Agricultural Subsidies and the Developing World

I haven't done much blogging for the past month. My wife heard an interview with some guy who has written a book on bloggers and who indicated that something like 85% of bloggers quit after about a year. My first post on this blog was almost exactly a year ago and Judy suggested that maybe I was one of the 85%.

There may be something to that. But I don't think ennui is really the reason. The real reason is that I find I have little new to say. There is a lot going on in the world about which I care a lot. But it seems like it's just the same thing over and over again. So, when I see something that seems comment worthy, I realize that I have already said everything I have to say about that. And I wonder, "Why say it again?"

Well, whatever the reason, I found something today that piqued my interest again. Actually two things, both op-ed pieces, one in the LA Times and the other in the NY Times Both are on a subject -- the role of trade policy in helping the 3rd World -- that I have been discussing/debating some with my youngest son, who is an International Relations major at the University of Wisconsin.

The LA Times piece argues that eliminating the developed world's agricultural subsidies and other restraints on trade in agricultural goods would be one of the most important steps the developed world got take in assisting economic development in the third world.

Seventy percent of the world's poor live in rural areas and depend on agriculture to earn a living and feed their families. But instead of being able to freely sell what they produce, they are often denied entry into markets as rich countries protect and prop up their own farmers — subsidizing products and imposing high tariffs on imports.

Rich countries — primarily the U.S., Japan and the members of the European Union — spend $280 billion annually on agricultural support. That's $5 billion a week to protect their often-rich farmers from competition. Ultimately, it is the taxpayers and consumers in these countries who shoulder the costs of these support programs. Economists estimate that consumers pay $168 billion a year because of tariffs, and taxpayers pay $112 billion a year for direct subsidies.

But the real damage is done to farmers in poor countries, because high tariffs keep them out of key markets, and tariffs and subsidies together drive down the world price of their exports. Without the income that trade could provide, it is their children who go hungry and who are deprived of clean water, medicines and other basic necessities of life.

Tariffs also hurt poor countries by blocking them from moving up the production chain. Even though 90% of the world's cocoa beans are grown in developing countries, they produce only 4% of its chocolate. One reason is that tariffs often escalate with the degree of processing — in the EU, producers of raw cocoa pay a tariff of 0.5% of the value of the beans, semi-processed cocoa pays about 10% of its value and chocolate even more.

If the rich countries would agree to level the playing field, everyone would see enormous gains. The World Bank estimates that full liberalization of trade in goods alone could generate $300 billion per year for the global economy. Developing countries would gain $86 billion of this share. And these numbers can grow as producers in poor countries take advantage of new markets.

The NY Tmes article does not really dispute this, but it makes painfully clear the significant practical obstacles that stand in the way:

It's true that the European Union needed to reform its agriculture policies. But any farm sector can absorb only so much reform at once. Unlike the nongovernmental organizations calling so vociferously for cuts in subsidies, governments have responsibilities to the citizens who elect them. The changes we have already begun are having an extensive impact on Europe's farm regions. As a result of the sugar reforms, producers in Ireland and Finland may well go out of business. We have seen no comparably bold action by any other major W.T.O. member, the United States included.

As the talks begin today, our fellow negotiators should be in no doubt that all the European Union's governments agree that there is no reason to move further on agricultural tariffs. They all agree that the time has come for others to respond in other areas of the Doha agenda, like lowering industrial tariffs and liberalizing service industries, to the moves we have already made.

Ignore for the moment the absurdity of basing international trade policy on the interests of Irish and Finnsih sugar farmers. (Are there such people?) The argument being made here is that the EU should not be asked to lower agricultural supports and tariffs unless and until the 3rd world countries lower their tarriffs on services and manufactured goods.

It is this point that my son has so much difficulty with. If the goal were actually to help the 3rd world to develop, then lowering barriers to our agricultural markets while allowing them to protect their nascent manufacturing businesses would make a whole lot of sense. Take the choclate example. Country A grows cocoa beans, most of which it exports. It would make sense for them to move up the manufacturing chain and start making cocoa and perhaps even chocolate. But, they have enough trouble competing with the developed world's chocolate manufacturers under the best of circumstances. When that is compounded by high tarriffs in the only markets with significant demand for chocolate, they have no real chance of developing a chocolate manufacturing business. If the goal of the developed world were to help Country A develop, it would be entirely consistent for the developed world to agree to eliminate their tarriffs and subsidies on both cocoa and finished chocolate and yet agree to allow Country A to maintain tarriffs on imported chocolate and subsidies for domestically manufactured chocolate. The effect would be to give Country A greater acccess to the devloped world's markets for both cocoa an finished chocolate and yet allow it to protect it's nascent chocolate industry from competition by establieshed chocolatiers.

There is an obvious asymetry here, but that asymetry is really not all that significant for the developed world. While it is critical that Country A's manufacturers have access to the developed world's chocolate markerts, the converse is probably not true: after all exactly how much chocolate can the people of Country A be expected to buy? Moreover, if the Country A chocolate market is significant, the developed world can get around the tarriffs by building maufacturing plants in Country A. This would allow them to compete in that market and at the same time contribute to Country A's economic develpoment by providing (relatively) good paying jobs to its citizens.

In short, if the goal really were to help the third world, the approach outlined in the LA Times piece would make all kinds of sense even if the third world were not required to reciprocate. As the NY Times piece makes clear, though, helping the 3rd world is not really the goal. The goal is to help the workers and businesses in the developed world. The workers and businesses in the developed world have competing interests, of course, with some wanting to protect exisiting domestic businesses from foreign competiton while others want to expand exports to those same countries. Those conflicts are what drive these countries to even be willing to consider "free trade." But, for concessions to be politically saleable, getting something in return is a necessity. Specifically, if Country A wants access to developed markets in what they presently produce (e.g. agricultural goods) then the developed countries will insist that they give up protections with respect to those things that they ultimately want to produce (manufactured goods). One can easily see how this quid pro quo demand can be seen (or at least portrayed) as a way for the developed world to prevent the 3rd world from ever being able to compete in areas beyond agricultural goods.

The politics of all this is very real and one cannot ignore that reality and continue to be relevant. However, it occurs to me that there is one interest that is being ignored here. Absent economic development, the 3rd world is going to continue to pose security challenges, even threats, to the developed world. Even if it costs us some jobs, mitigating that threat may be worth the cost.

One final point: If you haven't peeked already, who do you suppose wrote the the LA Times piece? Some mushy headed liberal do gooder no doubt, right? Hardly. The author is none other than that arch neo-con Paul Wolfowitz, the man who did more than any other to bring us the war in Iraq. I admit that the thought of agreeing with PW on anything cuases me some significant cognitive dissonance. But there it is. In the 21st Century it gets harder and harder to figure out where on the left-right political spectrum anyone really is.