Agricultural trade implications of environmental management

Agricultural Trade Implications of Environmental Management

Abstract: In principle, countries that introduce costly environmental regulations should experience a reduction in their international trade competitiveness in polluting commodities. Countries that fail to enact environmental protection regulations, on the other hand, presumably increase their export market share in the production of crops that damage the environment. An investigation of some of the issues involved in the determination of potential agricultural trade effects suggests that they may, in practice, be quite modest.

Keywords: Trade patterns, environmental management, comparative advantage, competitiveness, pollution intensity.

Environmental management restrictions on the use of certain agricultural chemicals or practices are unlikely to have noticeable effects on international trade. Early concerns had been that those countries imposing such restrictions, such as the United States, would be at an economic trade disadvantage to those with freedom to operate without restrictions.

However, research so far indicates little support for worries about trade-distorting effects, no matter how plausible they seem. Estimates of the economic and trade impacts of environmental controls in agriculture are limited because these programs have been modest, and many of them are relatively new.

In the United States, Federal legislation regulating pollution sources in agriculture include the 1972 Pesticide Control Act and the 1987 Water Quality Act. Environmental considerations also entered into the 1985 Food Security Act and the Food, Agriculture, Conservation, and Trade Act of 1990. Soil conservation and natural habitat protection programs introduced in 1985 include the Swampbuster, Sodbuster, and Conservation Compliance provisions, and the Conservation Reserve Program (CRP) (see box).

Impact of the CRP

With the CRP and other compliance programs, the United States probably has more ambitious soil conservation programs in place than other industrialized countries. However, a comparison of other environmental programs suggests roughly similar degrees of effort (11). Like the United States, nearly all other industrialized countries require extensive testing and evaluation of new pesticide products before they can be licensed for sale; they also have food safety standards related to chemical residues; and they all have research and extension programs that in many cases, encourage the use of more environmentally benign production practices. Some countries have also introduced modest fees and restrictions on pesticide and fertilizer use.

Since nearly all industrialized countries have introduced environmental measures toward agriculture - and at roughly the same time - it is likely that the structure of relative costs among this group of countries remains largely unchanged. These countries also hold a large share of total world agricultural exports (developed market economies accounted for 84 percent of 1988 world cereal exports) (4). In contrast, less developed countries (LDC's) with lower per capita income have reacted more slowly to environmental problems associated with agricultural production. The demand for environmental quality is understandably low in these countries; other serious problems associated with low levels of income are more pressing (14).

If the differentials in the cost of complying with environmental regulations toward agriculture in industrialized countries and LDC's are sufficiently large, LDC's may tend to develop a comparative advantage in the production of "pollution-intensive" agricultural commmodities and gain market share. This effect will depend, in part, on LDC supply flexibility in response to small changes in international markets. However, LDC responsiveness to changes in international market signals is likely to be limited because capital markets function poorly in LDC's, and their agricultural sectors are typically taxed.

The magnitude of changes in the patterns of world agricultural trade also depends on the share of LDC's in the world trade of commodities that are most affected by policies to protect the environment. The potential loss in U.S. export markets resulting from costly pollution controls will be greatest when LDC's account for a large share of foreign competition.

Major Finding

Some small reduction in U.S. trade competitiveness in agriculture can be anticipated with the introduction of more stringent environmental control policies. However, the actual magnitude of trade losses is likely to be small. In only 5 of the 10 crops studied (tobacco, cotton, peanuts, rice, and sorghum) do developing countries hold a greater than 20-percent market share of foreign competition. Furthermore, only three of these five (tobacco, peanuts, and sorghum) are "above average" in terms of "pollution intensity" (see box).

If it is assumed that the most stringent environmental regulations attempt to target crops that are the most "pollution intensive," then any significant displacements of industrialized country agricultural exports attributable to pollution controls would most likely occur in these three crops. However, sorghum, tobacco, and peanuts represent only a small portion of total world agricultural trade (less than 1 percent); thus, their impact on agricultural trade patterns overall is likely to be small. In the case of the United States, total agricultural exports were about $31 billion in 1987, with exports of sorghum, peanuts, and tobacco accounting for only $1.7 billion (4).

The trade effects of environmental controls on industry are difficult to uncover (9, 13). Studies have been unable to show that industrial pollution control measures have resulted in a loss of export markets or in increased imports of products of polluting industries. The primary reason seems to be that the costs of pollution control have not, in fact, loomed very large even in the most polluting industries (11). Further, the small increases in industrial production costs are likely to be swamped in their impact on international trade by the much larger effects of differentials in labor costs, or swings in exchange rates, for example.

The trade effects of pollution control toward agriculture will probably also be swamped by these effects, as well as by other changes, such as variations in foreign demand for agricultural commodities, and domestic changes in agricultural commodity policy. Given the unusually high degree of government intervention in agricultural markets across the world, the latter may make it particularly difficult to discern the impacts of environmental policy on agricultural trade.

In short, based on the record of experience with industrial pollution controls and the circumstances in which agricultural trade takes place, it is unlikely that domestic environmental policies directed toward agriculture will have noticeable effects on patterns of international trade. Nor are such policies likely to seriously damage U.S. competitiveness in international agricultural markets.

Table : Table 1 - Ranking of crops by nitrogen use, 1987

                                    Nitrogen use weighted
                    Unweighted    by leaching vulnerability
Crop and ranking   nitrogen use
                   Pounds/acre
1. Tobacco           164                      1/
2. Rice              131                     49
3. Peanuts            83                     46
4. Corn              122                     40
5. Cotton             73                     27
6. Sorghum            72                     22
7. Wheat              61                     20
8. Barley             44                     14
9. Oats               23                      7
9. Soybeans           19                      7

1/ The vulnerability index was not applied to tobacco because regional production data were not available.

Sources: (15) and (16). Tobacco nitrogen information is from (3) and (7).

Table : Table 2 - Ranking of crops by pesticide use weighted by leaching vulnerability

1. Peanuts

2. Sorghum

3. Corn

4. Tobacco

5. Soybeans

6. Cotton

7. Wheat

8. Rice

9. Oats

10. Barley

Sources: (5), (6), and (8).

Table : Table 3 - Ranking of crops by erosiveness

Crop and ranking           Erosiveness
                   Metric tons of erosion/acre
 1. Tobacco                   12.0
 2. Soybeans                   7.1
 3. Corn                       6.6
 4. Peanuts                    6.4
 5. Sorghum                    4.4
 6. Oats                       4.2
 7. Cotton                     3.7
 8. Wheat                      3.2
 9. Barley                     2.8
10. Rice                       0.2

Source: (17).

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[15.] USDA-ERS, Farm Cost and Returns Survey. 1987.

[16.] USDA-ERS, Objective Yield Survey. 1987.

[17]. USDA, Soil Conservation Service. National Resource

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[18.] Walter, I. "The Pollution Content of American Trade,"

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[19.] Young, E. and T. Osborn. The Conservation Reserve

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USDA-ERS, February 1990.

PHOTO : "Pollution Intensity" and Trade Performance of 10 U.S. Crops

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