WTO, Agricultural Subsidies and Development

1
WTO, Agricultural Subsidies and Development

• Strathmore University Presentation
• Dr. Reid E. Whitlock
• Nairobi, Kenya
• January 2006

2
WTO Meetings In Hong Kong18 December 2005

• 1 WTO secured an end date - 2013 -- for all
  export subsidies in agriculture
• The declaration makes clear that the agreed
  date is conditional. Loopholes have to be plugged
  to avoid hidden export subsidies in credit, food
  aid and the sales of exporting state enterprises

3
Agreements

• 2 There is an agreement on cotton.
• For cotton the end date for subsidies by
  developed countries is accelerated to the end of
  2006. In addition, cotton exports from
  least-developed countries will be allowed into
  developed countries without duty or quotas from
  2006.

4
Cotton (contd)

• " Ministers have also agreed to aim to cut
  trade-distorting domestic subsidies on cotton by
  more than would normally apply under the new
  agreement, and to do so more quickly." The main
  countries involved in this outcome were United
  States and the four countries pushing for an
  agreement on cotton (Benin, Burkina Faso, Chad
  and Mali).

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Item 3

• The member nations negotiated " a very solid"
  duty-free, quota-free access for the 32
  least-developed country members. (When??)

6
Item 4 Food Aid

• we reconfirm our commitment to maintain an
  adequate level and to take into account the
  interests of food aid recipient countries. To
  this end, a safe box for bona fide food aid
  will be provided to ensure that there is no
  unintended impediment to dealing with emergency
  situations. Beyond that, we will ensure
  elimination of commercial displacement. To this
  end, we will agree effective disciplines on
  in-kind food aid, monetization and re-exports so
  that there can be no loop-hole for continuing
  export subsidization.

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Item 5 Role of LDCs

• 5 We reaffirm our commitment to effectively
  and meaningfully integrate LDCs into the
  multilateral trading system and shall continue to
  implement the WTO Work Programme for LDCs adopted
  in February 2002.

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Item 6 Help To LDCs

• We recognize the dependence of several developing
  and least-developed countries on the export of
  commodities and the problems they face because of
  the adverse impact of the long-term decline and
  sharp fluctuation in the prices of these
  commodities

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WTO Summary

• Subsidies
• Food aid
• Access for LDCs

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Definitions

• A monetary grant given by government to lower the
  price faced by producers or consumers of a good
• A payment that a government makes to a producer
  to supplement the market price of a product or
  commodity the producer is selling.
• (continued)

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Definitions (contd)

• A payment, designed to increase producer income
  by raising the level of prices above market rates
  (BUYERS are given vouchers by the government to
  give to sellers when a sale is made. They can
  announce the higher price but only have to pay
  their original, lower price)
• Export subsidies are payments given by the
  government to farmers so that they will sell
  their product abroad

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What Do Subsidies Mean For Countries Like the
U.S.?

• By guaranteeing U.S. farmers a minimum payment
  for commodities such as corn, rice and soybeans,
  the government encourages overproduction. That
  drives down the market price, forcing even higher
  subsidies and creating more surpluses that can
  be exported.

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Myth of the Farmer

• A part of the problem is that Americans still
  believe the myth of the family farmer as somehow
  superior to other classes of workers. That
  gives farm lobbyists a potent hook with which to
  demand public assistance.

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The Myth is Costly

• and not only for the 97 percent of Americans
  who don't live on farms. Boosting farm subsidies
  in the U.S.will be enormously damaging to the
  U.S. position in global trade talks, where
  negotiators have been trying to get other
  countries to reduce their own agricultural
  subsidies.

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What Do Subsidies Mean For LDCs?

• As a condition for helping many LDCs service
  their large foreign debt, international lending
  agencies demand that the countries keep their
  tariffs low. The governments are then unable to
  bar American sugar, grain, and other food
  products from their countries, so their own
  farmers get stuck

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The Problem In A Nutshell

• An American farmer has high labor costs, high
  machinery costs, high land acquisition costs,
  high regulatory compliance costs (environment,
  pesticides, labeling, storage, etc..). Because
  the American market is well-served by farmers,
  there is not much market for an individual
  farmer's maize. The farmer looks to foreign
  markets that are fragmented and/or easy to
  penetrate to sell his/her products into. Because
  the American farmer's costs are so high (s)he can
  only sell at all by having the government
  supplement what (s)he earns on each foreign sale

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An Example

• If the price in the Kenya market was 2 per kilo
  of maize, the American farmer would lose money
  accepting this price, when his/her costs are 3
  per kilo. Instead of withdrawing from the market
  and producing something else, cutting costs or
  leaving farming altogether, American farmers
  appeal to the public -- the American people --
  and the U.S. government and claim that they can
  only continue to exist with help.

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The Example Continues

• The government gives this help in the form of
  subsidies. These subsidies bring the U.S.
  production cost per kilo down from 3 to 1 --
  enough to ensure that Kenyan consumers will buy
  their maize from American -- and not Kenyan --
  farmers.

19
The Paradox

• domestic supports can encourage overproduction
  because if the government is paying producers of
  a certain crop, others will want to start
  producing it too or will produce more of it than
  normal. This can make global prices

20
Historical Background

• Modern subsidies began In WW1 when the U.S.
  needed higher production for the war and offered
  subsidies as inducements to farm. After WW1
  prices dropped with overproduction so the
  government propped up prices with subsidies to
  avoid farm failures. During the Great Depression
  (1930). Dustbowl. Designed to increase, or at
  least stabilize, farm income. WW2 stimulus needed
  again. Post-war, prices fell with
  overproduction. Subsidies propped up prices.

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The Political Economic Realities

• There is a popular belief in the farmer as a
  folk figure in American culture like the
  cowboy
• Leaders cant favor producers at the expense of
  consumers or vice versa
• As a major food aid donor, subsidy-generated
  surpluses have a natural outlet

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More Realities

• - Agricultural subsidies are insignificant in the
  American budget.
• State 20 mmm (of which, USAID 3.9mmm in 2005
  joint State-Ag programs for another 4.8 mmm,
  global HIV/AIDS for 1.45 mmm and 2.5 mmm for the
  Millenium Challenge Corp), Ag 90 mmm, defence 540
  mmm, health human svc 660, interest on debt 440
  mmm, social security 510 mmm -- total over 4
  trillion

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More Realities

• - focusing on the aid part of the US budget, the
  US ranks 22 out of 22 DCs in aid as a of GNP.
  Most is spent on middle income countries and
  democratic success stories or disasters.

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Realities (contd)

• - the costs to LDC's of lost sales seem big to
  them.
• - there are costs in innovation not undertaken by
  DC's that continue to subsidize and LDCs that
  continue to stagnate and complain rather than
  changing focus.

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Details About Subsidies

• Remember, farm subsidies are a TINY percentage of
  the U.S. government budget -- 5 to 20
  billion/year (direct plus indirect -- subsidized
  loans, loan guarantees, insurance) out of 4
  trillion

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Details (contd)

• 58 percent of farmers including most vegetable,
  beef cattle, and chicken producers are able to
  operate in the market economy without receiving
  taxpayer subsidies. But producers of just five
  crops - wheat, corn, soybeans, rice, and cotton -
  have secured a direct pipeline to more than 90
  percent of U.S. farm hand-outs. Stated another
  way, while just 7 percent of all U.S. farms have
  sales of 250,000 or more, this 7 percent receive
  almost half of all government payments.

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More Details

• Many of the largest, most profitable farms and
  agribusinesses that have received the lion's
  share of subsidies have used these funds to buy
  out smaller farms.

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Its Not Just the U.S. !!!

• Japan.
• Europe a high-cost producer generates an
  export surplus of approximately 5 million tonnes
  of sugar. Currently, the EU is spending 3.30 in
  subsidies to export sugar worth 1. In addition
  to the 1.3bn in export subsidies recorded
  annually in its budgets, the EU provides hidden
  support amounting to around 833m on nominally
  unsubsidised sugar exports.

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Food Aid Development

• United States is now in the embarrassing
  situation of undermining its own foreign-aid
  program.
• 80 of U.S. aid actually goes to American
  companies implementing projects in LDCs. Italy
  and US tie over 70 of their aid.

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Access For Countries Like Kenya
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What Can Kenya Do?

• Buy into the U.S. (invest behind the subsidy
  wall)
• Develop products the U.S. cannot produce (too
  labor intensive, requires too much heat, sunshine
  or rainfall) -- examples are tea, coffee, gum
  arabic
• Protest to WTO

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Kenya Could Introduce Counter-Subsidies

• This could work if agriculture mattered so much
  to Kenya that it was prepared to match and beat
  any subsidy provided by American (or other)
  goverments to its farmers. The reality is that
  Kenya -- maybe the government and maybe the
  citizens -- doesn't care about this issue as much
  as America does, It does not have the political
  will to shift public funds from other sectors to
  agriculture.

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Clarification

• Note I did not say Kenya lacks the money to win a
  subsidy war. I believe that there are two
  categories of developing countries that are
  relevant for this discussion those that have the
  money to wage such a war but choose not to spend
  it for such a war, and those whose agricultural
  sector is so small, so backwards, so undeveloped,
  so uncompetitive, that even if every advantage
  and protection was given to it, it would not be
  able to adequately and professionally serve the
  market.

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One More Option

• What if Kenyans Stopped Farming - Admitting
  Defeat in This Trade War?

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Option Analysis

• This might be a good thing if the energy and
  determination of Kenyan farmers and the
  government structures that support them such as
  agricultural research stations and technical
  schools and extension workers and government
  anti-locust spraying programs and water
  infrastructure projects were redirected towards
  something about which the U.S. did not care about
  in which the U.S. could not defeat Kenya. Even if
  such a product existed, the transition would be
  slow and painful. Many farmers don't know how to
  do anything but farm, and are too old, too set in
  their ways, or too committed to farming to do
  anything else.

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A Few Thoughts

• Societies have a right to decide what they
  collectively really care about. The U.S. should
  not be faulted because it cares about keeping
  farming alive in America. That is its right. Its
  choice. Kenya should be equally clear and
  decisive about the things important to Kenya.
  Kenya could erect tariff barriers to keep
  American farm products out. This would require
  that it leave the WTO or face sanctions and
  reprisals. It would mean not taking IMF and World
  bank money. Kenya has to decide if it is worth
  it.

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Unacceptable

• That the U.S. joins a forum -- the WTO --
  committed to removing subsidies, when it has no
  intention of playing along with the game. It
  would be much more honest -- and would make the
  battle lines clearer to understand -- if the U.S.
  withdrew from WTO as it did from the global
  warming, greenhouse gases and emissions
  organizations.

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Unacceptable, part 2

• that developing countries have not done more to
  improve the competitiveness of their agricultural
  sectors though they are quick to criticize the
  developed countries for their problems. In my
  experience, the countries that really care about
  something, do something about the problem rather
  than just complain. Chile, Vietnam, Thailand,
  China come to mind.

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Unacceptable, part 3

• that many developing countries are still blaming
  colonialism for their inability to improve their
  situation. There is not --never was and never
  will be -- any such thing as a level playing
  field. A country has to deal with problems and
  opportunities it inherits, and has to make the
  best of them. No one is listening and no one
  will ever be swayed in the ways you hope, by your
  complaints. Not the U.N., not the WTO, not
  England, which colonized you, and certainly not
  the U.S., which cares next-to-nothing about Kenya
  and feels no obligation to give it any special
  consideration.

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The World Is Changing

• For better or worse, the world as we know it is
  merging, partnering, growing, in ways that make
  it extremely difficult for small economies to
  flourish. Small economies will be permanently
  relegated to pauper status -- forgotten footnotes
  to history, economics and politics that
  occasionally make the headlines when there is
  another coup or drought or massacre or ethnic
  cleansing or descent from democracy.

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Thank You

• QA Single questions only please -- short and
  to-the-point.