Chapter 4


Trade policy reform, aimed at re-establishing liberal market conditions, constitutes an
important component of most adjustment programmes. Typical elements of trade policies
under adjustment are:

* Removal of quantitative and qualitative restrictions (import quotas), replacement by
 tariffs, reduction of import tariffs in a second stage,

* Reduction/removal of export taxes,

* Liberalising capital movements.

All these measures are thought to open the economy to the world market. If trade barriers are
released or removed, relative domestic prices are expected to adjust to world market prices.
According to the free market economy ideal, this is a major precondition for efficient
resource allocation, for realising comparative cost advantages, and for economic growth.
(The same concept forms the basis of world-wide trade liberalisation under GATT).
Liberalisation of capital movements are expected to attract foreign direct investments, giving
further impetus to economic growth.

6.2 Effects of trade liberalisation on the food sector

The effects of trade policies on the food economy and on food security follow the same lines
of impact as in the case of exchange rate policies (see Figure 4.3), affecting directly the
prices of tradables and, through the mechanism of production, supply and demand response
(see section 3 of this module and Annex 1), spreading out to other markets (non-tradables,
labour) as well. The more the commodities of a sector have been protected or taxed before
adjustment, the greater will be the effects of a removal of taxes and other trade barriers. This
particularly concerns the agricultural sector.

Import/export taxes and other trade barriers lead to what is called direct protection. Direct
protection may compound (if negative, e.g. in the case of export taxes or import subsidies) or
compensate (if positive, e.g. in the case of import duties) the negative indirect protection of
tradables resulting from an exchange rate overvaluation (see section 3.2 Table 4.3 above).
The common measurement of the degree of protection is the protection rate which indicates
the direction and the percentage of the deviation of actual prices from the prices that would
have prevailed without policy interventions (see Annex 2D for further details). A negative
protection rate means actually dis-protection or taxation.

Table 4.13 presents the average nominal protection rates in agriculture by region of a group
of eighteen countries covered by a sample survey and Table 4.14 shows the protection rates
for certain categories of agricultural products (staples, importables, exportables) in some of
the countries concerned.


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