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Food security and COVID-19 — how World Trade Organization Members could fill a pressing need

In 2020 as the world has been dealing with the health and economic consequences of the COVID-19 pandemic, the World Trade Organization has focused attention on keeping markets open by urging Members to provide notifications of trade restrictive and trade liberalizing measures taken not just on medical goods but also on agricultural products. The G20 countries and various groups of WTO Members have made commitments to impose restrictions only under limited circumstances and only temporarily, consistent with WTO obligations. Some Members have urged countries to agree not to impose export restraints on agricultural goods to limit worsening challenges during the COVID-19 pandemic. On agricultural export restrictions, a number of countries have applied some restrictions despite information that global food supplies are sufficient which should make restrictions unnecessary. The attention paid to the issue by the WTO and its Members have limited the number of countries engaged in agricultural export restraints which is a positive development.

With the steps many countries have taken to limit the spread of the COVID-19, there has been enormous economic pain incurred by most countires, with tens of millions of people in countries temporarily unemployed, schools closed, food distribution disrupted with the closure of restaurants which constitute a large part of food shipped from processing plants and farms.

The UN, World Bank and others have projected huge increases in the number of people pushed into extreme poverty because of the effects flowing from the pandemic. Extreme poverty brings with it food security issues as people suffering extreme poverty don’t have the means to procure basic food needs.

The United Nation’s World Food Programme (WFP) has long been involved in helping address food security needs around the world. In the COVID-19 pandemic, the WFP is mobilizing to provide assistance to some 138 million people in 83 countries. With most countries occupied with dealing with the needs of their own populations, countries and private citizens have been slow to respond to the humanitarian challenges facing so many around the world. The WFP has appealed for US$4.9 billion to let them perform their stepped up function during COVID-19 through the end of 2020. As of August 6, they had received only 9 percent of what they need, $US440 million.

The WFP during the pandemic has been involved in facilitating services by many NGOs and international organizations. For example, “Over 16,500 health and humanitarian personnel from 288 organizations have now been transported to destinations throughout Africa, Asia, the Middle East and the Commonwealth of Independent States countries by WFP’s air passenger service since its launch on 1 May. 53 destinations are now being served, with approximately 2,500 passengers using WFP’s service per week.” WFP, COVID-19, Level 3 Emergency, External Situation Report #12 (6 August 2020)(emphasis in original). The latest situation report is embedded below and reviews the wide array of services provided as well a review of some of the countries with acute needs. It also provides a link to contribute to the WFP.

WFP-0000118265

The External Situation Report indicates that there are 27 countries (based on an FAO-WFP hotspot analysis) which “are at risk of significant food security deterioration in the next six months”. (page 2). Countries at risk are Guatemala, Honduras, El Salvador, Nicaragua, Haiti, Peru, Ecuador, Colombia, Venezuela, Burkina Faso, Mali, the Niger, Sierra Leone, Liberia, Nigeria, Cameroon, Central African Republic, Democratic Republic of the Congo, Lebanon, Sudan, South Sudan, Mozambique, Zimbabwe, Somalia, Yemen, Ethiopia, Iraq, Syrian Arab Republic, Afghanistan and Bangladesh (total is 31, though Peru, Ecuador, Colombia appear to be at a lower level of risk based on coloration used on page 2). FAO – WFP early warning analsyis of acute food insecurity hotspots, https://docs.wfp.org/api/documents/WFP-0000117706/download/.

Where is the food aid?

For many countries, agricultural production has remained reasonably strong but large volumes of agricultural products have been destroyed based on lack of domestic markets, typically flowing from the collapse of the restaurant trade and the challenges in redirecting product, packaging and labeling into retail channels. See, e.g., New York Times, April 11, 2020, Dumped Milk, Smashed Eggs, Plowed Vegetables: Food Waste of the Pandemic, https://www.nytimes.com/2020/04/11/business/coronavirus-destroying-food.html.

At the same time, there have been huge increases in internal-country demand for help from food banks in some countries. See, e.g., for the United States: Feeding America, The first months of the food bank response to COVID, by the numbers, https://www.feedingamerica.org/hunger-blog/first-months-food-bank-response-covid-numbers.

It would seem that coordinated action by major agricultural goods producers in the WTO with the WFP and other groups should be able to provide large quantities of agricultural goods to those in need globally in the remaining months of 2020, goods which might otherwise simply be destroyed.

Similarly, while all countries are financially stretched during the pandemic, helping WFP obtain the needed financial resources to provide a coordinated pledging event should be of interest to WTO Members and many of the multilateral organizations working on COVID responses, as well as the business community and the general public.

While the WTO has grappled with limiting/eliminating export subsidies for agricultural goods, the WTO has always recognized the need to maintain the flow of humanitarian need particularly in agricultural goods. Consider these paragraphs from the 2015 Nairobi Ministerial Conference Decision on Export Competition (WT/MIN(15)45, WT/L/980 (21 Dec. 2015) at 6-7):

“International Food Aid

“22. Members reaffirm their commitment to maintain an adequate level of international food aid, to take account of the interests of food aid recipients and to ensure that the disciplines contained hereafter do not unintentionally impede the delivery of food aid provided to deal with emergency situations. To meet the objective of preventing or minimizing commercial displacement, Members shall ensure that international food aid
is provided in full conformity with the disciplines specified in paragraphs 23 to 32, thereby contributing to the objective of preventing commercial displacement.

“23. Members shall ensure that all international food aid is:

“a. needs-driven;

“b. in fully grant form;

“c. not tied directly or indirectly to commercial exports of agricultural products or other goods and services;

“d. not linked to the market development objectives of donor Members;
and that

“e. agricultural products provided as international food aid shall not be re-exported in any form, except where the agricultural products were not permitted entry into the recipient country, the agricultural products were determined inappropriate or no longer needed for the purpose for which they were received in the recipient country, or re-exportation is necessary for logistical reasons to expedite the provision of food aid for another country in an emergency situation. Any reexportation in accordance with this subparagraph shall be conducted in a manner that does not unduly impact established, functioning commercial markets of agricultural commodities in the countries to which the food aid is re-exported.

“24. The provision of food aid shall take into account local market conditions of the same or substitute products. Members shall refrain from providing in-kind international food aid in situations where this would be reasonably foreseen to cause an adverse effect on local13 or regional production of the same or substitute products. In addition, Members shall ensure that international food aid does not unduly impact established, functioning commercial markets of agricultural commodities.

“25. Where Members provide exclusively cash-based food aid, they are encouraged to continue to do so. Other Members are encouraged to provide cash-based or in-kind international food aid in emergency situations, protracted crises (as defined by the FAO14), or non-emergency development/capacity building food assistance environments where recipient countries or recognized international humanitarian/food entities, such as the United Nations, have requested food assistance.

“26. Members are also encouraged to seek to increasingly procure international food aid from local or regional sources to the extent possible, provided that the availability and prices of basic foodstuffs in these markets are not unduly compromised.

“27. Members shall monetize international food aid only where there is a demonstrable need for monetization for the purpose of transport and delivery of the food assistance, or the monetization of international food aid is used to redress short and/or long term food deficit requirements or insufficient agricultural production situations which give rise to chronic hunger and malnutrition in least-developed and net food-importing developing countries.15

“28. Local or regional market analysis shall be completed before monetization occurs for all monetized international food aid, including consideration of the recipient country’s nutritional needs, local United Nations Agencies’ market data and normal import and consumption levels of the commodity to be monetized, and consistent with Food Assistance Convention reporting. Independent third party commercial or non-profit
entities will be employed to monetize in-kind international food aid to ensure open market competition for the sale of in-kind international food aid.

“29. In employing these independent third party commercial or non-profit entities for the purposes of the preceding paragraph, Members shall ensure that such entities minimize or eliminate disruptions to the local or regional markets, which may include impacts on production, when international food aid is monetized. They shall ensure that the sale of commodities for food assistance purposes is conducted in a transparent, competitive and open process and through a public tender.16

“30. Members commit to allowing maximum flexibility to provide for all types of international food aid in order to maintain needed levels while making efforts to move toward more untied cash-based international food aid in accordance with the Food Assistance Convention.

“31. Members recognize the role of government in decision-making on international food aid in their jurisdictions. Members recognize that the government of a recipient country of international food aid can opt out of the usage of monetized international food aid.

“32. Members agree to review the provisions on international food aid contained in the preceding paragraphs within the regular Committee on Agriculture monitoring of the implementation of the Marrakesh Ministerial Decision of April 1994 on Measures Concerning the Possible Negative Effects of the Reform Programme on Least-developed and net food-importing developing countries.

“13 The term ‘local’ may be understood to mean at the national or subnational level.

“14 FAO defines protracted crises as follows: ‘Protracted crises refer to situations in which a significant portion of a population is facing a heightened risk of death, disease, and breakdown of their livelihoods.’

“15 Belize, the Plurinational State of Bolivia, Ecuador, Fiji, Guatemala, Guyana, Nicaragua, Papua New Guinea and Suriname shall also have access to this provision.

“16 In the instance where it is not feasible to complete a sale through a public tender, a negotiated sale can be used.”

It is believed that the current WTO provisions on food aid should not pose hurdles to countries providing in kind aid where there are needed food products that can be exported during the pandemic. If that is not the case, then the WTO Members should agree to a temporary waiver of relevant restrictions to permit food aid during the pandemic.

There has been much discussion within the G20, WTO, WHO and other groups that collective action on the medical front is critical to see that medical goods, vaccines, are therapeutics are available equitably and at affordable prices. What one hasn’t seen is the same focus on ensuring that the world’ populations have access to food equitably and at affordable prices. During the pandemic, WTO Members have the opportunity to work together to see that food is not wasted and that food aid is supplemented to the extent possible to alleviate the unique challenges to food security presented by the COVID-19 pandemic.

Oil and gas sector suffers declining demand, collapsing prices, expanded state involvement — skewed economic results damage much of the global economy

The United States and many other countries view the World Trade Organization as the forum for global trade rules that support market economies. One of the challenges for the WTO going forward is what to do with the important Members whose economic systems are not anchored in market economic principles. While China is the most frequently mentioned WTO Member whose economic system is causing massive disruptions for market economies, there are other countries with important sectors that are state-owned, controlled and directed. The United States, European Union and Japan have been working on proposals for modifications of WTO rules to address distortions flowing from massive industrial subsidies and state controlled sectors that do not operate on market principles.

While WTO reform is not likely to see serious engagement by WTO Members before the COVID-19 pandemic is brought under control, the sharp contraction of economic activity in many countries is highlighting the importance for WTO Members actually addressing the role of the state in industry and rule changes needed to avoid the massive distortions that state involvement too often created.

Oil and Gas as an Example

Few industrial sectors have as much state ownership and control as the oil and gas sector. While there are countries with privately owned producers, much of the world operates with producers that are state owned or state controlled. Since the 1960s, a number of countries have engaged in cartel-like activity to collectively address production levels to achieve desired price levels. While many of these countries are part of the Organization of Petroleum Exporting Countries (“OPEC”), OPEC meets with other countries as well in an effort to achieve production and pricing levels. Current OPEC members include Algeria, Angola, Congo, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Saudi Arabia, the United Arab Emirates, and Venezuela.

The activity has resulted in artificial pricing levels in export markets as compared to prices in home markets of OPEC members and periodic price shocks based on collective action. Large price increases in the 1970s led to high levels of inflation and rapid changes to manufacturing operations in some countries.

  1. Economic contraction as countries struggle to limit spread of the coronavirus

There has been a sharp contraction in demand for petroleum products in 2020 as countries have shut down movement of people in an effort to control the spread of COVID-19. Air travel has been decimated in many parts of the world and there are significant reductions in automobile travel. Manufacturing has also seen significant reductions. The contractions have resulted not only in national reductions in use of petroleum products but also international reductions both directly (reduced air traffic and ship traffic) and because of disruptions to supply chains which have reduced downstream production.

The U.S.-China Economic and Security Review Commission released a staff research report on April 21, 2020 entitled “Cascading Economic Impacts of the COVID-19 Outbreak in China” which reviews information on the wide range of economic impacts from the COVID-19 pandemic as felt in the U.S. https://www.uscc.gov/sites/default/files/2020-04/Cascading_Economic_Impacts_of_the_Novel_Coronavirus_April_21_2020.pdf. The report includes a section entitled “Turmoil in Energy Markets” which states,

“The standstill in Chinese production and halt in flows of goods and people has drastically depressed Chinese demand for energy products such as crude oil and liquified natural gas (LNG), adding pressure to an oil supply glut that had materialized at the end of 2019.99 In December of 2019, Institute of International Finance economist Garbis Iradian had forecasted a supply glut, pointing to high output from Brazil, Canada, and the United States.100 The COVID-19 outbreak exacerbated this challenging outlook. As the Organization of the Petroleum Exporting Countries (OPEC) reported in April 2020: ‘The largest ever monthly decline in petroleum demand in China occurred in February 2020.’101 Chinese oil demand ‘shrank by a massive 3.2 million barrels per day’ over the prior year.102 Research by OPEC forecasted China’s 2020 demand for oil will decrease by 0.83 million barrels per day over 2019.103 As the largest oil importer,104 Chinese oil consumption has a significant impact on global demand. In 2019, China accounted for 14 percent of global oil demand and more than 80 percent of growth in oil demand.105 Following the outbreak in China, the OPEC Joint Technical Committee held a meeting on February 8 to recommend new and continued oil production adjustments in light of “the negative impact on oil demand” due to depressed economic activity, “particularly in the transportation, tourism, and industry sectors, particularly in China.”106 In LNG markets, on February 10, Caixin reported Chinese state-owned oil giant China National Offshore Oil Corp. (CNOOC) requested a reduction of an unknown quantity in LNG shipments, invoking a “force majeure” clause due to COVID-19.107 S&P Global Platts, an energy and commodities analysis group, stated China’s LNG imports in January and February fell more than 6 percent over the same period in 2019.108

Prices have also dropped in this period. OPEC’s reference price index fell from $66.48 per barrel in December 2019 to $55.49 per barrel in February 2020, a drop of 19.8 percent.109 These price cuts are causing financially strapped* U.S. energy producers to cut back investment in oil and gas projects as profits erode. The U.S. Energy Information Administration forecasts that the current drop in oil prices will lead to lower U.S. crude oil production beginning in the third quarter of 2020.110″

The complete report is embedded below (footnotes 99-110 can be found on page 22 of the report).

USCC-staff-research-Cascading_Economic_Impacts_of_the_Novel_Coronavirus_April_21_2020

2. State-owned or controlled oil companies create further crisis

With a sharp contraction in oil demand, one would expect falling oil prices and reductions in global production over time. OPEC efforts to achieve reductions in production amongst themselves and Russia didn’t work out with Russia walking out of talks to reduce production to prevent further price declines. Russia and Saudi Arabia then engaged in a price war which resulted in further sharp price reductions in March and early April, large surpluses of oil in the market, with dwindling storage capacity for surplus production. See, e.g., https://en.wikipedia.org/wiki/2020_Russia%E2%80%93Saudi_Arabia_oil_price_war (and sources cited therein). Below is a graph of crude oil prices from 2015 through April 2020.

3. April Agreement to Reduce Production Beginning in May and June 2020

The United States, concerned with the collapse of oil prices and the effects on U.S. producers and oil/gas field companies, engaged in outreach to both Saudi Arabia and Russia to seek a solution. OPEC members, Russia and many others (including the United States) agreed to global production reductions of close to 10 million barrels/day beginning in May and carrying through June, with smaller reductions for later periods, in an effort to bring about balance between supply and demand. See, e.g., April 12, 2020, AP article, “OPEC, oil nations agree to nearly 10M barrel cut amid virus,” https://apnews.com/e9b73ec833e9a5ad304a69e3b9b86914. The U.S. Department of Energy has a webpage that reviews statements by members of Congress and others on the OPEC+ deal.

Because the agreement kicks in at the beginning of May, the continued production and reductions in available storage for oil resulted in further declines in oil prices, with prices on April 20 going negative for the first time in history. Prices have recovered somewhat in the last several days. https://www.cnbc.com/2020/04/24/oil-prices-could-remain-under-pressure-according-to-satellite-imagery-analysis.html; https://oilprice.com/Latest-Energy-News/World-News/OPECs-No3-Already-Started-Cutting-Oil-Supply.html.

WTO Challenges

Joint action during the global COVID-19 pandemic may be understandable and in keeping with the resort to extraordinary measures by governments during the crisis to preserve health and economies. Nonetheless, the extraordinary distortions that flow to global commerce from joint government activity limiting production of oil and gas products or establishing minimum prices for export have been ignored within the GATT and now the WTO for decades. This is unfortunate as the distortions affect both competing producers of the products in question in other countries and also downstream users and consumers more broadly. The overall distortions over time are certainly in the trillions of dollars.

GATT Art. XX(g) permits governments to enforce measures “relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption.” While there have been some cases where Art. XX(g) has been examined, actions by OPEC or OPEC+ countries to limit production (and hence exports) have never been challenged.

While there are national antitrust laws in many countries, such laws (such as those in the United States) don’t make government interference in the economy or government restrictions on export actionable despite the harm to consumers and to downstream manufacturers.

In a consensus based system like the WTO, the likelihood of obtaining improved rules on state-owned or state-invested companies or to restrict governments’ ability to unilaterally or jointly restrict production and exports seems implausible. This is especially true on oil and gas with Saudi Arabia and Russia as WTO Members. The US-EU-Japan initiative hasn’t yet fleshed out possible rule changes for state entities, so one may see some efforts in the coming years that could be useful if accepted by the full membership. But if there is to be meaningful WTO reform, agreeing on rules for the actions of governments that affect production and trade in goods and services is clearly of great importance. Without such rules, the WTO will not actually support market economies in critical ways.

Modifying antitrust laws is the other option, but one which legislators have been unwilling to address over the last fifty years. It is not clear that there are current champions of such modifications in the United States or in other major countries.

Conclusion

There are many sectors of economies that are being seriously adversely affected by efforts to control the spread of COVID-19. Governments are taking extraordinary actions to try to prevent their economies from collapsing under the strains of social distancing.

The oil and gas sector is one where there has been significant negative volume and price effects. Unfortunately the extent of the negative volume and price effects is driven in large part by the actions of governments who are preventing the global market for these products from functioning correctly, just as government actions have interfered in the functioning of these markets for the last fifty-sixty years.

The recent agreement to slash global production by nearly 10 million barrels per day was needed in light of the extensive government interference that has characterized the market and the actions by Russia and Saudi Arabia in March and early April.

More importantly, the long-term government involvement and interference with the functioning of the sector should cause trade negotiators and legislators to be looking at how to reform the WTO and/or modify national laws to prevent government ownership, control or cartel-like actions from distorting trade flows and economies. The need is pressing, but don’t hold your breath for action in the coming years.