Case Study Analysis Paper – Agricultural Subsidies

Competition has become a very significant issue among countries that engage in business outside their boundaries. This has primarily caused abrasion between countries especially the high income countries such as the European countries and the United States. Because of market competition, local businesses strive to remain relevant amidst fierce competition from foreign investors and businesses. In the wake of trying to survive, countries have resorted to various mechanisms such as creation of tariffs and quotas with the sole aim of protecting local businesses from falling at the hands of foreign traders and investors. The purpose of this paper is to understand the effect subsidies have on agricultural trade and the measures that relevant in improving international trade.

Agricultural sector seems to generate more friction among the members of the WTO. Countries are getting into disputes because of agricultural issues that seek to degenerate the market. In response to these issues, WTO sought to address the key factors that are central to the agricultural issue and those are, tariffs, market access and export subsidies. While subsidies offered to the agricultural sectors may be important as far as developing and improving the industrial sector related to agriculture is concerned, other factors need to be considered on the wider angle of business and the effect it may pose on the same.

Direct subsidies for example results to overproduction and this is harmful to business because it destabilizes the balance of trade by squeezing out imports. Furthermore, it may even result to dumping of excess produce and this is not healthy for business especially for countries that have business ties. The Uruguay Round and the Doha Development Agenda seeks to correct the situation by changing the rules of agricultural trade by reducing direct support to agriculture and supporting indirect support such as research and development (International Economics, 2016).

Overview of the case study

Agricultural subsidies have resulted to business conflicts between nations especially those under the WTO (Jason, 2016). Common cases have been witnessed between high-income countries such as Japan, US and European countries. The WTO Doha Development Agenda is at the center of solving the problems that have engulfed the agricultural trade with regards to agricultural subsidies. Initially, the GATT agreement included among other things language on agriculture, however, it had many loopholes that the agreement had little impact as far as stabilizing agricultural trade was concerned. Although the GATT agreement saw quotas changed to tariffs and industrial countries made to reduce their direct support to agriculture, direct payment to farmers remained intact because, theoretically, it would not result to overproduction.

Based on the fact that the system has several loopholes, the Doha Development Agenda is again seeking to tackle the trade menace. In its current round of trade, its primary agendum is to push for the limiting government practices that restrict access to markets in high income countries as well as those that subsidies agricultural production (International Economics, 2016).

This study points out why countries protect their industries by using tariffs and quotas. Foreign products are levied and taxed so that local business can survive. Apart from the need for revenue there are also other reasons nations use to impose trade barriers. These include labor argument, the infant industry argument, the national security argument, the retaliation argument. Countries use the labor argument as justification for imposing trade barriers. This argument states that nations must protect their markets from imports that come from countries where labor is cheap because the advantage of lower wages may bring down the local industries. However, the labor argument does not give consideration to productivity differences.

The infant industry argument merely seeks to protect the industries in developing countries from competition by more established nations and foreign firms. This argument is based on two premises. One is that the market forces will hardly allow an industry to develop when there is a well-established foreign industry and when the industry in question is a risky one. The other factor is that such industries have spillover benefits that make

it more valuable to the economy than infant industries. The retaliation argument basically justifies trade barriers in retaliation to unfair business practices (International Economics, 2016).

Impact of Uruguay and Doha Development Agenda on Agricultural subsidies

The Uruguay Round was the eighth round of trade negotiations and was succeeded by the Doha Round that began in 2001. The main objective of the Doha and the Uruguay Rounds was to liberalize trade and sanitize the agricultural sector. The Doha and the Uruguay rounds of trade fundamentally called for the reduction of not only agricultural subsidies but also a reduction in the tariffs on agricultural products. The Uruguay round has instructed that all agricultural subsidies as well as all quantitative restrictions on imports should be phased out within a period of ten years. Additionally, the Doha and the Uruguay rounds have also impacted the agricultural subsidies by regulating amount of domestic support granted to farmers as well as direct payments given to agricultural producers.

In general, the Doha and Uruguay rounds have impacted agricultural subsidies in the following ways:

  • Reduction of domestic support to agriculture in terms of funding
  • Reformulation of agricultural supports both local and foreign
  • Reduction of export subsidies in terms of value and volume
  • Increase in market prices for basic agricultural goods such as food
  • Decline in the value of total products imported

According to the data findings on agricultural subsidies 2007 European Union, Japan and the United States are cited to be offering the highest subsidies to the agricultural sector. Australia and Canada offer the lowest subsidies to the agricultural sector. In trying to understand these data findings, it is important to first appreciate the economic strengths of these nations and the impact of their economy on other economies in regards to supporting agricultural production. The United States and the European Union have had trade conflicts such as the banana case. These countries are funding the agricultural sector to ensure the local businesses thrive even amidst competition (Jayati, 2013). However, they tend to overlook the long term effect it might have not only on international business but also relationships among nations.

In presenting these findings, the analysis of the same should precede everything else so that the data is first understood before other factors are considered. However, it is important to point out the impacts the agricultural subsidies have on international trade and how those impacts affect international relations between countries. The economic differences of these nations should also be part of the presentation so that the wider aspect of agricultural trade and how it affects the economy of nations is clearly understood.

Recommendations

Trade negotiators are striving to find ways of making the Doha Round effective in the world. Politicians on the hand will not stop at anything than to ensure the domestic policies regarding trade are maintained or changed to benefit their countries. The only way nations can spearhead the operations of the Doha Rounds is keep politics out of the negotiating processes. The United States for example should cut agricultural protection to allow for a healthy international trade. Brazil, India and the ilk should also reduce manufacturing and service barriers to expand the international trade and push Doha towards achieving its objectives. Doha Round can only progress when all countries across the globe commit to liberalization of agricultural trade.

Farm policy is another recommendation that can see the Doha Round progress despite being difficult to achieve. Farm policy reform would have two positive benefits. One farm policy reforms would do away with the nonsensical and unnecessary subsidies offered to specific crops. This would result to an equitable local market. The second benefit would result from unilateral reductions in farm subsidies(Daniella, 2015). This policy would offer the US trade negotiators the opportunity to break the impasse over agriculture protection especially by the European Union and other nations involved in world trade talks. This would allow them to lead the world in not only opening global markets but also help them maintain credibility in the international market. These two farm policies would expand the economic opportunity as well as economic freedom that will see the world succeed in promoting prosperity through trade.

Trade barriers across the globe to trade on agricultural products results to the increase in the domestic prices of agricultural products and people are forced to buy food products at high prices in these distorted markets. There is need to destroy trade barriers especially those that linked to agricultural products. Developed countries play a role in increasing poverty in developing countries because they lower the world prices of agricultural products and has a negative impact on farmers in developing countries.

Conclusion

In conclusion, the world is left with two policy issues to take care of, that is, limiting government subsidies to agriculture and advancing world trade. It is important for all countries in the world to defend free trade and campion for trade liberalization. This should be a top priority for all countries if Doha is to succeed. Expanding international trade is the most important factor in strengthening the economy locally as well as promoting better international relationships.

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