Farm Subsidies

Examining a long-standing global conflict.

Wilmington NC – [Click the Listen button to hear Dennis' commentary.]

Late last month the World Trade Organization, or WTO, made a little-noticed ruling that may have huge consequences, possibly forever changing the way rich countries treat both their farmers and less developed nations.

There has long been a global conflict over farm subsidies between the United States and the European Union, on one side, and the world?s less industrialized, agricultural-exporting countries on the other. Both the US and the EU have long histories of subsidizing farmers. Other countries argue that these subsidies allow American and European farm products to be sold on world markets at artificially low prices. In turn, farm products in many countries are priced out of world markets, depressing farm incomes and foreign earnings.

Thus, farm subsidies have long been disputed in multinational trade negotiations. WTO provides the structure for most of these negotiations, and enforces resulting agreements. Farm subsidies were a priority for many countries in the most recent WTO trade negotiations, last year at Canc?n. But for America, they were just one relatively minor item, among many. This created discord, and the talks ended in acrimony.

Following failure at Canc?n, Brazil challenged US subsidies to cotton producers under provisions of WTO?s 1995 Agreement on Agriculture. That agreement?s Peace Clause immunized farm subsidies from legal challenge if they were capped at 1992 levels. US subsidies to cotton farmers totaled 1.6 billion dollars in 1992. But in 1999 and again in 2001, subsidies topped 2 billion dollars. This gave Brazil grounds to challenge American subsidies under the Peace Clause. Brazil claimed to have lost 600 million dollars in world sales due to subsidized American competition. America?s share of the world cotton market did rise from 20 percent to 40 percent at this time.

The WTO ruled for Brazil, finding US cotton subsidies violated the 1995 agreement. The ruling is not final ? the full text is not yet released ? and will certainly be appealed. The final outcome may be years away. But even so, the freedom of rich countries to cast money at their farmers has been disrupted. The Peace Clause has now expired, and other countries will be emboldened by Brazil?s success to challenge US and EU subsidies on a wide range of farm products.

America and the European Union have justified farm subsidies on similar grounds. Their arguments have rested on the perception that farm incomes, on average, are below those of non-farm people. Thus, subsidies are needed to keep people ?down on the farm.? The historic reasons for doing so include both assuring an adequate supply of food, and slowing the migration of people leaving farms to more closely match the rate of growth in non-farm jobs.

However, this rationale may now be questionable. Both the US and the EU produce exportable surpluses ? exporting more farm products than they import. Thus, if farm subsidies are needed to assure adequate domestic food supplies, those subsidies are greater than necessary. Perhaps, they are not needed at all. Further, the number of people living on farms has fallen to the point where there is little excess labor to move into non-farm jobs. And overall, income parity has been achieved between farmers and others. Recent demographic studies in the US suggest that some farmers of the future will migrate in from the non-farm sector.

We should now expect the great trading powers ? America and the European Union ? to stand their ground with WTO, and fiercely fight for the right to subsidize farmers as they see fit. But, the time may now also be ripe to revisit the desirability of doing so.