ENVIRONMENTAL EFFECTS OF TRADE IN THE AGRICULTURAL SECTOR: A CASE STUDY

Agriculture has been at the center of conflicts over world trade from the beginning in 1986 of the eighth, Uruguay Round, of multilateral trade negotiations. Yet it is only in the final phases of the Round that linkages from trade to the environment have come to the fore. In this paper, the specific linkages from trade to the environment in the agricultural sector are developed. The impacts of trade flows and policies on environmental quality in agriculture have features which make them unusually difficult to resolve. In many respects, the same domestic agricultural policies at the root of trade distortions also encourage environmental damages. Hence, reforming these domestic and trade policies would be a partial, though not a complete, step in the direction of greater environmental benefits. A complete set of policies will require targeted environmental interventions as well. Market failures in agricultural production and consumption have widespread effects on soil, water, human health, and natural ecosystems which are difficult to monitor and therefore to estimate. These market failures are generally reinforced by government policies which distort the prices of agricultural products and inputs (water, fertilizers, pesticides). These distortions occur in agriculture to a greater extent than in many sectors of both developed and developing countries. Trade flows and policies are a direct result of these domestic distortions. This case study will consider market failures with adverse environmental impacts in agriculture and their interaction with failures in agricultural trade policy in developed and developing countries. Section II develops a theoretical perspective on market and government failures in agriculture. In it, a simple model is discussed which emphasizes the distinction between the welfare effects of trade liberalization with and without appropriately targeted environmental policies. Section III provides some concrete examples of trade flows in agriculture and their environmental impacts in developed and developing countries, and analyzes the domestic policies at the root of distortions in agricultural trade. Section IV considers the likely impact of agricultural trade liberalization on market failures with adverse environmental effects, and the need to integrate environmental and trade policy reforms. Section V discusses the relationship between trade and environmental policy instruments in this context, and proposes some principles to guide trade and environmental policy in the agricultural sector. Section VI offers a summary and some proposed guidelines for the agricultural sector