Agri-environmental Relationships and the Choice of Policy Mechanism

T HE main goal of international trade liberalisation is to establish a trading environment in which all firms compete on an equal footing. This includes a concern that all firms should pay the full costs of the inputs that are used in the production process. Where the production generates external costs, the Polluter Pays Principle has been widely accepted as indicating that the firm should bear the costs of environmental regulation (OECD, 1972). While for many years agriculture stood outside of most negotiations on international trade, it has taken a key role since the inception of the Uruguay Round of trade negotiations (Ingersent et al., 1995). In this context, agricultural policy has come under scrutiny to examine whether it is in conflict with trade liberalisation. Following the conclusion of the Uruguay Round trade negotiations, policies are exempt from commitments to reduce aggregate measures of support (AMS) if they fall into the ‘green box’ by meeting a number of criteria specified in Annex 2 of the Agreement on Agriculture. Policies have both to meet policy-specific criteria and to meet more general criteria that ‘they should have no, or at most minimal, trade distortion effect or effects on production’, that they must be financed by government (rather than involving transfers from consumers), and that they shall not provide price support to producers. Tangermann (1996, pp. 332–3) comments that these general criteria may prove to be more binding than the policy-specific ones. It is sometimes argued that agriculture in some places is different; that agriculture receives support in respect of the contribution that agricultural land management makes in protecting the quality of the rural environment and in supporting rural communities in other ways. While these policies, by their very nature, do affect the level of production, it is argued that they should not be regarded as trade-distorting subsidies and should be permitted within the rules