Update: U.S. flexibility on farm subsidies key to trade progress


Update

SANDRA POLASKI

U.S. flexibility on farm subsidies key to trade progress

In “In Agricultural Trade Talks, First Do No Harm” (Issues, Fall 2005), I argued that negotiations at the World Trade Organization risked further impoverishment of the world’s poor because the talks lacked a critical focus on how changes in the global trading system would affect small-scale farmers in developing countries. In low-income countries, 68% of the people sustain themselves through farming, so their fate largely determines the overall welfare of their countries.

When the Doha Round of trade negotiations was launched in autumn 2001, against the backdrop of the 9/11 terrorist attacks, there was wide agreement to emphasize the needs of developing countries in order to strengthen their economies and buttress global stability and security. Despite that moment of clarity, many of the major players, including the United States, soon reverted to their traditional priority of gaining market access abroad for their own firms and agricultural interests. After the article appeared, the negotiations bogged down and finally were suspended in July 2006.

The main sticking point is agricultural trade. The United States, which has resisted any significant cuts in its annual $15 billion to $20 billion in farm subsidies, has been blamed by most countries for the current impasse. The subsidies are widely seen as inducing overproduction, dumping below-cost goods on world markets, and lowering prices for farmers elsewhere. In the current round, negotiators insisted that the United States be allowed not only to spend up to $22.6 billion in subsidies under any new agreement but also to gain wide access to markets in other countries, including low-income countries such as India, where 58% of the population—most, desperately poor—depends on farming. India responded by saying that it would negotiate over any commercial matter but that the livelihoods of its struggling farmers were not on the negotiating table.

The impasse has prevented progress on the overall negotiations. Most countries have refused to make their best offers for reduced tariffs on manufactured goods or services until they have an acceptable deal on agriculture. An economic analysis of the U.S. stance raises critical questions. Agriculture accounts for only 1.4% of the U.S. gross domestic product, less than 2% of employment, and 5.6% of total exports. For the U.S. economy and its firms and workers, the vast majority of export gains from the Doha Round would come in the manufacturing and service sectors. Even in the agricultural sector, gains would come primarily from economic growth in developing countries that are able to grow their way out of poverty and increase the purchasing power of their households. In much of the developing world, countries that were net agricultural exporters a generation or even a few years ago are now net importers under current trade rules and tariff levels. It is not tariffs that reduce poor countries’ imports; it is the poverty of their citizens.

In effect, the United States has chosen to put at risk much larger potential export and employment gains for manufacturing and service sectors for the sake of trying to maximize access to markets where its agricultural exports are already growing strongly. What accounts for the U.S. strategy? The most important factor is the political economy of agriculture. Agribusiness and very large farms collect most of the billions in subsidies. The value of these subsidies leads them to spend heavily on lobbying and campaign contributions. Coupled with the presence of farm votes in many political swing states, the farm lobby wields disproportionate influence.

In previous rounds of global trade talks, the United States and other wealthy countries have been able to protect their farm sectors while prying open markets abroad. However, a new balance of power has emerged in the global trading system, as large developing countries such as India, China, Brazil, and Indonesia make their presence felt. Among these countries’ key concerns is the issue of employment and livelihoods. Because small-scale agriculture is the main occupation in many developing countries, these countries are reluctant to open their agricultural markets too quickly, lest poor farmers be displaced before manufacturing and other jobs can be created for them.

They have formed a group called the G33 to propose that they should be allowed to exempt 10% of agricultural tariff lines from tariff cuts for products that are crucial to their livelihoods and rural development. An additional 10% of their agricultural tariff lines could be selected for cuts that are smaller than those generally agreed on. Tariffs on the remaining 80% of farm goods would be reduced by an agreed-on overall formula.

The daunting task at the center of the negotiations is to find a trade deal that captures the positive potential of global trade to accelerate economic growth and job creation, while recognizing and allowing sufficient flexibility to deal with the reality of job destruction that increased trade always entails. This is true for both rich and poor countries, although the poor have much less scope to absorb the shocks and make the transition. The G33 proposal is a reasonable attempt to balance these competing objectives for countries with high shares of employment in agriculture.

The United States has the ability to break the current impasse. To do so, it must step back from its current maximal demands and instead accept the G33 proposal for flexibility on agricultural trade liberalization while reducing its overly ambitious demand to maintain high levels of trade-distorting subsidies for wealthy U.S. farmers. A new proposal along these lines would instill life back into the Doha talks. Other countries would then feel pressure to come forward with proposals in other sectors. Until this happens, there will be no agreement on a new trade regime.