amber box" policies, "green box" policies, or "blue box" policies.

Amber box policies have a direct impact on production, thereby causing trade distortion, and are required to be reduced. The reduction is based on the total aggregate measure of support (Total AMS) that is calculated from each country's level of support to agriculture in 1986-1988. Once again developed countries must reduce amber box policies more and faster than developing countries, while least-developed countries are not required to make any reductions.

Green box policies are domestic support programs that only have a small impact on trade, and can be used without restraint. These programs often include research, infrastructure development, and direct payments to farmers that do not increase production, such as environmental payments or certain income support.

Blue box policies are permitted programs that provide payments to farmers to limit production or to provide for rural development and small-scale programs that directly support only a small portion of a product's production.

Export subsidies are also limited by the Agreement on Agriculture. Export subsidies are prohibited unless they are listed by the member nation. The listed subsidies must be reduced over a period of years. Once again, developed countries must reduce their export subsidies by the greatest amount over the shortest period of time, followed by developing countries, and no reductions are required of least-developed nations. Certain instances of highly subsidized exports in the form of food aid to poor nations are permitted.

Agreement on Sanitary and Phytosanitary Measures

Another agreement that is important to international agricultural trade is the Agreement on Sanitary and Phytosanitary Measures (SPS). This agreement recognizes the importance of a nation's right to protect food safety, animal health, and plant health. However, the Agreement attempts to ensure that these laws are applied to protect health and safety rather than as trade barriers. The Agreement attempts to use international standards if possible, and where they do not exist or a member desires higher standards, the standards must be based on scientific justifications and risk assessments under procedures outlined in the Agreement.

Agreement on Trade-Related Aspects of Intellectual Property Rights

The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) also has implications for agriculture. The TRIPS agreement is intended to regulate ideas and knowledge as part of trade and to provide society with benefits received from encouraging invention, innovation, and research. This WTO agreement mandates that members protect intellectual property either through patents or the development of other intellectual property rights protection systems. Intellectual property rights are especially important for agriculture in the areas of biotechnology, conventional species breeding, and agricultural input products such as pesticides and mechanical equipment. For a discussion of biotechnology as the subject relates to agriculture, please visit our Biotechnology Reading Room.

Dispute Resolution

The WTO also provides a forum for dispute resolution for disagreements that inevitably arise between trading nations. Often agricultural trade issues such as alleged trade distorting subsidies are at the heart of the disputes. The WTO attempts to provide fast, equitable, and mutually acceptable resolutions to disputes between trading nations.

Countries are encouraged to settle disputes between themselves and are permitted to do so during any portion of the formal dispute resolution process. The formal process has specific deadlines, but these may be changed by agreement between the parties. The process is designed to take one year without appeal or one year and three months with appeal.

The first stage is for consultation and mediation between the countries. The next step is the empaneling of a group of experts to review the dispute and prepare a report for the Dispute Settlement Body, the full membership of the WTO. The panel reviews each country's case in writing and then a series of hearings are held. After the hearings, a first draft of the panel's report, the facts and arguments sections, is submitted to the parties for comment. Next, an interim report is prepared that includes facts, arguments, findings, and conclusions for review by the parties. After review, a final report is submitted to the parties, and three weeks later it is submitted to the entire body of the WTO.

Unless rejected by a consensus of the Dispute Settlement Body, a report becomes a ruling automatically after 60 days. Both sides to a dispute may appeal a report.

Appeals must be based on legal issues and cannot open new issues or review existing evidence. The appeal is heard before three members of the seven-member Appellate Body. The Appellate Body consists of individuals with legal or international trade backgrounds not affiliated with any government. The members of the Appellate Body serve four year terms. The appeal will affirm, modify, or reverse the legal findings and conclusions of the panel's report. The Dispute Settlement Body must then accept or reject the Appellate Body's report.

If a country loses a dispute, it is expected to change its laws or policies rapidly to conform to the WTO agreements and the dispute ruling. If the appropriate changes are not adopted within a reasonable time period, the complaining country can request that trade sanctions be applied to the noncompliant country.

Trade Agreements

In addition to the broad agreements that come from the WTO and GATT negotiations, the United States has trade agreements with individual countries and multiple countries within a region. These agreements may be free trade agreements that eliminate tariff and non-tariff barriers affecting trade between the parties to the agreement, or they may be agreements that deal with specific issues or products such as lumber, poultry, or rice.

The North American Free Trade Agreement (NAFTA) is a well-known example of a regional free trade agreement. This agreement removes most barriers to trade between the United States, Canada, and Mexico.

Between the United States and Mexico all non-tariff barriers to agricultural trade were eliminated and many tariffs were immediately eliminated with a gradual reduction of other tariffs to be accomplished over different periods of time up to 15 years for some tariffs. All agriculture provisions are to be implemented by 2008.

Between the United States and Canada the agricultural provisions of the U.S.-Canada Free Trade Agreement were incorporated into NAFTA. With only a few exceptions, all tariffs affecting agricultural trade are removed.

Between Mexico and Canada most agriculture-related tariffs are removed immediately or over a period of years. Tariffs on dairy, poultry, eggs, and sugar will remain.

Other regional free trade agreements and negotiations include the Free Trade Area of the Americas, the Central America Free Trade Agreement, and the U.S.-Southern African Customs Union. Country free trade agreements and negotiations include Australia, Bahrain, Chile, Morocco, Singapore, and Thailand.

Domestic Trade Laws

Many domestic trade laws impact international agricultural trade. When goods are imported into a country, the goods must generally meet all legal requirements of the importing country to gain entrance to the country. These laws fall into many categories including labeling, packaging, chemical residue tolerances, food safety laws, quotas, and tariffs. WTO member counties generally structure their domestic laws that affect international trade to meet their obligations under the WTO agreements.

Under the United States Constitution's Commerce Clause, Congress has exclusive power to regulate international trade. International agricultural trade is regulated by many federal laws. One such example is the country of origin labeling requirements included in the 2002 Farm Bill that require certain imported agricultural commodities to bear a label at the retail level indicating their source country. For a discussion of country of origin labeling, please visit the Country of Origin Labeling Reading Room.

Generally, agricultural products imported into the United States are subject to the same requirements as domestic agricultural products, with the exception of import duties, some grade and quality standards, and health restrictions. The United States Department of Homeland Security's Bureau of Customs and Border Protection (CBP) works with domestic agencies such as the Food and Drug Administration (FDA) and the USDA to enforce regulations on imported agricultural products.

Many domestic food and product safety laws impact international agricultural trade including the Pure Food and Drugs Act, the Federal Food, Drug, and Cosmetic Act, the Food Quality Protection Act, the Federal Meat Inspection Act, the Poultry Products Inspection Act, and the Grain Standards Act. Under federal legislation, the FDA is responsible for food safety with the exception of meat, poultry, and eggs. The FDA protects consumers from food that is impure, unsafe, or fraudulently labeled. The USDA utilizes the Animal and Plant Health Inspection Service (APHIS), the Food Safety Inspection Service (FSIS), the Grain Inspection Packers and Stockyards Administration (GIPSA), Federal Grain Inspection Service (FGIS), and the Agricultural Marketing Service (AMS) to regulate imported agricultural products under the authority of federal laws.

APHIS regulates animal and plant health. Imported agricultural products are examined for health and potential quarantine, humane treatment, and control of pests and diseases. The FSIS ensures that meat and poultry products are safe, wholesome, and accurately labeled. GIPSA and FGIS develop and maintain standards and inspections for domestic and export grain and also work to increase international marketing of United States grain. The AMS helps maintain a quality food supply through application of quality standards, grading, and certification. Certain imported fresh foods such as fruits, vegetables, and specialty crops must meet certain standards and grades in order to be sold in the U.S.

The Environmental Protection Agency (EPA) also impacts international agricultural trade through pesticide regulation. New pesticide safety and pesticide residue levels in food are determined by the EPA and then enforced by the FDA.

The CBP assists the other agencies with enforcement of the relevant laws on imported products at the port of entry. It also assesses and collects the necessary tariffs on imported goods.

Other domestic agricultural laws may impact trade indirectly. For example, domestic commodity price support programs and export subsidies for agricultural commodities may distort trade. These laws may cause commodity prices to be lower on the world market than they would be without subsidies. WTO member nations are restricted in the type and amount of subsidies that they can use.

Policy Decisions

Government policy plays a key role in international agricultural trade. Protectionist policies in agriculture are often used by countries to ensure that a country's food supply can be met domestically, to protect producers from the uncertainties of weather and world price, and to promote rural society. According to the WTO, these policies often result in political gains for the short term, but distort trade and result in inefficient producers and dissatisfied consumers with poor economic growth in the long term.

Free-trade policies promote the unrestricted flow of goods and services between nations. According to the WTO, this flow results in competition, innovation, and economic growth. However free-trade is not without costs. For example, economies change over time and competitive advantages shift, causing industries and jobs to move across borders over time.

These policy decisions affect international agricultural trade intimately. Subsidies affect commodities' world price, and policies may limit or promote producers' access to export markets in other countries.

Foreign Agricultural Service

The Foreign Agricultural Service (FAS) is an agency within the USDA that works to improve United States agricultural exports. The FAS pursues market development, negotiates trade agreements, collects statistics, administers some agricultural foreign assistance programs, and provides contacts to the international community and organizations.

The FAS employs agricultural counselors, attachés, trade officers, analysts, and negotiators worldwide. The FAS works with the United States Trade Representative's office to help reduce foreign trade barriers and other policies that hinder United States agricultural trade. The FAS, as the enquiry point for sanitary and phytosanitary issues and technical barriers to trade with the WTO, provides the official notification regarding these issues.

FAS personnel also collect market data on production, trade, and trade policy. This information is used to assist in the formulation of United States trade policy and negotiations and to assist exporters of United States agricultural products with business decisions.

The FAS carries out promotional activities to assist the development of markets for United States products. Financing is also provided to exporters through the Commodity Credit Corporation (CCC) to protect exporters from possible problems with foreign banks.

In addition to assisting with commercial transactions, the FAS works with the United States Agency for International Development in the administration of foreign food aid programs. Food aid is provided primarily from three programs: Food for Peace provides concessional agricultural commodity sales on a long term basis to countries that need it; Food for Progress provides commodities to countries expanding free enterprise in their agricultural sector; and Donations provides donations of surplus CCC commodities to countries in need.