Reflections on Agricultural Subsidies

Franziska Sucker (University of the Witwatersrand), Reflections on Agricultural Subsidies, SSRN (2021):

Many sub-Saharan African countries enjoy a static comparative advantage (that derives from climatic and other natural endowments) in several agricultural products, including traditional cash crops like coffee, cocoa and tea, as well as new products like legumes, pulses and sesame seeds. Yet, developed countries are the biggest exporters of these agricultural products. According to the United Nation Conference on Trade and Development (UNCTAD), this is largely ‘due to heavy subsidies to their agriculture. In fact, the inability of developing countries to compete with the subsidized agriculture of developed countries has turned them into net importers of food produced in developed countries’.

Indeed, no African country exports to one of the top five agricultural products importing countries (United States (US), China, Germany, Netherlands and the United Kingdom), despite their world share in agricultural trade having increased from 10 per cent in 2005 to 12 per cent in 2017. Also, African countries level of calories consumed is higher than the level of calories it produces domestically, ie a calorie production deficit. Therefore, they have been net food importers over the last two decades. During this time, on average, agricultural product imports accounted for 13,4 per cent of the total products imported by African countries, while agricultural exports accounted for only 9,16 per cent of African countries’ total exports. Moreover, their agricultural imports increased significantly in cost from US$17 billion in 2001 to US$61 billion at the end of 2016, with the United Nations (UN) forecasting these costs to reach US$110 billion by 2025. This growth in imports may be attributed to the inability to produce enough to satisfy growing local demand for cereals, animal and vegetable fats and oils, sugar and confectionery, and meat and edible offal. Interestingly, in 2020, South Africa’s agricultural imports decreased by 8 per cent, while exports increased by 3 per cent, resulting in agricultural trade growing by 26 per cent and a US$4.3 billion surplus. Favourable weather conditions contributed to the large domestic output, and a weak currency (a result of the lock-down measures adopted to reduce the spread of the coronavirus (COVID-19)) increased the output’s competitiveness in the global market. The main exports by value were citrus, grapes, wine, apples and pears, maize, nuts, sugar, wool and fruit juices. The significant decline in imports may, in part, be attributed to the travel restrictions adopted to reduce the spread of COVID-19. The highest declines were noted in the imports of poultry meat, sugar, spirits, sunflower oil, prepared animal feed, beer made from malt, fish, and coffee. These declines overshadowed the increase in rice, wheat and palm oil. Against this background, I first reflect on the relevant trade rules that allow(ed) the development of this highly subsidised sector (section 1). Thereafter, I deliberate, more specifically, on agricultural subsidies that may be required to meet the increasing demand for food supplies in African countries, ie for purposes of food security (section 2). I then conclude with some thoughts on future means to increase African countries’ agricultural production and expand their trade (section 3). Overall, this chapter does not purport to be a complete and comprehensive treatise of World Trade Organization (WTO) rules on agricultural subsides. Rather, it offers reflections on the use of agricultural subsidies and provides a peek into the challenges that African countries face in a sector where they have a static competitive advantage and suggests some possible solutions that could address some of these challenges.