Trade in agricultural and food products has changed over time, with the food we eat and the clothing we wear increasingly being delivered by global production systems that cross many borders. Wheat produced in Australia and the Ukraine, for example, is processed into flour in Indonesia and Turkey, and then exported to make noodles in China, and bread in Africa and the Middle East.
These global value chains (GVCs) connect producers of food and fibre to consumers across the world and help deliver stable supplies of food and textiles along with greater choice to consumers, and at the same time generating incomes for producers. In 2014, on average around 21% of the value of exported agro-food products from any given country came from goods and services produced in other countries.
For agriculture and food sectors, participation in agro-food value chains helps enhance overall sector growth – improving the returns to farmers and food makers along the value chain. In particular, making use of inputs from other countries to produce agro-food products, and having access to foreign consumers through these chains, has helped to grow agro-food sectors and increase the share of gains flowing to farmers and producers.
Against this background, governments and producers are increasingly interested in how they can position their agricultural and food sectors to make the most out of the opportunities created from agro-food GVCs. The manner in which producers in different sectors participate in value chains is heavily influenced by the nature of the products they produce – with products such as fresh vegetables more likely to go relatively directly from producer to consumer through GVCs, compared to oilseeds, wheat and many fibres such as wool and cotton, which feed into food and clothing manufacturing processes and which can cross borders multiple times before reaching the end consumer.
But while the product itself influences GVC participation, differences across agro-food sectors around the world indicate that it is not the only influence – much of what determines the gains from agro-food GVC participation relates to policy factors.
Getting the policy mix right to create value for producers and consumers
Growing value in agro-food GVCs is not all about moving into higher value or traditionally termed ‘value adding activities’ – for example, turning wheat into flour. Value can be created by playing to a sector’s strengths which may lie in producing more of the primary product. For each sector in any country, the relative gains from moving down the value chain or extending sales of more primary products into an increasing network of value chains will differ. However, for all, getting the policy mix right is important to enhance value creation:
- Trade and investment policies are a key influence on GVC participation and domestic value added creation. Tariffs on imports and those faced on exports reduce a sector’s participation in GVCs, and – importantly – also reduce value added creation. Tariffs charged on imports act as a brake on agro-food export earnings because they raise the cost of intermediates for domestic producers. On the investment side, foreign direct investment (FDI), both inward and outward, can positively influence agro-food GVC engagement.
- Non-tariff measures can similarly reduce participation and export earnings if they lead to frictions between trading partners. The cost-raising effect of possible trade barriers reduces industry competitiveness and its ability to participate in value chains. For some, they can also reduce domestic value added creation. However, non-tariff measures also have positive effects when they improve confidence in markets. Overall, less complex and more transparent and science-based arrangements that pre-empt trading partner concerns can increase the domestic value added generated in exports.
- Enabling policies in agriculture are important. Transport infrastructure, education levels and agricultural research and development are all positively related to participation and domestic value added creation from GVC participation.
- Agriculture policies that do not distort market decisions are also important for both GVC participation and domestic value added generation by agro-food exports. Non-distorting support provided either directly to producers or to the sector as a whole has a positive influence on both GVC participation and domestic value added. By contrast, the use of distorting support has a negative influence resulting from the distortions that created in both output and input markets within domestic economies.
- Services trade restrictions negatively influence agro-food GVC engagement and decrease the domestic value added generated for countries with high levels of restrictions.
OECD work is exploring the nature and shape of evolving global value chains in food and agriculture, and how countries can maximise their participation in, and benefits from, these GVCs.