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Getting Tough on Agricultural Subsidies

Is the era of agricultural subsidies coming to an end after key WTO negociations failed?

November 12, 2003

Is the era of agricultural subsidies coming to an end after key WTO negociations failed?

In all likelihood, there will eventually be some kind of multilateral agreement concluding Doha — simply because politicians abhor a public policy vacuum.

But that agreement will only be substantive if rich countries do something they have never agreed to: grant concessions on agricultural protection.

Industrial tariffs for most goods in the North are so low now that there are few concessions left to give in this area by both the European Union and the United States.

Developing countries have also become more suspicious — and more sophisticated — about the extensions of trade negotiations to issues such as intellectual property rights and competition policy.

They were burned in the Uruguay Round by the agreement on trade in intellectual property rights.

As a result, they are looking to get more for their industrial trade concessions in the Doha round. The obvious candidate is agricultural protection.

The notorious reluctance of Japan, Korea and France to grant any concessions on agricultural protection is more flagrant than the U.S. reluctance to modify its agricultural subsidies.

But the bad news is not limited to those countries. Virtually none of the rich countries have shown any inclination to compromise.

It is ironic that rich countries continue to favor this stance even though their agriculture sectors continue to decline in importance every year (measured by share of income or employment).

But in the entire world, politically important rural constituencies play on nostalgia and jingoistic appeals for food self-sufficiency to block cuts in agricultural protection.

Taxpayers and consumers in rich countries thus continue pouring resources into a contracting agricultural sector.

Everyone except rich countries’ farmers would be better off if international trade in agricultural products were liberalized.

Rich countries protect their farmers through trade barriers and subsidies. Subsidized products — when exported — cause more damage than trade barriers alone.

True, rich countries' barriers to imports alone raise agricultural prices on domestic consumers — and remove domestic demand from world markets.

Otherwise, they allow global markets to set prices that reflect production costs in the rest of the world.

Subsidies, in contrast, can push world price and production in the developing world downward. This may benefit urban consumers in developing countries who have access to lower-priced agricultural imports.

Yet, it can wreak economic havoc in rural areas of developing countries, where most of its poorest people live.

Understandably, the countries of the North would have to concede a great deal. Their agricultural subsidies are huge. In 2001, the United States spent $97 billion on agricultural subsidies. This compares to $11 billion on non-military foreign aid.

In Japan, the comparable figures were $57 billion and $10 billion, while the EU spent $99 billion and $26 billion. Winding down these subsidies ought to be the quid pro quo the industrial countries offer developing countries.

As with any good trade agreement, such liberalization would be beneficial to the vast majority of people in both the North and the South.

In a political context, the continuing failure of rich countries to get serious about the reduction of agricultural subsidies is certainly grounds for concerted action on the part of poor countries.

Yet, scuttling the Doha round is in nobody's long-run interest. The developing countries should consider imposing countervailing duties on subsidized products.

Or they could limit market access to agricultural products that are "dumped" on their markets at prices below their (unsubsidized) cost of production.

Such barriers to trade in agricultural goods would then be the chips these countries would play on the negotiating table to eliminate agricultural subsidies.

Any effort to impose barriers on the trade of subsidized agricultural commodities by developing countries will undoubtedly be challenged by rich countries as a violation of the principles on which the WTO is based.

But the gains from trade — which the GATT and the WTO were set up to expand — arise from the real advantages in cost of production, not from the dumping of excess production that results from politically expedient subsidies.

When trade displaces low-cost suppliers — and replaces them with political favorites who enjoy special subsidies — the goal of free trade is turned on its head.

There is no reason emerging leaders of the developing world — like Brazil and India — cannot lead a coalition that defends limits to market access for subsidized agricultural output.

Trade diversion through subsidies is a distortion the WTO should properly eliminate — not defend.

The Cancún failure represents the first blossoming of power by the developing countries. This power must be used not to hobble the WTO — nor to subvert expansion of international trade.

Rather, it should be used to structure the expansion of trade so that developing countries gain more. An excellent strategy would be to take on rich countries' unjustifiable agricultural subsidies.