7. The politics of farm subsidies & trade. Politica economica delle risorse strategiche - Giacomo Branca, Universitá della Tuscia

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1 7. The politics of farm subsidies and trade a. Do all governments give subsidies to farmers? b. What explains the tendency of rich countries to subsidize farmers? c. Do farmers in rich countries need subsidies to survive? d. Why don t taxpayers and food consumers join to resist farm subsidies? e. How do farm subsidies shape international agricultural trade? f. Why hasn t the WTO been able to discipline farm subsidies?

2 a. Do all governments give subsidies to farmers? Yes, rich countries Nearly all rich (OECD) countries support farmers incomes (283 million $ in 2006): Trade policies (e.g. import tariffs or export subsidies) boost domestic farm prices (gvt. price guarantee) Public spending to purchase farm commodities (storage, foreign food aid, Food Stamp program) Direct cash transfer, subsidized loans, tax breaks Level of support is average 29% of farmers income but it varies among countries E.g. Switzerland 68%; EU 32%; US 16%; Australia 5%; New Zealand 1% Not much related with weight of ag sector. E.g. Switzerland Ag. weights 1% GDP; New Zealand 6% Level of support varies among commodities (in general exported goods receive more support) Food prices artificially high (indirect support to farmers) transfer of income from rich urban food consumers to farmers (policies rural biased)

3 a. Do all governments give subsidies to farmers? No, poor countries Developing countries provide much less support to agriculture despite being more agricultural (sector contributing more to GDP): Often farmers taxed to support urban people E.g. food prices artificially low (indirect support to urban consumers) transfer of income from farmers to food consumers in urban areas (policies urban biased) However.examples of input subsidies to farmers (e.g. fertilizer program in Malawi and Zambia)

4 b. What explains the tendency of rich countries to subsidize farmers? During industrial development All economic sectors (including agriculture) become wealthier However, wages & incomes in ag. sector remains lower than off-farm (especially true for less competitive farmers) Larger and more competitive farms buy small farms to take advantage of newly available machinery So traditional farmers seek gvt. support lobby groups Subsidies initiated in: Europe, during/after World War I, 20s US, during Great Depression, 30s (Roosevelt) Japan, industrialization, 50 and 60s Taiwan and S. Korea, 70 and 80s

5 c. Do farmers in rich countries need subsidies to survive? Yes, when subsidies start Average incomes lower e.g. US 1933, farmers income < 50% non farmers income Economic & social justification No, after development Small farmers leave, farm consolidation increased size, large commercial farmers, income > non farmers (valuable land, buildings & machinery) But farm subsidies are kept.thanks to the power of agriculture lobbies...and target mainly small farmers (in fact are linked to volume production).. E.g. US, 45% subsidies largest 7% farms E.g. EU, 80% subsidies wealthier 20% farms

6 d. Why don t taxpayers and food consumers join to resist farm subsidies? Farm subsidies are costly both to taxpayers and food consumers. E.g s Billion $/yr Country Taxpayer Food consumer US 30 6 EU Japan 6 28 But taxpayers and consumers are not as organized as agriculture lobby pressure Smaller groups easier to organize greater individual share of benefits & easier to discipline free-riding Also smaller commodity groups (sugar) do better than larger farmer groups in securing subsidy benefits Rich consumers: food expenditure only a small share of income (US from 41 to 10%), also thanks to increased ag. productivity Taxpayers: public spending increases, reduced % ag. subsidies

7 e. How do farm subsidies shape international agricultural trade? Farm subsidies in rich countries distort production and trade Too much food produced in regions not well suited to farming (e.g. alpine areas, desert land in US southwest) Too little food produced in the (tropical) developing countries where potential is high. Take away share from other rich countries more suited for certain types of productions (e.g. Australia) Examples: Sugar: high (domestic) sugar prices & import restrictions in US & EU production from sugar beet in US & EU instead of cane sugar in Caribbean, Brazil and tropical Africa 40% sugar produced in the wrong place

8 e. How do farm subsidies shape international agricultural trade? Damages done by farm policies of rich countries to poor countries can be quantified E.g. Brazil s complaint on US cotton subsidies in 2002 without US subsidies: production 29% lower and exports 41% lower International cotton price 13% higher (with benefits for African producers as well cash crop & increased farm income by 2-6%...

9 f. Why hasn t the WTO been able to discipline farm subsidies? One of the purposes of WTO is to reduce trade distortions (all sectors) But in agriculture limited results of the rounds of negotiations. For example average import tariff applied to ag imports was 17% (three times more the average tariff on manufactured goods!) US ag products find: average 30% import tariff in EU and 59% in Japan In fact barriers to ag trade are difficult to bring down. Without import barriers domestic farm support (subsidies) would cost more (increased international competition would require more domestic support.) Easy to support farmer income through import tariffs (they do not cost and may earn govt revenues; they push some costs to foreign producers)

10 f. Why hasn t the WTO been able to discipline farm subsidies? Not all subsidies distort trade Subsidies that stimulate production and export do these are so called coupled measures (e.g. indirect support through market price, minimum guarantee price) Decoupled subsidies do not (e.g. direct cash payments to farmers) Subsidies that do not distort trade Green box they are allowed Subsidies that do distort trade Red box they are banned Amber box allowed only up to a certain $ value. But no agreement in the Doha Round here. Decoupled subsidies (EU): blue box

11 Example of trade distorting policy export restrictions & import subsidies effects on international food prices export restrictions play a direct role in aggravating food crises (Pascal Lamy, Director General of WTO, 2011) 40%, 19% and 10% of spike in rice, wheat and maize prices respectively due to trade policies (Anderson and Nelgen, 2012) If enough countries adopt trade policies, end result is increased world food price instability Unless countries cooperate over not using trade policies, each has unilateral incentive to intervene, but collectively no better off

12 An example: World Rice Market Rice Price Supply with Export Controls Supply W 3 P 3 = W 2 W 1 =P 1 P 2 Demand with Import Subsidies Q 2 Q 1 =Q 3 Demand Rice Quantity

13 An example: Welfare Effects of Export Taxes Rice Price Supply with Export Taxes t Supply W 2 W 1 =P 1 P 2 a c b d Q 2 Q 1 =Q 3 Demand Rice Quantity

14 Welfare Effects of Export Taxes If several countries use export tax, shifts up world supply curve, world price increasing to W 2, domestic price in exporting countries falling to P 2 Global effects of export tax: - importers loss of consumer surplus = (a+b) - exporters loss of producer surplus = (c+d) - exporting government tax revenue = +(a+c) - deadweight loss = -(b+d)

15 Resources: Paarlberg R., Food Politics, chapter 9

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