The Role of Agricultural Trade in Reducing Inequality

Trade Is an Engine for Economic Growth

Over the past decades, international trade—together with technology adoption, lower transport costs, and finance liberalization—has fuelled economic growth worldwide and contributed to poverty reduction. However, the relationship between trade liberalization and income inequality remains controversial, with heterogeneous impacts across countries, sectors, firms, workers, and households.

The overall positive effects of greater trade integration on economies often mask important disparities in the distribution of outcomes within countries, with benefits accruing to richer and urban households, and fewer benefits or negative effects on unskilled workers and poor rural households. One reason for this is market rigidities, particularly pervasive in developing countries, including lack of major labour reallocation across sectors.

Agricultural Trade Can Mitigate or Exacerbate Inequalities

Poverty is disproportionately concentrated in rural areas, where agriculture is the predominant livelihood activity. While the growth of agricultural trade has slowed compared to previous decades and is expected to stay relatively low, it remains an important driver of incomes in developing countries. Since 1990, the share of developing countries in the global agri-food exports increased from roughly one third to almost half today, driven largely by trade policy reforms these countries implemented.

Modifying trade policy measures (e.g., tariffs, quotas, or export taxes) has immediate effects on inequality through changes in economic output, prices, employment, wages, consumption, and government revenues. Typically, trade openness boosts incomes in competitive sectors due to greater access to foreign markets and export growth. However, reducing trade barriers in import-competing sectors such as agriculture, where market failures and asymmetries persist, often results in lower rural incomes, wages, and employment, with some farmers exiting the sector altogether.

In the longer run, the effects of trade on technology transfer, productivity, competition, marketing structures, investment, and infrastructure development also play a role in determining changes in incomes, poverty levels, and inequality. The implications for employment and state budgets are of particular importance, both in terms of generating and supporting incomes and ensuring access to essential public services and programs—all with long-lasting implications for the welfare of the poorest segments of society and their social mobility.

At the same time, expansion in trade typically benefits consumers, who gain access to cheaper and more diverse foods, positively affecting their nutrition and health, and ultimately leading to better economic opportunities for the poor and greater inclusion. Addressing child malnutrition through access to more diverse and healthy diets, including through trade, is essential to resolve long-term inequality issues.

Disperse Effects of Trade Openness by Population Group

Trade effects can vary greatly by education level and for men and women, with extended implications for inequality within households as well as economy wide. Gaining market access in sectors with a large share of female employment (textile or flower exports, for example) can lead to higher earnings for women, which has been shown to improve nutrition, health, and schooling of children, affecting their lives in the long term. If, on the other hand, trade openness leads to higher demand in male-dominated industries, such as mining or fisheries, while exposing sectors with a high share of female workforce to greater competition, it can lead to a loss of financial independence for women and, in the absence of social safety nets, put households led by women in precarious conditions.

The effects of trade openness are highly heterogeneous for different economic sectors and population groups, potentially leading to higher inequality.

As a result, the effects of trade openness are highly heterogeneous for different economic sectors and population groups, potentially leading to higher inequality, especially when labour mobility between sectors is constrained.

Complementary Measures Are Needed to Achieve Greater Equality

Constraints to more equitable distribution of gains from agricultural trade include ineffective policies to address the underlying inequalities and structural issues. These include poorly targeted or insufficiently funded agricultural development and social programs; gender-based discrimination or marginalization of specific groups (for example, Indigenous People or migrant workers) in obtaining productive resources; persistent barriers that the poor, women, and young people face in accessing credit, knowledge, and markets; and excessive market power in the processing and marketing parts of agricultural value chains.

Development of trade opportunities must go hand in hand with sound fiscal policies that reduce inequality via redistribution and better targeting of government expenditures.

Therefore, the development of trade opportunities must go hand in hand with sound fiscal policies that reduce inequality via redistribution and better targeting of government expenditures on safety nets, education, and labour programs that expand employment opportunities, especially among the rural and urban poor.

Making Trade More Inclusive Requires Rigorous Analysis and Decisive Action

Governments should give due consideration to the distributional effects of trade policies, starting by identifying and then proactively addressing trade-offs that inevitably arise following any reforms, implementing complementary measures to ensure that the benefits are shared more equally, both within and across countries. Ex-ante assessments of distributional effects of trade measures must inform these policy decisions. Moreover, past policy reforms—for example, those brought by trade agreements—must be evaluated to understand their impacts on incomes, gender equality, opportunity for youth, and social inclusion, to derive lessons for the future.

Greater access to education, training, information, and targeted programs to foster geographic and sector mobility for workers are urgently needed for trade to become more inclusive.

Ensuring broad-based benefits from agricultural trade requires targeted efforts to guarantee equal access and economic opportunities for women, youth, poor farmers, and other vulnerable groups. To reduce the potentially negative effects of exposure to greater competition from food imports, smallholder farmers need access to finance, inputs, knowledge, and markets as well as viable opportunities for diversifying sources of income, including off the farm.

Greater access to education, training, information, and targeted programs to foster geographic and sector mobility for workers are urgently needed for trade to become more inclusive, in particular benefiting the growing young population in low- and middle-income countries. Such a multi-pronged approach would help harness the power of trade to achieve and sustain broad-based income growth, poverty reduction, and greater equality.

Ekaterina Krivonos is a senior economist in the Markets and Trade Division of the Food and Agriculture Organization of the United Nations.