Wednesday, December 7, 2005

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Everything you always wanted to know about trade but were afraid to ask

Foreign Affairs has just released a special issue pertaining to all things about multilateral trade -- no subscription required. Contributors include Jagdish Bhagwati, Peter Sutherland, Carla Hills, and Charlene Barshefsky,and William Cline.

I recommend the contributions by Arvind Panagariya and C. Fred Bergsten. Panagariya does an excellent job of disentangling the complexities of the agricultural negotiations:

The common assertion that agricultural liberalization in rich countries would bring large benefits to LDCs is mistaken. These states -- many of them poor African countries -- benefit from the current regime because they can sell their exports at the high EU prices and buy imports at the low world prices. (Cotton is perhaps the sole exception: U.S. subsidies hurt poor countries because the EU tariff on cotton is zero and therefore its internal price for cotton is the same as the world price.) Gains to those developing countries not in the Cairns Group would accrue principally from their own liberalization. The principle of comparative advantage applies just as much to agriculture as to industry. Moreover, because developing countries do not currently enjoy trade preferences in one another's markets, they stand to gain from access there.

Meanwhile, liberalization in developed countries would principally benefit them. Ending their agricultural subsidies would eliminate not only inefficiencies but also the losses from the spillover of the subsidies to the importing countries. Cutting tariffs will generate benefits for their consumers by lowering prices. And countries with a comparative advantage in agriculture -- mainly developed countries such as the United States, Canada, Australia, and New Zealand as well as the richer developing countries in the Cairns Group such as Brazil, Argentina, Malaysia, and Indonesia -- would benefit from the higher world prices that would follow liberalization in the developed countries.

Gains from the removal of subsidies under the Doha Round, moreover, are likely to be much smaller than previously thought. For one thing, negotiable subsidies have never been as large as has been publicized, and they have declined in importance over the years. Today, export subsidies are in the $3 billion to $5 billion range and domestic subsidies subject to negotiations are well below $100 billion. These numbers are not insignificant, but they are much smaller than commonly believed, making tariffs the more serious barrier to agricultural trade.

Bergsten's essay provides an autopsy of the underlying political pressures that ail the Doha round:
The main problems that undermine the prospects for a successful Doha Round, however, lie outside the negotiations themselves. Three factors stand out: the massive current account imbalances and currency misalignments pushing trade politics in dangerously protectionist directions in both the United States and Europe; the strong and growing antiglobalization sentiments that stalemate virtually every trade debate on both sides of the Atlantic and elsewhere; and the absence of a compelling reason for the political leaders of the chief holdout countries to make the necessary concessions to reach an agreement. Progress on each front is necessary for the Doha negotiators to have a chance of succeeding.
[Sure, the Foreign Affairs essays tell you what the elite thinks. But what about average, ordinary, hard-working Americans?--ed.] Well, then, scoot on over to the German Marshall Fund's latest survey results on how Americans feel about trade and poverty reduction. Some of the more interesting results:
Despite broad agreement (73%) that freer trade helps to boost prosperity, clear majorities in France (74%), Italy (65%), Germany (59%), and the United States (57%) believe that freer international trade decreases total jobs in their country. In a related question, 37% of European and 46% of American respondents favor protecting domestic jobs by raising tariffs, even if this means higher consumer prices....

Democracy is an important factor in determining public support for helping or trading with poor countries. Overwhelming majorities support providing development assistance (80%) and promoting trade (80%) with poor countries that are democratically run, but with the mention of non-democratic regimes, support for aid and trade drops dramatically to under 45%. Most American (78%) and European (88%) respondents also agree that aid levels should be linked to a country’s efforts to fight poverty and promote democratic governance.....

While reducing U.S. and European agricultural subsidies is a make-or-break issue in WTO talks, it does not resonate strongly with respondents in any of the countries polled. When asked about phasing out subsidies to large domestic farms, roughly equal numbers find this a high (34%), a medium (33%), or a low (29%) priority for their government to address.

But overall, more people look favorably on providing subsidies to small farms (71%) than approve of subsidizing large farms (50%)—an attitude that contrasts with the current distribution of U.S. and EU subsidies, under which large farms receive the bulk of subsidy payments. Three quarters (74%) of U.S. respondents have a favorable view of providing subsidies to small farms, compared with 55% favorable in the case of large farms. Support for farm subsidies is lowest in Germany: 56% favorable in the case of small farms, dropping to just 32% favorable in the case of large farms. In France, 78% percent of people have a positive view of subsidizing small farms, but this plunges to just 40% who like the idea of subsidizing large farms (while a 59% majority disapprove). Given the French government’s resistance to any further cuts to farm support, this distinction in public opinion is noteworthy.

UPDATE: One last article worth reading -- Christina Davis makes the paradoxical argument in the International Herald-Tribune that the prospects for trade liberalization would improve if the Hong Kong meetings failed:
Patching over the differences in order to avoid headlines about a negotiation collapse would send the wrong signal. It would allow leaders in France to think that they can coddle the farm sector with exceptions for every special product and still pretend to care about development goals. It would allow leaders in Japan to believe that they can refuse a 100 percent ceiling on agricultural tariffs and still say they are committed to upholding the world trade system. It would allow the United States to continue spending $19 billion annually on its farmers while pointing fingers at other governments who fail to liberalize.

Dramatic failure, on the other hand, might finally catch the attention of business lobbies and the public that pay little heed to the interminably long negotiations over the minutiae of trade formulas. The lines of disagreement should be widely publicized. Such failure would highlight the linkage between agricultural liberalization and broader trade liberalization.

posted by Dan on 12.07.05 at 10:37 AM


The quotes Dan provides here cover a lot of ground, but let me note a few things:

First, with respect to the cost of farm subsidy programs: in the United States, the major subsidy programs for crops (corn and feed grains, soybeans, wheat, cotton and rice) vary in cost depending on climate and market conditions. They will be more expensive in years with bumper crops and low world market prices, and cost less if either the market price is higher or the crop is smaller -- unless they are then augmented by disaster assistance of the kind that was rushed through Congress on several occasions between 1996 and 2002. The political rhetoric on farm programs that makes it through the media clutter will often give the impression that they cost every year what they did in the most expensive year.

Other major farm programs work a little differently. The dairy program impacts international trade in dairy through import barriers; its subsidies are indirect, and mostly influence the economics of producing milk for sale in different parts of the United States. The tobacco and peanut programs historically relied on production quotas, while the sugar program is built on import restrictions (quotas more than tariffs), as the United States is comparatively disadvantaged with respect to sugar production. In terms of direct subsidies from the Treasury, in most years these go to producers of the five major crop groups, plus dairy farmers. Budget outlays for tobacco, peanuts and sugar are typically small by comparison, and of course there are still many farm products that do not receive direct subsidies.

With respect to Europe: Panagariya doesn't mention one salient benefit of eliminating farm subsidies to most European countries -- they pay more than their own farmers get back. This is one reason why resistance to cutting back on Europe's farm programs is strongest from the French. French farmers are more heavily subsidized than their German or English counterparts.

As to the countries whose farmers would benefit from trade liberalization, Panagariya is absolutely right: large developed countries and some of the more advanced developing countries have powerful farm sectors that would likely compete effectively in a freer trade environment. The idea of farm trade liberalization as a boon to subsistence cotton farmers in West Africa is almost certainly wrong; and to the extent it isn't, it is likely that agriculture in such countries would consolidate quickly to take advantage of economies of scale, just as it has in established farm exporters like the United States and Australia. Freer trade equals greater farm income...and, in fairly short order, fewer farmers.

Last point, about the Marshall survey as it applies to agriculture: I've trained myself not to grit my teeth when I see numbers like these in a survey. The problem is that they always raise the same questions. What is a small farm? What is a large farm? Why are we subsidizing the first? What about the second? If you want to subsidize small but not large farms, how do you restructure farm programs to do this? For good measure, in Europe one of the objectives of subsidizing small farmers is to keep some of Europe's least economically productive people on the land and out of the cities. In North America by contrast most small farms, not economically viable by themselves, are not supposed to be -- they are hobby farms, recreation for their owners. So the definitions of small farm, large farm, family farm, corporate farm are not even the same in different parts of the world. What then is to be the standard for an agreement about what kinds of subsidies are permissable in a trade agreement, and what kinds are not?

A successful Doha round depends in part on whether answers to these questions can be found. My point here is only that the general public does not have a clue as to what the questions Marshall is asking mean in practical terms -- which means that people devising farm program schemes can plausibly claim that almost any program will do what the surveyed public says it wants done.

posted by: Zathras on 12.07.05 at 10:37 AM [permalink]

Can agriculture be treated apart from water and energy? Large-scale farming means relying more heavily on non-renewable energy for power. It also means consuming more fresh water. Although with marginal improvements in efficiency of use, water could probably be conserved in much greater amounts, this has yet to be done, and it may not be enough to offset by greater non-farm demand.

Of course, the market will presumably adjust supply and demand eventually. But I wonder if the question for government policy is not to liquidate older impediments to free trade but to make the transition to a sustainable economy less abrupt.

posted by: David Billington on 12.07.05 at 10:37 AM [permalink]

Depends what sector of agriculture you're taling about, David. One of the major environmental problems in watersheds around the eastern and central United States turns out to be a product of all the changes in landscaping designed to drain water from farms. Then again there are many parts of the world where commercially productive agriculture is only possible with irrigation -- but where agriculture can't compete with much more water-intensive users, like people's homes.

Frankly, if a "sustainable" society is our objective changes in agricultural practices alone won't get us there, or even get us close. Changes in how the non-farm population lives and works would make a larger difference by several orders of magnitude.

posted by: Zathras on 12.07.05 at 10:37 AM [permalink]

"Frankly, if a "sustainable" society is our objective changes in agricultural practices alone won't get us there, or even get us close. Changes in how the non-farm population lives and works would make a larger difference by several orders of magnitude."

Agreed. I hope there is debate about trade and subsidies in terms of a more comprehensive view of long-term needs.

posted by: David Billington on 12.07.05 at 10:37 AM [permalink]

"So the definitions of small farm, large farm, family farm, corporate farm are not even the same in different parts of the world. What then is to be the standard for an agreement about what kinds of subsidies are permissable in a trade agreement, and what kinds are not?"

If subsidies are capped overall, why can't each individual country decide where its allowed subsidies go?

I'd also like to mention that all this business of liberalizing agricultural trade not helping small-scale farmers in poor countries is a bit of a shock to me. Maybe I've been reading the wrong publications...

posted by: Alex on 12.07.05 at 10:37 AM [permalink]

A few points to get things in perspective:

. the fight over subsidies in the WTO comes down to the fact that they impede an efficient global allcoation of resources. US and EU farm policies (subsidies and border protection) deliberately shield farmers from downside price risk, with the inevitable consequence of overproduction that has to be disposed of on world markets below cost. This depresses the world price and reduces returns to efficient farmers elsewhere. With the current patterns of production, liberalisation would benefit Australia, Brazil, Argentina and others who have done the work of improving productivity to be competitive at a depressed world price. What the European argument against liberalisation ignores is that a higher world price for a commodity, and more open access, would spur a supply response, not just in Brazil but in other areas where agriculture is undercapitalised. There is already evidence, for example, the countries like mali and Sudan are increasing investment in sugar processing to take advantage of future duty free and quota free access. The dispersion of this investment would not be uniform but it would be just. The Euros want to micromanage agriculture trade as a mechanism of international redistribution. Managed trade is highly inefficient at this process.

. The evidence clearly shows that US subsidies have blunted the international competitiveness of US crop industries. Taking exports as a proxy for competitiveness, "program" crops - cotton, soybeans, corn and wheat - are, in real terms, less than half their levels of the late 1970s. So even with subsidies, unsubsidised producers have outcompeted US program crops. This raises the question: why are US taxpayers putting this money into producing a product that the world doesn't want to buy at the price US producers can produce it at? Interstingly, non-program crops in the US have doubled their export share in the same time period - being exposed to market signals they are producing what the world wants and competitively.

posted by: Sturt on 12.07.05 at 10:37 AM [permalink]

Alex, trade liberalization can help some small-scale farmers. Their costs of production -- more accurately, their costs of production plus the costs of getting their product to market -- just have to be low enough to be competitive. New Zealand dairy farmers are one example of smaller operators who can prosper on a world market. But this example is a little less encouraging if one realizes what a fantastic place New Zealand is to raise milk cows. Most countries in the world are not so blessed.

Among the ones that are, costs of farm production are often most easily lowered by substituting capital for labor. This can also be good for smaller farmers who get bought out as their neighbors expand, provided they have title to their land now and something else to do later. But this will not always be the case.

posted by: Zathras on 12.07.05 at 10:37 AM [permalink]

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posted by: top bid penis enlargement pill on 12.07.05 at 10:37 AM [permalink]

Liberalisation is good, it prospers all involved, but how much are we willing to change?

The economic liberalisation of the agricultural sector would mean than agricultural products would be transported from further a field, they would be being transported more miles than is necessary simply because the cost of labour is cheaper in another part of the world. The major drawback here is that the environmental impact of increased haulage is not translated into a monetary form and thus the market does not take account of them (market failure).

The idea of any economic structure is to benefit society.

Does the environmental impact of increased (and arguably unnecessary) haulage, outweigh the prosperity this may bring to some of the poorest parts of the world?

Further does cheaper food in the West worth the sacrifice of our countryside as we know it?


posted by: Alastair on 12.07.05 at 10:37 AM [permalink]

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