Term Paper on "US Farmers Subsidy"

Term Paper 6 pages (1747 words) Sources: 1+

[EXCERPT] . . . .

U.S. Farmers Subsidy

In July 2004, Europe and the United States agreed to cut their agricultural subsidies that have been blamed for driving Third World farmers out of business, however, no timetable was set, and advocates believed that the proposal did not go far enough, but the decision, at the World Trade Organization, put the so-called Doha round of negotiations back on track (Smith pp). The issue of farming subsidies was also the focus of the Caux Conference for Business and Industry that was held the same month (Smith pp). Canadian counselor to the WTO, Robert Anderson, maintains that reducing tariffs and subsidies would benefit both the developing and developed world, yet it would be a "long and tortuous process," not least because these developing countries that are net agricultural importers also benefit from subsidies, "at least in the short run" (Smith pp). Anderson called for an "honest evaluation" of issues such as price fixing cartels, that act as "unofficial reverse development assistance that transfers wealth from poor countries to rich countries" (Smith pp).

According to Christie Peacock, Chief Executive of the UK charity Farm Africa, there has been a two-thirds decline in investment in African agriculture during the last decade (Smith pp). Africa is the most rural continent in the world, with 80% of the population depending farming, compared with only 3.3% in Europe and the United States, yet direct food aid to Eritrea, for example, was forty times the aid to agricultural development (Smith pp).

According to Peacock, there was only $2 billion of intra-regional trade in Africa, yet there was a $50 billion domestic demand for food crops, which is predicted to double in the next fifteen years (Smith pp).

Larry Mitchell, CEO of the American Corn Growers Association, declared that American agricultural subsidies of $20 billion a year were "critically wrong," and quoted a report from the Agricultural Policy Analysis Center at the University of Tennessee, which accuses the United States of "exporting poverty," because subsidies depress farm prices worldwide (Smith pp). The APAC report suggested that a "careful and balanced application" of measures should be implemented to improve the welfare of farmers worldwide (Smith pp). Mitchell noted, "There is a large difference between a subsidy and support. The former is paid by taxpayers, and the latter by users. If we raise the support program, we can reduce of eliminate the subsidy program" (Smith pp).

Although the United States provides proportionally less support for its farmers overall than the EU, it is the second largest supporter of agriculture in the developed world, and for some commodities, such as sugar, overall support is at EU levels (Trade pp). U.S. support to agriculture has risen in recent years, and U.S. barriers to agricultural imports are much higher than for non-agricultural goods (Trade pp). For some commodities, such as dairy products, sugar, tobacco and peanuts, the degree of protection through quotas and prohibitive out-of-quota tariffs is extremely high (Trade pp). On average, the least developed countries appear to face higher tariffs for the sort of agricultural products that they export to the U.S. than developed countries face (Trade pp).

The United States does not use direct export subsidies to anything like the extent that the EU does, however, it is the world's largest user of export credits and food aid, and its use of these may well distort world markets, especially for cereals (Trade pp). There is evidence of occasions when U.S. subsidized exports have had detrimental effects on domestic production and exports from developing countries (Trade pp).

The latest edition of the United States International Trade Commission finds considerable constraints on imports, and welfare losses to the U.S. from the quotas and associated tariffs on dairy products, sugar, peanuts and cotton, and also finds effective restraints occur for imports of canned tuna (Trade pp). The impact of these restrictions on developing countries is complex, some countries will benefit if they have preferential quota access while others will lose (Trade pp). It is obvious that a large number of developing countries have an interest in sugar, cotton and peanuts, however, it is less obvious that they would find a U.S. market for dairy products, although India is a major milk producer and exporter (Trade pp). As one example of a developing country viewpoint, according to the WTO, Trade Policy Review of Brazil, the Brazilian government has identified the major obstacles to Brazilian exports to the United States as the sugar and tobacco quotas and the high specific duties on orange juice (Trade pp). Brazil has also recently mounted a challenge to U.S. cotton subsidies in the World Trade Organization (Trade pp).

The evidence indeed suggests that the current U.S. barriers hit the very poorest countries hardest (Trade pp). Analysis of the impact of U.S. tariffs, including specific duties, by the International Trade Center finds that U.S. agricultural tariffs bear most heavily on imports from Least Developed Countries, LDCs (Trade pp). They calculate that the average U.S. tariff on agricultural imports from LDCs is 28.1%, compared to 12.7% for all developing countries and 14.5% for OECD, Organization for Economic Co-operation and Development, countries (Trade pp). On the basis of this, a joint IMF/World Bank 2002 paper concludes, "The results suggest that EU protection is heavily skewed against imports from middle-income developing countries, and United States protection against imports from LDCs" (Trade pp).

This evidence also suggests that the United States Generalized System of Preferences, U.S. GSP, program is not particularly generous with respect to agricultural products, a point supported by some WTO calculations (Trade pp). The estimated gap between the average agricultural tariff faced by middle-income countries, who will largely have GSP terms, and OECD ones, who will mainly face MFN rates, in the United States is only 1.5% (Trade pp). A wide range of agricultural products are indeed excluded from coverage under the U.S. GDP, and even the U.S. Africa Growth and Opportunity Act, AGOA, excludes many significant agricultural products (Trade pp). Notably, the Act did not alter the United States' quotaprovisions (Trade pp). Therefore, two broad conclusions may be drawn:

There are six broad product groups where the U.S. has exceptionally high barriers to entry in the form of quotas and large out-of-quota tariffs, and of these sugar and cotton are likely to be of particular significance to a wide range of poorer countries" (Trade pp).

The evidence suggests that overall U.S. barriers on agricultural imports weigh disproportionately on products exported by LDCs (Trade pp)

The direct support given to U.S. farmers and the presence of significant trade barriers for certain products naturally means that the United States agricultural production is higher than it would otherwise be, meaning that world prices are likely to be lower than they would otherwise be (Trade pp). Moreover, U.S. direct export subsidies, export credits, and food aid are likely to have a further depressing effect on world prices (Trade pp).

The United States offers more support to exports through export credits than any other country, and the OECD calculate that approximately 90% of the subsidy value of export credit programs is from the U.S. program, compared to 7% from the EU (Trade pp). They also calculate that U.S. export credits as a percentage of export value average 6.6%, but rarely exceed 1% in other countries (Trade pp). Research is not conclusive as to whether or not the use of export credits distorts agriculture markets, however if they do, the distortion arises mainly from U.S. actions (Trade pp). Export credits are offered on a wide range of products, with bulk cereals accounting for roughly a third of the total (Trade pp).

The United States is also the world's largest donor of food aid, the current budgetary provision for the U.S. Agency for International Development is $1.3 billion under the food aid programs (Trade pp). Roughly 40-60% of food aid given during the 1990's came from the United States, and nearly 90% of food aid is given in the form of cereals (Trade pp). Although the food aid is often given for genuine humanitarian reasons, there is indirect evidence that suggests that some U.S. aid is influenced by the need to dispose of agricultural surpluses (Trade pp).

A recent study cites examples where U.S. grain exports, either subsidized or given as food aid, have severely destabilized production of cereals, or cereal substitutes, in developing countries (Trade pp). Indonesia has accused the United States of dumping flour on its market, with detrimental effects on Indonesian rice production, and a recent surge in U.S. grain exports to Nigeria has hit local production of cereal substitutes, such as cassava and rice (Trade pp). In Bangladesh, an increase in U.S. food aid in cereals has been matched by an almost equivalent fall in local production (Trade pp). The Kenyan government alleges that the United States dumping of wheat in Egypt lies behind a surge in Kenyan imports of very cheap Egyptian flour, which in turn has had adverse consequences for Kenyan wheat farmers (Trade pp).

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