Agricultural Subsidies and The World Trade Organization, Research Paper Example

One of the leading and most influential Intergovernmental organizations is the World Trade Organization. It was founded in 1995 out of the General Agreement on Tarriffs and Trade, a Bretton Woods conference treaty designed to promote free trade between international countries. This served two purposes: helping to enable the gains from free trade economists have advocated for since the writings of Adam Smith, while also promoting peace, as historically trading partners have been reluctant to go to war against each other. The main rule of the organization is one of non discrimination, that every member country must extend the same level of treatment to every other member country. Despite this, regional trade agreements such as the North American Free Trade Agreement are usually allowed as they promote free trade, even if it means the United States is giving Mexico and Canada better trade conditions than they give many other member countries.

While one of the main goals of the World Trade Organization is the reduction of tariffs and quotas that limit trade, it also looks to reduce subsidies. Often subsidies allow producers of one country to export a good to another nation, whose own producers cannot compete with the price the subsidies make viable. Although the World Trade Organization attempts to reduce subsidies that create unequal playing fields for domestic companies, one area where advanced nations have been less than willing to cut subsidies in is agriculture. Farming, while an industry that can use large amounts of capital, could be one industry in which developing nations have a comparative advantage. This is because the agricultural methods used in these developing nations are labor abundant and they have a relative abundance of labor. Despite this, or perhaps because of it, developed nations, including the United States and European Union countries continue to heavily subsidize farmers in their country.

These policies are very damaging to the efforts developing nations are making towards their economic improvement. One estimate says that the Western African nations lose two hundred and fifty million dollars each year due to United States cotton subsidies alone (Mshomba). The European Union countries, with high population densities and highly educated work forces that are capable of producing goods in other sectors would almost certainly be a net importer of food in a free market. Instead, as a group it exports more food than any nation on Earth, except for the other culprit of agricultural subsidies, the United States. This means a reduced market for African agricultural products, an especially large issue as these countries have more of their economic futures tied up in farming than developed nations.

A can be expected due to the economic harm they cause, these policies do not go unnoticed. The World Trade Organization negotiates in rounds, having completed seven of them so far. However, the current Doha round began in 2001 and has remained uncompleted since. The main issue of contention holding it up is anti trade agricultural policies including subsidies, tariffs, and quotas. The initial proposal, supported strongly by the developing nations who have membership in the organization, called for a removal of these distorting policies that would theoretically allow for a true market system for global agriculture. The developed nations supported this effort in name, but resorted largely to finger pointing to avoid making any sacrifices themselves. The European Union and nations such as India have tried to get the United States to lower their domestic subsides, while the United States has tried to get the EU countries to reduce their tariffs. Finally, India has been pushing for these reforms, while trying to prevent their own products from being exposed to market forces (Hanrahan).  In other words, the negotiations have largely been sidetracked as each country attempts to force other countries to make concessions for free trade while personally avoiding them.

According to The Economist, the United States farm bill, which determines the level of aid and shape of policy the federal government will take towards agriculture, was passed in 2007 and lasts for five years. The bill was budgeted for over sixty billion dollars of aid towards farmers each year (Harvest of Disgrace). While that is a relatively low percentage of the United States federal budget, only sixty-five countries on the planet have a Gross Domestic Product that high (International Monetary Fund). Clearly then, the aid to farmers in this country is a significant amount of money that can heavily impact the global market. The World Trade Organization often allows countries to impose countervailing tariffs that offset the subsidies other countries offer. However, it would take a large coordinated effort by many countries to counteract American agriculture policy, meaning each individual developing nation is essentially powerless to stop it.

Another area with heavy government protections is sugar production. A quota is in place that allows only fifteen percent of sugar sold in the United States to be imported. Brazil, a leading producer of sugar cane, has filed complaints with the WTO about this policy. They have also used the organization to target some of the European Union’s similar sugar regulations. Another policy is that the government must buy certain amounts of domestic food at below market prices and then sell it on foreign markets, effectively undercutting the market price that farmers in these countries can charge for their goods. This policy is known as dumping and attempts to prevent it often come through anti-dumping acts, which are at times difficult to distinguish from bills designed solely to restrict trade.

A related area to this is America’s continued subsidization of corn based ethanol products as an alternative fuel source to petroleum. This policy is easily explained in industrial policy. There is an argument that the country needs a domestic fuel source for security reasons meaning this industry could have national importance. The infant industry argument could be applied, as perhaps it is irrational for a start up to challenge the current energy companies, but with support from the government, domestic companies could ultimately challenge foreign energy companies. This argument is somewhat warped however, as certainly there are domestic competitors in the energy industry and some of these subsidies are likely going to entrenched companies. Finally, there could be spillovers from this technology. Perhaps technology created for corn based ethanol could be used to create an even better ethanol or alternative energy product. However, it is important to make sure that these subsidies are for this reason and not just a handout to special interests using these arguments as justification. However, the expert opinion on corn based ethanol seems very pessimistic (Advanced Biofuels: Ethanol, Schmethanol). This suggests that this product is not right for subsidization even if it fits with standard arguments for the practice.

These agriculture subsidization policies seem difficult to explain. According to dominant economic theory, the quotas and subsidies are probably welfare reducing in the country that enacts them and certainly in other countries.  Not only this, but the programs are also seemingly blatant violations of World Trade Organization regulations. However, within the countries undertaking these policies, the issue is understandable and explicable. An agriculture producer has a much larger share of the market than any individual agriculture consumer. Therefore, a slight increase in the price of food positively impacts each farmer more than it hurts any one consumer. The disutility to consumers is more diffusely spread than the utility to producers. It is this asymmetry of interests that lead the countries to pass these policies as the farmers have incentive to lobby for the subsidies while no domestic agent has as strong an incentive to lobby against them. For these reasons even if subsidization and other trade restrictions are a net loss to domestic economies the programs seem likely to continue unless the WTO somehow stops them.

In regards to WTO compliance, these policies may violate their rules against subsidization of industry. Brazil’s formal complaints about them may show that they are against WTO regulations and it may just be a matter of time before they officially rule that. However, Brazil is a growing economy that is quickly becoming one of the world’s largest markets. More impoverished nations carry less clout for many reasons. For one, the economic interaction between them and a developed country such as the United States is much more important to the developing nation than to the United States. Therefore, the larger economic powers have much more leverage in negotiations. Also, the smaller countries cannot afford large diplomatic staffs, meaning that often they do not have anyone working at the World Trade Organization full time, compared to large staffs for developed nations (Oxford Analytica). They simply do not have the expertise or man power to successfully lodge complaints against larger countries who have adapted these damaging policies.

Another question is why the United States and other western developed nations, countries who have been behind the increased globalization and free trade in recent decades, keep these policies that contradict that goal in place. It may be explainable with a theory of self interest. The United States could be supportive of free trade, but only in industries where it perceives that they have a comparative advantage. By fighting for free trade in capital intensive industries and a closed market in labor intensive industries, the country theoretically come out ahead. Instead of truly being for free trade, it is possible that the policies in this country are designed to get the benefits without the painful adjustments that would take place in some markets. This self interested model would seem to necessitate a pessimistic outlook for the future of free trade. If the countries really are all out for themselves it will be especially difficult to ever pass environmental or labor standards as they could be seen as protectionist policies. The inability of the World Trade Organization to complete a new round of negotiations seems to support this view.

The current agriculture subsidies in the United States may be the one policy most contradictory to the national commitment to free trade. These policies, along with similar policies from European Union countries have been heavily criticized by smaller economic countries in past WTO negotiations. It is difficult to reconcile these subsidies with free trade, but it is important to see why they exist. Asymmetrical interests, a half hearted commitment to promoting free trade, and industrial policy give advanced nations reason to continue policies of this type.

Agricultural products continue to be one of the most contentious areas of international relations. Developing nations are constantly protesting these policies as they limit the ability of their own farmers to produce goods for the country, which could be their first step towards serious economic growth. Despite these protests, and the existence of an intergovernmental organization that is designed to limit these kinds of interferences of free trade, these policies continue to persist. Not only are these conflicts occurring between economic powers and weaker countries, but powerful countries are continuing to clash on this issue, as seen by the numerous Brazil against the United States cases in the WTO the past few years. Many developed nations seem to acknowledge the need for lowering global agricultural subsidies, but feel that it is the other subsidizing nations who need to rectify the problems. For these reasons the Doha round of negotiations for the World Trade Organization has been unable to be completed in over a decade so far. Until there is a consensus agreement on how to deal with these conflicts, they may stand in the way of great deals of international economic integration.

 

 

Works Cited

“Advanced Biofuels: Ethanol, Schmethanol | The Economist.” The Economist – World News,  Politics, Economics, Business & Finance. The Economist, 27 Sept. 2007. Web. 05 13 February 2012<http://www.economist.com/node/9861379?story_id=9861379>.

“The Farm Bill: A Harvest of Disgrace | The Economist.” The Economist – World News, Politics, Economics, Business & Finance. The Economist, 22 May 2008. Web. 13 February 2012. <http://www.economist.com/node/11412562?story_id=11412562>.

Hanrahan, Charles E. “WTO Doha Round: Agricultural Negotiations.” CRS Report For Congress (2007). Print.

Mshomba, Richard. “How Northern Subsidies Hurt Africa.” United Nations: It’s Your World. United Nations. Web. 14 Feb. 2012.            <http://www.un.org/ecosocdev/geninfo/afrec/vol16no2/162agric.htm>.

“Small Developing Countries Struggle In WTO – Forbes.com.” Information for the World’s Business Leaders – Forbes.com. Web. 14 Feb. 2012. <http://www.forbes.com/2010/05/18/wto-gatt-trade-business-oxford-analytica.html>

“World Economic Outlook Database April 2011.” IMF — International Monetary Fund Home Page. Apr. 2011. Web..            <http://imf.org/external/pubs/ft/weo/2011/01/weodata/index.aspx>.