Case study: Agricultural Subsidies and Development(3000 words)

For decades the rich countries of the developed world have lavished subsidies on their farmers, typically guaranteeing them a minimum price for the products they produce. The aim has been to protect farmers in the developed world from the potentially devastating effects of low commodity prices. Although they are small in numbers, farmers tend to be politically active, and winning their support is important for many politicians. The politicians often claim that their motive is to preserve a historic rural lifestyle, and they see subsidies as a way of achieving that goal. This logic has resulted in financial support estimated to exceed $300 billion a year for farmers in rich nations. The European Union, for example, has set a minimum price for butter of 3,282 euros per ton. If the world price for butter falls below that amount, the EU will make up the difference to farmers in the form of a direct payment or subsidy. In total, EU dairy farmers receive roughly $15 billion a year in subsidies to produce milk and butter, or about $2 a day for every cow in the EU—a figure that is more than the daily income of half the world’s population. According to the OECD, overall EU farmers receive approximately $134 billion a year in subsidies. The EU is not alone in this practice. In the United States, a wide range of crop and dairy farmers receive subsidies. Typical is the guarantee that U.S. cotton farmers will receive at least $0.70 for every pound of cotton they harvest. If world cotton prices fall below this level, the government makes up the difference, writing a check to the farmers. Some 25,000 United States cotton farmers received some $3.4 billion in annual subsidy checks. Total agricultural subsidies in the United States amount to some $43 billion a year according to OECD figures. Japan is also a large subsidizer, providing some $47.4 billion in subsidies to farmers every year. In relative terms Switzerland, which is not an EU member, spent the most. Subsidies made up a remarkable 68 percent of its farm economy. Iceland was at 67 percent and Norway at 64 percent. European Union subsidies equaled 32 percent of that trading block’s farm economy, while the United States figure was 16 percent. One consequence of such subsidies is to create surplus production. That surplus is sold on world markets, where the extra supply depresses prices, making it much harder for producers in the developing world to sell their output at a profit. For example, EU subsidies to sugar beet producers amount to more than $4,000 an acre. With a minimum price guarantee that exceeds their costs of production, EU farmers plant more sugar beets than the EU market can absorb. The surplus, some 6 million tons per year, is dumped on the world market, where it depresses world prices. Estimates suggest that if the EU stopped dumping its surplus production on world markets, sugar prices would increase by 20 percent. That would make a big difference for developing nations such as South Africa, which exports roughly half of its 2.6 million tons of annual sugar production. With a 20 percent rise in world prices, the South African economy would reap about $40 million more from sugar exports. American subsidies to cotton farmers have a similar effect. Brazilian officials contend that by creating surplus production in the United States that is then dumped on the world market, U.S. cotton subsidies have depressed world prices for cotton by more than 50 percent since the mid-1990s. Low cotton prices cost Brazil some $600 million in lost export earnings in 2001–2002. India, another big cotton producer, has estimated that U.S. cotton subsidies reduced its export revenue from cotton by about $1 billion in 2001. According to the charitable organization Oxfam, the U.S. government spends about three times as much on cotton subsidies as it does on foreign aid for all of Africa. In 2001, the African nation of Mali lost about $43 million in export revenues due to plunging cotton prices, significantly more than the $37 million in foreign aid it received from the United States that year. The global rice market is also badly distorted by subsidies, with overproduction of rice in the United States helping to depress world prices. The United States paid its 9,000 rice farmers approximately $780 million in subsidies in 2006. An average ton of U.S. rice cost $240 to sow, tend, and harvest in 2006, but by the time it had left U.S. port, subsidies had cut the cost to $205 a ton. This has made it impossible for farmers in Ghana, once one of the largest rice producers in Africa, to survive. It costs farmers in Ghana $230 a ton to produce U.S. quality rice, but with global prices driven down below that by subsidies in developed nations, rice production in Ghana has collapsed. With incomes falling, local farmers do not have the capital to invest in new farming technology, and they risk falling ever further behind mechanized farming in more developed nations. Overall, the United Nations has estimated that while developed nations give about $50 billion a year in foreign aid to the developing world, agricultural subsidies cost producers in the developing world some $50 billion in lost export revenues, effectively canceling out the effect of the aid. As one UN official has noted, “It’s no good building up roads, clinics, and infrastructure in poor areas if you don’t give them access to markets and engines for growth.” Similarly, Oxfam has taken the unusual position for a charity of coming out strongly in support of the elimination of agricultural subsidies and price supports to developing world producers. By increasing world prices and shifting production from high-cost, protected producers in Europe and America to lower-cost producers in the developing world, Oxfam claims that consumers in rich nations would benefit from lower domestic prices and the elimination of taxes required to pay for the subsidies, while producers in the developing world would gain from fairer competition, expanded markets, and higher world prices. In the long run, the greater economic growth that would occur in agriculturally dependent developing nations would be to everyone’s benefit. Although subsidies have been against the spirit of World Trade Organization rules, under the terms of a 1995 “peace agreement” WTO members agreed not to take each other to court over agricultural subsidies. However, that agreement expired on December 31, 2004. Signs are growing that unless rich countries take steps to cut their subsidies soon, a number of efficient agricultural exporting countries will launch an all-out assault on farm subsidies. Indeed, Brazil did not even wait for the “peace agreement” to expire; in late 2003 it filed a complaint with the World Trade Organization, claiming that the United States had retained its position as the second-largest cotton grower in the world, and the largest exporter, by paying $12.5 billion in subsidies to its cotton farmers between August 1999 and July 2003. Brazil argued that between 2001 and 2002 alone, the United States funneled nearly $4 billion in subsidies to its cotton farmers for a crop worth just $3 billion, which depressed world prices and cost Brazil $600 million in lost sales. In an interim ruling issued in mid-2004, the WTO agreed that U.S. subsidies had artificially lowered cotton prices and harmed Brazilian exporters. The United States appealed, and it may be two more years before the issue is resolved. In a landmark ruling, in March 2005 the World Trade Organization condemned U.S. subsidies and required the U.S. government to remove them. The U.S. responded by removing a scheme that compensated U.S. cotton mills and exporters for buying U.S. cotton, but the majority of subsidies were left intact. According to Oxfam, the development charity based in the United Kingdom, the U.S. reforms touched programs accounting for less than 10 percent of all the subsidies received by U.S. cotton farmers. In late 2006, Brazil requested that the World Trade Organization establish a compliance panel to investigate whether the United States failed to scrap its subsidies as required by the March 2005 ruling. If the WTO finds against the United States, Brazil could seek retaliatory sanctions, imposing duties of up to $3 billion on U.S. goods exported to Brazil. The United States immediately went on the defensive, arguing that “The United States has gone to extraordinary lengths to implement recommendations and rulings. Given all of these changes, there is no basis for Brazil’s request for a compliance panel.” The WTO, however, overruled American objections and started a formal investigation.
1. If agricultural tariffs and subsidies to producers were removed overnight, what would the impact be on the average consumer in developed nations such as the Untied States and the EU countries? What would be the impact on the average farmer? Do you think the total benefits outweigh the total costs, or vice versa?
2. Which do you think would help the citizens of the world’s poorest nations more, increasing foreign aid or removing all agricultural tariffs and subsidies?
3. Why do you think governments in developed nations continue to lavish extensive support on agricultural producers, even though those producers constitute a very small segment of the population?
4. The current Doha Round of trade talks organized by the World Trade Organization is trying to reduce barriers to free trade in agriculture. So far, however, the talks have made little concrete progress on this issue and as of mid-2007 they are stalled. Why do you think this is the case? What other solutions might there be to the problems created by barriers to trade in agriculture?