April 14, 2008
The ag subsidies exacerbating this food crisis
Kim Elliott highlights a policy instrument readily available to policymakers to address the food prices crisis:
While it is hard to know exactly how much biofuels are to blame for rising food prices, especially for wheat and rice, subsidies for biofuel production are one of the few policy levers available in the short run to relieve demand pressures. So it's odd that a new World Bank analysis of responses to rising food prices prepared for the Development Committee stops short of recommending changes in the aggressive promotion of biofuel use. Most of the note focuses on ways that developing countries can cope, and that the World Bank and donors can help. The short discussion of bio-fuels focuses on the bank's role in "informing the discussion" only to conclude:Trade-offs between energy security, climate change and food security objectives need to be carefully monitored and integrated into both food and bio-fuel policy actions.This rather tepid response overlooks the many scientific analyses that raise serious questions about the environmental benefits of the current generation of biofuels, especially corn-based ethanol. It has long been known that substituting corn-based ethanol for gasoline does little to cut greenhouse gas emissions because producing it is so resource-intensive. A literature review from the Congressional Resource Service concluded that using corn ethanol cuts net greenhouse gas emissions by only about 20 percent because of the heavy use of fertilizers and pesticides, which are themselves energy-intensive and cause water pollution besides.
Worse, recent research published in Science magazine suggests that when land-use changes are taken into account, production of corn-based ethanol actually leads to a net increase in greenhouse gas emissions...
[I]n the midst of the current crisis, and given the new evidence on the perverse effects on the environment, continuing to subsidize and promote the use of food crops for fuel is simply unconscionable.
Given the success of the ethanol lobby in spite of harsh criticism from economists over the years, I have little hope that policymakers will acknowledge the error of their ways even in the midst of this crisis.
Posted by Dingel at 10:36 PM | Comments (0)
February 20, 2008
Debunking ag liberalization myths
The IMF's Stephen Tokarick dispels some agricultural trade liberalization myths in the latest issue of the JEP:
The implicit or explicit argument that often follows hard upon the heels of the inflated estimates of the size of high-income country farm “subsidies” is that the support to farmers in high-income countries is extremely damaging to poor, developing countries— even more damaging than tariffs levied against developing-country exports. However, the effects of liberalizing trade in agricultural products is likely to be both smaller and more heterogeneous than such statements suggest. Some low-income countries are net exporters of agricultural products; others are net importers. The degree of substitutability between foreign and domestic agricultural products also varies substantially.Those who oppose agricultural trade liberalization have their own favorite misstatements. One common claim often made by European trade negotiators is that if high-income countries cut agricultural tariffs worldwide, this step would erode the special treatment— often called “trade preferences”—that high-income countries currently make available to many of the lowest-income countries. As a result, they argue that the lowest-income countries could end up worse off as a result of agricultural trade liberalization. However, analysis shows that the magnitude of this effect, if it exists at all, is likely to be very small, and not nearly enough to counterbalance the more positive benefits of agricultural trade liberalization.
Of course, if you are a regular reader of Trade Diversion, you already knew that Oxfam's big numbers conflate subsidies with tariffs and quotas, liberalization won't have massive benefits for LDCs, the effects will be heterogeneous, and liberalization gains will exceed preference erosion losses.
Here's a previous episode of myth-busting.
Posted by Dingel at 12:17 PM | Comments (0)
February 06, 2008
Obama on farmers
As a senator from Illinois, Obama loved the corn lobby, argues Emmanuel. But perhaps as president, Obama would be enjoy a broader base of support and not have to mollify the farm lobby? Then he'd push sensible economic policies?
Look at this gem Tim Lee found:
Encourage Young People to Become Farmers: Obama will establish a new program to identify and train the next generation of farmers. He will also provide tax incentives to make it easier for new farmers to afford their first farm.I realize that no politician would say this, but the fundamental problem in agriculture is that there are too many farmers. We prop up farms that should have gone out of business a long time ago for no good reason. Why on Earth would the federal government want to spend money encouraging people to go into an already over-staffed industry? Will we also have a program to encourage people to go into the typewriter-repair business?
Less egregiously, Obama proposes a $250,000 subsidy payment cap, but the White House is pushing for $200,000.
Posted by Dingel at 08:23 AM | Comments (0)
February 04, 2008
Bush threatens to veto farm bill
Is President Bush finally facing down Congress on agriculture in his lame duck year? Here are the guts of tonight's FT story by Alan Beattie:
President George W. Bush has threatened to veto the “farm bill” unless provisions he says amount to tax rises are taken out, and a cap on subsidies given to richer farmers is lowered...Even if the White House is successful in getting Congress to trim spending, it is unlikely to make US farm programmes consistent with the offer to cut payments that Washington has already made in Doha...
Collin Peterson, the Minnesota Democrat who chairs the House of Representatives agriculture committee, has said failure to agree a bill by the expiry of the current bill on March 15 would mean reverting to a law dating from 1949 that would massively raise support prices for a range of commodities...
Reformers were dismayed by the draft House and Senate bills, which, they say, have done little to reduce the price supports that encourage overproduction and environmental degradation, and have added only minimal amounts of money for fruits and vegetable farming, which currently receives little support.
Posted by Dingel at 11:21 PM | Comments (0)
December 18, 2007
US cotton programs not WTO-compliant
The WTO has once again ruled in favor of the Brazilian complaint against US cotton subsidies, finding that US reforms have not brought its subsidies into compliance with previous WTO dispute settlement panel decisions.
15.2 (pdf): "The Panel considers that to the extent that the measures taken by the United States to comply with the recommendations and rulings adopted by the DSB in the original proceeding are inconsistent with the obligations of the United States under the covered agreements, these recommendations and rulings remain operative."
Addendum: FT story.
Posted by Dingel at 03:54 PM | Comments (0)
December 02, 2007
Romney defends US ag subsidies
Mitt Romney in a GOP debate, via Hit & Run:
We're competing with European and Brazilian and other farmers, and we're competing in a marketplace where they are heavily subsidized, at great disadvantage for our farmers. And so, if we're going to change our support structure, we want to make sure that they change their support structure.And we do this together, as opposed to unilaterally saying: We're going to put our farmers in a tough position and have the farmers in the rest of the world continue to be subsidized.
Unfortunately for Mitt, European farm subsidies have been largely decoupled from production since 2003, so they aren't triggering a surge in output or a flood of imports. Moreover, the European Union is due to reform its Common Agricultural Policy in 2008-09:
The European Commission unveiled plans Tuesday to shake up Europe's farm subsidies in a bid to make costly hand-outs more relevant to the modern world as the sector enjoys the strongest boom in generations.While past reforms have geared the European Union's Common Agriculture Policy (CAP) towards reining in production, farmers are now struggling to keep up with surging demand fuelled by explosive growth in China and India.
Kicking off a six-month review of the CAP, the EU's executive arm floated the idea of capping hand-outs to the biggest farms, phasing out milk quotas, scrapping rules on keeping land fallow and guaranteed minimum cereals prices.
Based on the findings of the review, the Commission is to come forward with reform proposals in May that would both modernise and simplify Europe's support of its farms. [AFP]
So while Europeans seem to progress, US policy is getting worse. Moreover, I've never heard of Brazilian farmers receiving subsidies. Shame on Mr Romney for blaming others when the United States is the laggard.
Posted by Dingel at 05:38 PM | Comments (0)
November 09, 2007
2007 farm bill even worse than 2002
The 2002 farm bill reversed a gradual, albeit slow, trend of liberalizing American agriculture. Many analysts, including myself, hoped that that legislation was an aberration born of particular electoral considerations, and that the 2007 farm bill might return to reform. Unfortunately, Kim Elliott says things are only getting worse:
Senators Richard Lugar (R-IN) and Frank Lautenberg (D-NJ) introduced a reform-oriented farm bill that no one thinks has a chance. Perhaps the best that can be hoped for in this case is that continued disagreements over who gets what in the farm bill and who pays for it will continue to stall passage, resulting in a short-term extension of the slightly less bad 2002 farm bill.
Posted by Dingel at 09:51 PM | Comments (0)
October 26, 2007
How big is the farm bill?
The proposed farm bill is approximately 1.8 percent of projected spending over the next five years.
Posted by Dingel at 01:47 PM | Comments (0)
October 22, 2007
The distribution of ag subsidy income
Thomas Hertel, Roman Keeney & L. Alan Winters explain why agricultural liberalization is so tough to achieve:
The “average” farm household in the United States is little affected by the trade reforms currently being contemplated in Geneva, but these reforms imply significant losses primarily for the very richest households involved in production of highly protected commodities. Meanwhile, in the developing world, many of the benefits of rich country agricultural liberalisation are translated into reduced poverty....[I]n the United States, farm income accounts for less than 10% of total income of farm households... [O]ur estimates of the impact of Doha on the average farm household’s income suggest that it is statistically indistinguishable from zero! If this is the case, then what is the source of such strong opposition to reform?... In the United States, most farm households earn relatively little from farming, but those large farms producing sensitive products tend to be specialised, with the richest deriving up to 90% of their income from agriculture...
In contrast to the negligible impacts on the average US farm household, full agricultural trade liberalisation would cut the total income of the wealthiest rice farmers by about 19% and that of cotton farmers by 10%... It is these wealthy, highly specialised households in a few heavily protected sectors that stand in the way of serious agricultural reform in the US. Indeed, around one half of producer revenue in the US rice and sugar sectors over the period 2001-2005 were attributable to farm programs., while more than a third of cotton revenues are directly attributable to government programs. This sharp concentration of potential losses among a relatively small number of influential households has made reform in the US difficult indeed.
Read the full column for other important insights into agriculture at the Doha Round.
Posted by Dingel at 10:43 AM | Comments (1)
October 16, 2007
Brazil wins again
How many times have I reported this headline before? Reuters: "WTO rules against US cotton subsidies"
Posted by Dingel at 08:18 AM | Comments (1)
August 30, 2007
Fifth Avenue farms
Behold the power of Google Maps:
"The red dots indicate people who live in Manhattan (and so clearly are neither hurting for money nor tilling the soil on the family farm) but receive agricultural subsidies from the federal government. The larger red blobs mark people receiving more than a quarter of a million dollars in farm subsidies annually." - Yuval Levin
[HT: Norberg]
Posted by Dingel at 08:34 AM | Comments (1)
August 18, 2007
In defense of anti-dumping
Ever the contrarian, Dani Rodrik mounts a defense of anti-dumping rules (pdf):
There are also some provisions of the GATT/WTO regime that are highly open to protectionist abuse, but these have had only limited impact on trade. The anti-dumping (AD) provisions of trade law are particularly notable in this respect, as they provide easy access to protection in circumstances where the economic case for protection is weak or non-existent. While countries do make use of AD, it is hard to argue that the world economy has greatly suffered as a result. In retrospect, what is striking is not that AD is used, but that it is used so infrequently in light of the flexibility of the rules, and that it has caused so little damage. Indeed, we could argue that AD has made the trade regime more resilient by providing a safety valve for protectionist pressures. These pressures might have had more damaging consequences otherwise, if they had to make their way outside international rules rather than within them.
Posted by Dingel at 09:02 PM | Comments (0)
August 11, 2007
What made the House's 2007 farm bill?
The people of the First District of Minnesota, I think, can probably lay claim to one of the richest agricultural pieces of land in the entire world . . . I had 14 hearings throughout my district with universal acceptance of making sure the safety net is maintained . . . When I need advice on the farm bill, I go to a couple of good farmers in my district, Kevin Papp, president of the Minnesota Farm Bureau, and Doug Peterson, president of Minnesota’s Farmers Union. I don’t need to go to the ideologues at the Cato Institute or Club for Growth to know what’s good for rural America. [Tim Walz (D-MN)]
The House Farm Bill allocates $286 billion over five years to agricultural programs—that’s an even bigger price tag than the one attached to the bloated 2002 Farm Bill, which increased agriculture spending by 80 percent over 1996’s Freedom to Farm Act, itself a huge bill.It continues the tradition of giving huge subsidies to wealthier farmers, though on a more limited basis than the 2002 Bill. Where the 2002 Bill dished out subsidies to farmers earning up to $2.5 million annually, this bill establishes an annual income threshold of $1 million, or $2 million if a husband and wife each claims subsidies. A slight improvement, at best.
I think the House successfully avoided the Cato Institute's contaminating influence.
Posted by Dingel at 10:27 AM | Comments (0)
July 31, 2007
Worst. Farm Bill. Ever.
CGD's Kimberly Elliott attacks the farm bill that passed the House on Friday:
From an international perspective, the majority in the House did not just miss an opportunity for reform, they thumbed their nose at our trading partners, especially the poorest. The House farm bill provides increased support to cotton and sugar, two products of particular interest to African exporters, and it blithely ignores a World Trade Organization ruling that certain subsidies violate U.S. commitments. Such cavalier treatment of legally binding international obligations undermines the already dim prospect for completing the Doha Round. It also invites new challenges to U.S. policies in the WTO, which could result in retaliation against U.S. exporters. Brazil and Canada have already filed new WTO complaints against U.S. farm policies and final passage of the House would invite even more, while making the U.S. case even harder to defend. It is now up to the Senate to salvage both common sense for American farmers and taxpayers, and what is left of America's reputation in the world.
Posted by Dingel at 01:54 PM | Comments (0)
July 25, 2007
100% port screening
I'm filing this under non-tariff barriers:
All cargo going into the US on ships would have to undergo thorough screening at foreign ports under new legislation agreed by key congressional committees, in a move attacked on Wednesday by the shipping industry as a recipe for chaos...Erik Autor, vice-president for international trade at the National Retail Federation, said there would be significant technical challenges in meeting the bill’s requirements...
He questioned, for example, whether the Department of Homeland Security had the resources to examine promptly the millions of images that would be created annually of containers scanned at overseas ports.
“We still say that there are potentially a great deal of challenges in order to implement this mandate – and challenges that are not going to be overcome any time soon,” he said
Mr Autor warned the time taken to scan containers would slow down handling at many ports in a system already prone to congestion. [FT]
Is 100% screening feasible? See this really long article for details of the debate. I don't see a definitive answer.
Posted by Dingel at 10:14 PM | Comments (0)
July 21, 2007
No significant changes in farm bill
Dan Griswold describes the latest from the House Agriculture Committee:
Sadly, the new 2007 farm bill looks a lot like the old 2002 farm bill that is due to expire on September 30. No real changes were made in the Title 1 commodity programs that lavish production subsidies on farmers who grow corn, wheat, cotton, and other program crops. Trade barriers remain against imports of lower-priced sugar, rice, and dairy products.
Posted by Dingel at 05:01 PM | Comments (0)
July 18, 2007
Who gains from agricultural liberalization?
I haven't read the paper, but the abstract is interesting:
Brazil is found to account for nearly one-half of all the benefits to developing countries deriving from global agricultural trade reform. These gains are associated with improvements in the welfare of each group and a lower incidence of poverty. Large-scale producers gain more than smallholders as they tend to be relatively specialised in export products, but there are important gains to agricultural employees, who are relatively poor, and to urban households, who benefit from the expansion of the agro-food sector. Overall, there is no discernible impact on income inequality, and no evidence that the gains to commercial farmers occur at the expense of poorer households.
Posted by Dingel at 10:35 PM | Comments (0)
July 16, 2007
Did the US exceed its ag subsidy cap?
The WTO's DSM is going to heat up a bit:
Brazil lodged its broadest attack against U.S. farm spending with a complaint at the World Trade Organization that may signal the start of a raft of litigation as hopes for an international accord dissolve...The U.S. stayed below the $19.1 billion a year spending ceiling until 2001. Since then, the U.S. hasn't provided spending figures to the WTO, Brazil says.
"Available public information indicates that the domestic support that the U.S. provided exceeded its commitment levels,'' Brazil's WTO ambassador, Clodoaldo Hugueney, wrote to his U.S. counterpart, Peter Allgeier.
I've seen scholarly work on this subject indicating that US payments have been below the allowed cap, so I do not know if Brazil has a strong case here.
Update: AP reports that the "United States spent only $11 billion on trade-distorting subsidies last year."
Posted by Dingel at 09:15 PM | Comments (0)
July 13, 2007
The other half of the cotton equation
Cotton subsidization is one of the West's most egregious protectionist offenses, but John Baffes of the World Bank provides some important contextualization:
Cotton subsidies have received considerable attention during the past four years... four cotton-producing countries in West and Central Africa—Benin, Burkina Faso, Mali, and Chad—have requested that the Doha round of negotiations on trade liberalization contain financial compensation for WCA countries for as long as those Western subsidies remain in place. Brazil also brought a case to the World Trade Organization...Western cotton subsidies should be abolished, but not much attention has been paid to another, perhaps more important, issue. Many African cotton-producing countries, especially in WCA, must reform their cotton sector...
[E]ven if cotton prices increase either as a result of elimination of subsidies or as a result of market forces, it will do no good to poor producers if such an increase is absorbed by bankrupt parastatals, debt-ridden cooperatives, or corrupt public officials unwilling to engage in serious reform efforts... the positive impact of the end of cotton subsidies on the welfare of West African cotton farmers will be limited unless it is accompanied by domestic reforms that should include privatization of the state-owned cotton companies and liberalization of the cotton trade.
Check out the short article, which is Cato's latest Economic Development Bulletin (pdf), for discussion of six problems in the cotton sector that reformers need to address.
Posted by Dingel at 06:41 PM | Comments (0)
June 27, 2007
Problems trade negotiators aren't ready to tackle
State censorship as a non-tariff barrier to trade?!? Oh boy.
[HT: Muse]
Posted by Dingel at 08:31 PM | Comments (0)
June 16, 2007
Re-coupling
Agricultural reform in the wrong direction:
Rep. Colin Peterson [D-MN], House Agriculture Committee chairman... has suggested increasing most of the price-linked subsidies, and paying for the increase out of the money currently allocated for direct subsidies that farmers receive regardless of production or market prices... While paying farmers “money for nothing” may be fiscally irresponsible, it is less market distorting than the types of subsidies that Chairman Peterson is proposing to increase.
Peterson's proposal would cause the US to fall behind the EU in decoupling agricultural subsidies and expose the subsidy programs to further litigation at the WTO's dispute settlement panel.
Posted by Dingel at 10:33 AM | Comments (0)
June 06, 2007
Bipartisan Standards
It seems that the labor and environmental standards appearing in the new bipartisan deal on trade also appear in a similar form in NAFTA, which suggests they won't have much bite.
Posted by Dingel at 09:29 AM | Comments (0)
May 17, 2007
Ag subsidies & obesity
So how can the supermarket possibly sell a pair of these synthetic cream-filled pseudocakes for less than a bunch of roots?For the answer, you need look no farther than the farm bill. This resolutely unglamorous and head-hurtingly complicated piece of legislation, which comes around roughly every five years and is about to do so again, sets the rules for the American food system — indeed, to a considerable extent, for the world’s food system. Among other things, it determines which crops will be subsidized and which will not, and in the case of the carrot and the Twinkie, the farm bill as currently written offers a lot more support to the cake than to the root. Like most processed foods, the Twinkie is basically a clever arrangement of carbohydrates and fats teased out of corn, soybeans and wheat — three of the five commodity crops that the farm bill supports, to the tune of some $25 billion a year. (Rice and cotton are the others.) For the last several decades — indeed, for about as long as the American waistline has been ballooning — U.S. agricultural policy has been designed in such a way as to promote the overproduction of these five commodities, especially corn and soy.
That’s because the current farm bill helps commodity farmers by cutting them a check based on how many bushels they can grow, rather than, say, by supporting prices and limiting production, as farm bills once did. The result? A food system awash in added sugars (derived from corn) and added fats (derived mainly from soy), as well as dirt-cheap meat and milk (derived from both). By comparison, the farm bill does almost nothing to support farmers growing fresh produce. A result of these policy choices is on stark display in your supermarket, where the real price of fruits and vegetables between 1985 and 2000 increased by nearly 40 percent while the real price of soft drinks (a k a liquid corn) declined by 23 percent. The reason the least healthful calories in the supermarket are the cheapest is that those are the ones the farm bill encourages farmers to grow.
Full NYT story (from April 22, oops) here.
[HT: My friend Aaron.]
Posted by Dingel at 11:11 PM | Comments (0)
May 11, 2007
IP in PTAs
John Bennett points to this short New Yorker piece by James Surowiecki criticizing the United States' inclusion of intellectual property in its preferential trade agreements. If you have read Bhagwati or Panagariya (pdf) on this topic, you already know Surowiecki's arguments, but it's nice to see them receive more exposure.
Posted by Dingel at 05:59 PM | Comments (0)
April 28, 2007
Public opinion of farm subsidies
Bryan Caplan: "In the sector closest to perfect competition, where economists truly have to think hard even to imagine a case against laissez-faire, Americans favor heavy intervention nevertheless."
Posted by Dingel at 08:17 AM | Comments (0)
April 16, 2007
Buying out the farm
Cato's Sallie James and Dan Griswold propose a farm bill:
Because the first-best solution of completely ending farm programs as of September 30, 2007—with no compensation or transition payments—is politically infeasible, we advocate that the government buy out the damaging and expensive support for farmers by paying them a fixed amount of money, which they would be free to spend as they wish. Although it would require large up-front outlays, a politically expedient buyout of agricultural subsidies and trade barriers, with concrete steps to ensure the changes are permanent, would be a worthwhile investment.
Posted by Dingel at 08:33 PM | Comments (0)
March 21, 2007
The Pros and Cons of Decoupling
The EU pays non-farmers not to farm:
The loophole allows investors to become classified officially as farmers and then buy the right to receive annual EU subsidies to cut agricultural production. Because the subsidies are decoupled from the land they relate to, investors do not need actually to own the ground they are claiming for or even go anywhere near it.The profits to be made are enormous, with investors potentially increasing their capital nearly fivefold in 5 years.
Auctioneers and brokers who used to sell cattle and farm-land are now focusing their attention on selling the rights to receive European taxpayers’ money — known as entitlement trading — in what one described as a “ferocious” market with the rights to subsidies “flying off the shelf”.
Demand is outstripping supply by five to one, because the profits from investing in subsidies are up to ten times higher than putting the money in a bank. After making a one-off payment, the investor is entitled to receive from the taxpayer every year a cheque that typically amounts to a third of the original investment.
While it's unfortunate that this nonsensical redistribution scheme and its accompanying rent-seeking are wasting EU taxpayers' money, it also has its merits: The payments are completely decoupled from production and exporting activities, so the subsidies are not market-distorting and the WTO will have no objections!
Posted by Dingel at 09:15 AM | Comments (0)
March 19, 2007
King Cotton & the 2007 farm bill
Speaking after a two-day World Trade Organization (WTO) meeting on cotton, representatives of cotton producers said they believed the 2007 farm bill -- an umbrella law that will set most U.S. agriculture policy for five years -- could boost aid to American cotton farmers by up to 66 percent...African governments and farmers blame cotton subsidies to producers in rich nations for flooding the market, driving down global prices and causing poor farmers to run at a loss.
Of course, Congress hasn't written the 2007 farm bill yet, so these comments must refer to the USDA's proposal, which means criticism may be premature.
This next paragraph strikes me as odd:
Brazil has already successfully attacked the U.S. cotton program, winning a landmark 2004 verdict at the WTO's Dispute Settlement Body that caused the United States to repeal certain export and import subsidies on cotton. But other U.S. assistance programs remain in place.
Where can I get more info about US cotton import subsidies? I had never heard of them before, and I'm slightly skeptical of their existence, given that most search results are copies of the Reuters piece.
Check out the blog dedicated to the 2007 Farm Bill, which has details of the Senate and House Agriculture Committees' upcoming activities.
Posted by Dingel at 06:40 PM | Comments (0)
January 11, 2007
Griswold's innovative argument against subsidies
A report from France's state statistical agency say that
French farmers, seen by many as the pampered beneficiaries of generous European subsidies, have been getting poorer since the late 1990s, despite the fact that they are increasingly taking second jobs outside farming to boost their income...Earlier CAP reforms, slowing productivity improvements and sharp falls in agricultural prices have squeezed French farmers' incomes in the last decade, according to Insee. It says farming revenues have fallen since 1998 and, in spite of a recovery last year, are still down about 10 per cent.
Dan Griswold reads that FT story and writes:
The decline of the French farm has occurred despite, or perhaps because of, the generous support of the CAP. France’s farmers receive the equivalent of $11.6 billion a year in handouts, more than one fifth of total European Union spending on agriculture. Those subsidies have arguably kept French farms from becoming more competitive and thus contributed to their long-term decline.
Subsidies hurt their recipients?!? Such a counterintuitive suggestion needs to be backed by an argument, but Griswold doesn't make one.
Posted by Dingel at 02:43 PM | Comments (1)
December 22, 2006
Agricultural politics
Dan Drezner points to a WaPo story about the 2002 farm bill and its role in winning votes for trade promotion authority.
Posted by Dingel at 08:01 PM | Comments (0)
December 17, 2006
EU opposes climate change CVDs
Joe Stiglitz's suggestion that countervailing duties apply to exports from countries not participating in the Kyoto protocol has been rejected by Peter Mandelson:
The European Union’s trade commissioner will on Monday dismiss French proposals for a “green” tax on goods from countries that have not ratified the Kyoto treaty as not only a probable breach of trade rules but also “not good politics”...“Not participating in the Kyoto process is not illegal. Nor is it a subsidy under WTO rules,” Mr Mandelson will warn in a podcast speech to 50,000 subscribers. “How would we choose what goods to target? China has ratified Kyoto but has no Kyoto targets because of its developing country status. The US has not ratified but states like California have ambitious climate change policies.”
Above all, he says, it would undermine the international co-operation required to combat climate change...
Mr Mandelson backs a plan, to be unveiled this week, to include in the EU’s carbon emissions trading scheme all airlines landing or taking off in the EU, even though it is likely to antagonise the US and Asian countries.
Mr Mandelson, who favours a positive rather than punitive approach, is also writing to Pascal Lamy, WTO director-general, to suggest talks on scrapping tariffs on renewable energy and clean power generation equipment worldwide.
Posted by Dingel at 06:29 PM | Comments (0)
December 12, 2006
Brazilian cotton two years after WTO victory
Here's an interesting story following up on yesteryear's Brazilian cotton subsidy case:
The future loomed bright for Brazilian cotton growers after their government won a headline-grabbing victory at the World Trade Organization, which declared some U.S. cotton subsidies illegal... And there were predictions that Brazil's cheaper labor and land would make it even more competitive on the world market.It hasn't worked out that way. Some Brazilian farmers, including former top producers, have quit cotton altogether. The WTO frowned on several U.S. cotton subsidies but singled out only "Step-Two" payments, those made to exporters and domestic mills for buying higher-priced American cotton. That represented just about 7 percent of the $3.7 billion that Washington planned to spend on cotton programs this year...
On top of the subsidy issue and the drop in Chinese purchases, Brazil also has a poor road system and high transportation costs. And India has emerged as a competitive threat, with its better transport network. India has also embraced genetically modified cotton, which requires less insecticide. Brazilian farmers will soon be able to plant genetically modified cotton, but it won't be enough incentive for some.
Although Brazil grabbed much of the spotlight in recent years, the real competitive threat to Texas cotton producers is India, a Texas Tech University agricultural economist says. "We don't see a big expansion for Brazilian cotton in the future," Samerendu "Sam" Mohintu said. "It's going to grow, but at a very slow rate. China is buying from India, which has a transportation advantage" over the United States and Brazil. India's cotton quality "isn't as good, but it's cheap," Mohintu said.
Posted by Dingel at 12:14 AM | Comments (0)
October 27, 2006
Cotton subsidies, again
Joe Stiglitz calls for trade liberalization by the United States:
Americans like to think that if poor countries simply open up their markets, greater prosperity will follow.Unfortunately, where agriculture is concerned, this is mere rhetoric. The United States pays only lip service to free market principles, favouring Washington lobbyists and campaign contributors who demand just the opposite. Indeed, it is America's own agricultural subsidies that helped kill, at least for now, the so-called Doha Development Round of trade negotiations that were supposed to give poor countries new opportunities to enhance their growth.
Subsidies hurt developing country farmers because they lead to higher output - and lower global prices. The Bush administration - supposedly committed to free markets around the world - has actually almost doubled the level of agricultural subsidies in the US.
Cotton illustrates the problem. Without subsidies, it would not pay for Americans to produce much cotton; with them, the US is the world's largest cotton exporter. Some 25,000 rich American cotton farmers divide $3 to $4 billion in subsidies among themselves - with most of the money going to a small fraction of the recipients. The increased supply depresses cotton prices, hurting some 10 million farmers in sub-Saharan Africa alone.
I support Stiglitz's prescription and would love to see the US drop its agricultural trade barriers. But I must continue tradition here at Trade Diversion by noting that agricultural subsidies do not hurt the poorest of the poor as badly as advocates say. Preferential access programs, notably the EU's Everything But Arms regime, mean that LDCs import agricultural commodities at subsidized prices while exporting them at high prices. Cotton does not accurately illustrate the broader agricultural picture:
The common assertion that agricultural liberalization in rich countries would bring large benefits to LDCs is mistaken. These states -- many of them poor African countries -- benefit from the current regime because they can sell their exports at the high EU prices and buy imports at the low world prices. (Cotton is perhaps the sole exception: U.S. subsidies hurt poor countries because the EU tariff on cotton is zero and therefore its internal price for cotton is the same as the world price.) Gains to those developing countries not in the Cairns Group would accrue principally from their own liberalization. The principle of comparative advantage applies just as much to agriculture as to industry. Moreover, because developing countries do not currently enjoy trade preferences in one another's markets, they stand to gain from access there. ["Liberalizing Agriculture," Foreign Affairs, 12/05]
I apologize for quibbling, but I have yet to see anyone refute Arvind Panagariya on this point. (emphasis added in each article)
Posted by Dingel at 08:10 PM | Comments (0)
October 19, 2006
The impact of the MFA abolition
Quota restrictions on United States imports of apparel and textiles under the multifibre arrangement (MFA) ended abruptly in January 2005. This change in policy was large, predetermined, and fully anticipated, making it an ideal natural experiment for testing the theory of trade policy. We focus on simple and robust theory predictions about the effects of binding quotas, and also compute nonparametric estimates of the cost of the MFA. We find that prices of quota constrained categories from China fell by 38% in 2005, while prices in unconstrained categories from China and from other countries changed little. We also find substantial quality downgrading in imports from China in previously constrained categories, as predicted by theory. The annual cost of the MFA to U.S. consumers was about $100 per household.
Posted by Dingel at 10:35 PM | Comments (0)
October 11, 2006
Stiglitz asks, EU answers, and what the heck is a BTA?
Joe Stiglitz has suggested imposing countervailing duties on the "hidden subsidies" provided to US firms by America's non-participation in the Kyoto Protocol. The EU wants to do something like that:
Commission advisors are considering slapping a tax on imported goods from countries which do not impose a CO2 cap on their industry, according to a draft paper seen by European Voice (5-11 October). The paper will be presented to a top group of industrialists, member-state and civil- society experts who help the Commission shape policies in the field of environment and energy - the high-level group on competitiveness, energy and the environment. The idea, known in academic circles as a "border tax adjustment", is understood to have emerged from expert discussions on long-term energy scenarios at a September meeting of the competitiveness sub-group.
Note that the Commission didn't take Kyoto as the climate change gold-standard and decided to suggest slapping tariffs on imports from any country without CO2 caps. This means the EU can target nations that have weaker obligations under Kyoto:
Cembureau President Paul Vanfrachem welcomes the idea, saying that the tax would help offset the competitive disadvantage that the ETS forces on the European cement industry. "What we are seeing today is [cement] imports increasing a lot, especially imports from China where there is no carbon constraint," says Vanfrachem.
Dan Drezner predicted China-bashing to be a likely outcome of declaring war on "hidden subsidies."
Now, what the heck is a "border tax adjustment" and how does it differ from Stiglitz's countervailing duty?
Brief definition: "Rebate of indirect taxes (taxes on other than direct income, such as a sales tax or VAT) on exported goods and levying of them on imported goods. May distort trade when tax rates differ or when adjustment does not match the tax paid."
If you think "border tax adjustment" sounds ugly, you could use "tax adjustments applied to goods entering into international trade" as suggested by a GATT working party in 1970.
Here's some more info (pdf; hat tip to Jonathan Alder):
Under the “destination system” of border tax adjustments (BTAs), traded goods are subject to the taxes of the importing (“destination”) country and exempted from the taxes of the exporting (“origin”) country. For instance, gasoline trucked from Toronto to Buffalo is exempted from paying gasoline tax in Canada and subject to gasoline tax in New York, at the combined New York/federal tax rate. BTAs are a necessary part of a tax on national or in-state consumption, and are a nearly universal feature of sales, excise, value added and other taxes. Because BTAs are required for consistent treatment of a consumption tax base they are regarded as a normal part of the tax and not as a form of local favoritism...BTAs should be distinguished from tariffs and other forms of industry protection. Energy-intensive manufacturers (e.g. basic chemicals, aluminum) already undertake large investments in developing countries that sometimes displace American production and jobs. Various factors make such investments attractive including lower resource costs and the prospect of winning large new markets. A BTA ensures that job displacement is not accelerated by the FCCC, but does not favor domestic over foreign production or otherwise alter underlying market conditions. Aluminum or ethylene production that already would have been shifted overseas, for example, will still be shifted. But it won’t be shifted because of climate protection policies.
Relevant literature on BTAs to counter non-participation in emissions permit trading schemes:
* Javier de Cendra "Can Emissions Trading Schemes be Coupled with Border Tax Adjustments? An Analysis vis-à-vis WTO Law" 2006
* R. Ismer & K. Neuhoff "Border Tax Adjustments: A feasible way to address nonparticipation in Emission Trading" 2004
* Philippe Quirion & Damien Demailly "Leakage from climate policies and border tax adjustment: lessons from a geographic model of the cement industry" 2006
Having learned what a BTA is about fifteen minutes ago, I have no opinion on this topic and will leave the punditry to others.
Posted by Dingel at 08:40 PM | Comments (0)
September 17, 2006
Star-Trib on subsidizing water pollution
Today, in the third installment of "With Water in Mind," the Star Tribune editorial page begins a five-day series on the way that farmers are polluting the Mississippi River -- and the way federal farm policy rewards them for it.
The outrage is that most farmers would readily change their cultivation practices, reducing erosion and nutrient runoff, if they weren't tied to traditional crops and production patterns by federal farm subsidies. Congress has created several important conservation programs in the last two decades, but the majority of federal farm subsidies still reward farmers for planting the wrong crops in the largest possible quantities.
Posted by Dingel at 02:04 PM | Comments (0)
August 28, 2006
"Unfair Trade" & IP (Old School Edition)
I thought that TRIPS brought intellectual property (arguably a non-trade issue) into the realm of international trade, but it seems that the uneasy marriage has a much older heritage in the United States: Smoot-Hawley, everyone's favorite tariff legislation.
The ITC was established in 1916 as the U.S. Tariff Commission. Smoot-Hawley gave it the authority to review claims of "unfair trade practices" based on patent infringement. If a company with U.S. operations believes a competitor is importing a product that infringes on its intellectual property, it can bring a Section 337 claim to the ITC. An administrative law judge then hears the case, and he can issue an exclusion order barring imports of the infringing product for the duration of the patent. The order is also subject to the review and approval by the six-member, bipartisan ITC board.Incredibly, all of this takes place separately from normal judicial proceedings on patent infringement or validity. Most of the cell-phone cases mentioned above are also in court on patent-infringement grounds, but these cases can take years and are subject to lengthy appeals. The ITC tries to discharge Section 337 cases in about a year, and will not wait for the courts. Once the ITC votes on the judge's order, there is only one avenue of appeal: The President has 60 days to override the ITC's order. If he doesn't act, the import ban takes effect... [WSJ]
More at Against Monopoly.
Posted by Dingel at 11:12 PM | Comments (0)
August 26, 2006
Ag Subsidies Misconceptions
A recent IMF discussion paper by Stephen Tokarick:
The current round of multilateral trade negotiations-the Doha Round-presents an opportunity for countries to reap the benefits of trade liberalization. Unfortunately, a number of misconceptions about the likely impact of trade reforms has, in part, impeded more rapid progress toward completion of the Round. This paper addresses some of the most egregious of these misconceptions and presents results from IMF research that sheds light on these issues. In particular, this paper argues that: (i) developing countries have much to gain from their own trade liberalization; (ii) preference erosion could be significant for some countries, but it is not a justification for postponing tariff reductions; (iii) tariffs applied against agricultural products in rich countries actually harm developing countries more than subsidies; and (iv) a disproportionate share of agricultural subsidies in rich countries goes to large wealthy farmers.
Those four arguments are well-known to those that follow the subject closely, but I have no doubt that misconceptions are widespread.
[Hat tip: Truck & Barter]
Posted by Dingel at 09:41 PM | Comments (0)
August 23, 2006
Agricultural subsidies aren't key to food security, redux
Oh boy, here comes the "agricultural subsidies enhance national security" argument again:
"I would hate to think of a day where the United States of America becomes hostage to other countries (that export food to the U.S.), in a way that we are held hostage over our energy needs," [Senator Ken] Salazar said.
I think Sallie James' interpretation of the statement is unfair, however:
I know of only two other countries that pursue a policy of total self-sufficiency in food(which seems to be what the senator is advocating): North Korea and Zimbabwe.
I think the actual position taken by advocates of "food security" is that the United States should not be so "dependent" upon imports as to lose significant bargaining power. Whether that means that imports should be less than xx% of total consumption or that the domestic production capacity should be able to provide all domestic consumers with minimal nutrition within xx months' notice, I don't know. But it doesn't imply agricultural autarky, per se.
Nonetheless, I've argued against such justifications for ag subsidies. America will not become "dependent" upon agricultural imports if it liberalizes.
Posted by Dingel at 08:38 AM | Comments (0)
August 04, 2006
Goldberg on Subsidies
Sallie James of Cato thinks that this Jonah Goldberg op-ed on farm subsidies is “excellent.” I disagree.
First, he writes: "Subsidies combined with trade barriers (another term for subsidy) prop up the price of food for consumers at home and hurt farmers abroad."
No, subsidy and trade barrier are not synonmous. That's the whole point of the amber box distinction. Moreover, subsidies don't "prop up" prices like a tariff or quota.
Then suddenly the distinction is relevant again: "Our farm subsidies alone — forget trade barriers — cost developing countries $24 billion every year, according to the National Center for Policy Analysis."
The NCPA study from which that number comes is two pages in length, and I have no idea how the $24b figure is calculated. Maybe they took that number from a widely quoted 2003 study by the International Food Policy Research Institute. It says: "Protectionism and subsidies by industrialized nations cost developing countries about US$24 billion annually in lost agricultural and agro-industrial income." Oops, looks like those trade barriers count too.
I'm glad that Goldberg opposes subsidies, but that doesn't make his arguments sound.
Posted by Dingel at 05:15 PM | Comments (0)
July 09, 2006
Let me introduce you to Amber
In an editorial on the Doha stalemate, the LA Times says:
Much of U.S. agricultural policy is designed to protect the interests of a small number of large and wealthy producers. Laws originally passed to aid small farmers during the Depression now result in astonishing inequities and are often counterproductive. The Washington Post recently revealed that the federal government has paid at least $1.3 billion since 2000 to people who don't farm at all — they simply happen to own property that was once used as a farm. Meanwhile, real farmers who rent cropland are being forced out of business by landowners who find it more profitable to use their property for other purposes while continuing to collect federal cash for crops they aren't growing.Ending these subsidies and lowering agricultural tariffs would boost the U.S. economy, eliminate waste and help farmers in the Third World trade their way out of poverty. It's a shame Washington thinks that its protectionist farm policies are something to be surrendered only grudgingly, and only if others do so. Good riddance, we say.
While I agree it is absurd to pay $1.3 billion in agricultural subsidies to people who don't farm at all, abolishing those payments won't help farmers in the Third World trade their way out of poverty. Poor country exporters are only damaged by subsidies that actually affect their competitors' level of agricultural output. These trade-distorting payments, which in WTO jargon are classified as "amber box" subsidies, are what the EU and US need to cut more deeply in order to achieve a trade deal with developing countries. Abolishing handouts to non-farmers who live on former farmland is a great idea, but it won't break the Doha stalemate.
Posted by Dingel at 10:44 AM | Comments (0)
July 03, 2006
Five trade myths you already know are wrong
A number of people have pointed to Alan Beattie's FT column titled "The truth behind the top five trade myths and why it matters." You can read most of the article at the New Economist. But if you're a regular Trade Diversion reader, you'll find that I've already covered each of these myths!
Here are Beatle's five myths and links my previous posts on the topic:
1. "Ghana is allowed to sell raw cocoa beans to the European Union, but if it exports finished chocolate it gets hit by big tariffs." No it does not.2. "Each European Union cow gets $2.40 a day in subsidies, more than what 1bn people each have to live on." Not really.
3. "The World Trade Organisation is undemocratic and secretive." Yeah, right.
4. "No economy ever got rich without using tariffs to industrialise." Hong Kong.
5. "Cutting rich countries' farm subsidies and tariffs will be a big boost for the world's poorest." Sadly, this is not true.
The last link even covers the first comment posted at New Economist, which highlights that cotton subsidies are the exception to that rule. Though I'm already familiar with the nature of these myths, it's nice to see Beattie offer concise and accurate refutations of them in a publication of the FT's renown.
Posted by Dingel at 07:58 AM | Comments (0)
July 02, 2006
Agricultural Subsidies are front page news
I'm sure that the headline of the Washington Post's front page story, "Farm Program Pays $1.3 Billion to People Who Don't Farm," will incite rage in many readers.
However, my reaction was "well, at least it's not market distorting." Respect the amber box.
Posted by Dingel at 07:35 PM | Comments (0)
April 14, 2006
How to rescind sugar subsidies?
CEI:
This paper explores the possibility of reform of the sugar program by considering other agricultural reforms at home and abroad. The cases examined are New Zealand's agricultural policy reform in the mid-1980s, changes to the United States peanut quota program through a buyout program, and the buyout program for tobacco quota holders in the United States.
[Hat tip: H&R]
Posted by Dingel at 08:08 AM | Comments (0)
November 30, 2005
Has EU agricultural subsidization been decoupled?
I'm unclear as to whether the EU has made substantial strides in eliminating its non-export agricultural subsidies as a market distortion.
At a July 7, 2005 event at the Washington Council on International Trade, Nikolaos Zaimis, an EU trade delegate, said that, for domestic subsidies, the EU will shift to an income-based regime as of January 1, 2006, terminating its production-linked subsidies (this severance is known as "decoupling"). This shift will be very costly -- the EU will pay guaranteed incomes to farmers equal to their average subsidy receipts in the last few years. However, this means that farmers will now respond to market incentives in making their production decisions, as the marginal revenues associated with various output levels are entirely unaffected by subsidies.
Does anyone know if the EU is really committed to 100% decoupling in 2006? Prior policy commitments, such as the 2003 reform of the Common Agricultural Policy, implemented a variety of minimum levels for decoupled payments, ranging from 40% for tobacco to 75% for grains. Was Zaimis mislabelling the EU's previous partial decoupling as a more significant shift, or are there new policies taking effect in 2006?
Posted by Dingel at 08:00 PM | Comments (0)
Ag Subsidies Aren't That Big!
Arvind Panagariya has consistently been the most insightful analyst of agricultural subsidy issues. In a Wall Street Journal article, he criticizes "fuzzy trade math"
Trade talks at Cancun broke down principally because the G-20 group of mainly larger developing countries rejected U.S. and EU offers on reducing their agricultural protection. Two years later, as the Hong Kong Ministerial approaches, agriculture remains the make-or-break issue in the Doha negotiations. But the impasse can be broken once we clear up the misinformation on (a) the magnitude of EU and U.S. subsidies and (b) the level of protection through trade barriers in developed and developing countries in agriculture.The New York Times has editorialized that the "developed world funnels nearly $1 billion a day in subsidies," which "encourages overproduction" and drives down prices. The World Bank's president, Paul Wolfowitz, similarly referred to developed countries expending "$280 billion on support to agricultural producers" in an op-ed in the Financial Times. Oxfam routinely accuses rich countries of giving more than $300 billion annually in subsidies to agribusiness. Astonishingly, these estimates bear virtually no relationship to the subsidies actually at the heart of the Doha negotiations. Instead, they have their origins in the altogether different measure called the Producer Support Estimate (PSE), published by the OECD. The PSE includes all measures that raise the producer price above the world price, including border measures such as tariffs and quotas. All economists would find the identification of such a measure with subsidies unacceptable.
Read the whole thing.
Posted by Dingel at 07:55 PM | Comments (0)
November 07, 2005
EU CAP Summary
The BBC has posted a helpful overview of the EU's Common Agricultural Policy.
Posted by Dingel at 10:55 AM | Comments (0)
October 13, 2005
More on Ag Subsidies & National Security
Baron Coleman responds to my previous post and continues to argue that agricultural subsidies are key to national security. I continue to believe that agricultural liberalization would not harm, and could perhaps enhance, our economic "security."
Initially, Coleman misunderstands my comment about "the marginal impact of subsidies." I meant "marginal" as in "difference," not "trivial." Subsidies obviously cause the marginal producer to enter the market. My question is - how many farmers are entering the market due to subsidies? Coleman suggests that almost all of US agriculture is subsidy-dependent. I'm not aware of evidence that suggests anything close to such extreme dependence. In fact, I'll now argue that "trivial" would be an accurate description of the marginal impact of subsidies.
First, subsidies don't support most US agricultural output:
Most of U.S. agriculture receives little or no subsidies, with 60 percent of the value of U.S. agricultural production receiving a 3 percent subsidy share in 1999. This concentration of benefits on a relatively few commodities is an artifact of the way that commodity programs were initially set up in the 1930s. Tobacco, barley, corn, wheat, cotton, oats, rice, and grain sorghum were by far the most important commodity crops that had firm political backing because production was geographically concentrated in a relatively small number of states. [Iowa Ag Review]
It's not as if the subsidies are 'saving the family farm.' Of the 2,128,982 farms enumerated by the most recent Census of Agriculture, for 2002, only 33 percent received government payments. Two-thirds of the nation's farmers get no subsidy payments whatsoever. For the most part they don't qualify because they grow the 'wrong' things. If you want to see what the wrong things are, stroll through the produce aisle or meat department of your local supermarket. The farmers who produce most of America's food do so without a check from taxpayers. [Environmental Working Group]
Second, New Zealand provides an example of agricultural subsidization liberalization that resulted in a more efficient allocation of resources in the agricultural sector, not the end of domestic farming:
In New Zealand, farm subsidies "were gradually introduced in the early sixties, and steadily increased until 1984 when it was announced that most of them would be eliminated. By 1987, they had been phased out and the era was over."... The Federated Farmers of New Zealand reports that in 1984, "nearly 40 percent of the average sheep and beef farmer's gross income came from government subsidies." In fact, New Zealand farmers were more dependent on subsidies then than U.S farmers are now. They survived the subsidy cuts by slashing their own spending, purchasing only essentials, and implementing more efficient methods. Without subsidies, they began to operate on the basis of market demand. [Heritage]
Agricultural protection is critical to agricultural producers earning rent, not keeping them in business. Given that subsidies aren't critical to the existence of domestic agricultural production, the arguments in Coleman's third sub-point aren't crucial to this discussion.
Next, Coleman writes:
Fourth, while oil dependence has served us fairly well, it has also held our economy captive to the political whims of foreign nations, many of which are hostile to our interests. More than once, other nations have strategically limited oil supply in an effort to disrupt our economy.
The terminal impact to "dependence" is that our economy can be "disrupted." During the 1970s, high price caused consumer to reduce the oil-consuming activities with the lowest marginal utilities, not cease all consumption. The "disruption" of our economy merely reduces gains from trade and doesn't cause welfare losses that make us worse off than in the state of "oil independence." Similarly, "food dependence" might expose us to a greater risk of manipulation by foreign producers, but it wouldn't put anyone in danger of starving should there be an embargo by those exporters.
Coleman argues:
Free and rational markets cannot guarantee foreign actors will continue to act in their own best interest by supplying America with food. In the event a producing country wanted to limit America’s food supply, there is nothing a rational market could do to prevent it.
Two objections.
First, what percentage of the globe would need to ally against the United States for this threat to be credible? If a hostile nation stopped exporting food to the US, food exporters from nations still friendly to the US could make a profit by selling food to the US and then importing food from the anti-US exporters for their own consumption. For its tactics to be effective, the hostile nation would have to cut off its exports not only to the United States, but also to all countries still friendly to the US.
Second, I think the incentives created by US "dependence on foreign food" would outweigh the possible gains from such a confrontation. The United States is a significant export market for most developing nations, and I believe the classic arguments about interdependence increasing the price of war and thus promoting peace are relevant here.
Regardless, this discussion seems to have entered the realm of geopolitics and left economics behind. If a food embargo was used as a military tactic against the United States, then perhaps military tactics could be used to deter such a move. Such approaches are outside of my field, but if Coleman is addressing agricultural subsidies as a non-economic issue, then non-economic solutions are relevant.
On a closing note, consider two pieces of empirical evidence that others may wish to investigate in application to this topic:
- I believe that the UK has long imported a significant portion of its agricultural consumption goods. Has an enemy ever attempted to exploit this "dependence"?
- Cuba was subject to a US food embargo for forty years. What was the impact upon consumption of agricultural goods and citizens' well-being?
Posted by Dingel at 07:44 PM | Comments (0)
October 12, 2005
Agricultural subsidies aren't key to food security
Baron Coleman defends agricultural subsidies on national security grounds:
In theory, opening America’s agricultural markets makes sense... Free competition would dictate the price of goods, which likely wouldn’t change much for the average American consumer. If that was the end of the analysis, I would be on board.But it isn’t.
The implications of being dependent on “foreign food” - much like the US has become dependent on “foreign oil” - would eventually become disastrous. America’s food supply would quickly become dependent on the stability of the politics and climates of developing countries.
That’s a risk I’m not willing to take. [The Baron]
There is no need for agricultural subsidies, even if one is afraid of dependence upon foreign producers.
First, the United States is a dominant agricultural producer. According to the USDA, "the United States is the largest exporter of agricultural products in the world and is a highly competitive producer of many products." The US's strengths vary. For example, the US is a net exporter of rice & wheat and a net importer of macaroni & pastries. The Midwest heartland was the "breadbasket of America" long before agricultural subsidies.
Second, Baron's analysis doesn't assess the marginal impact of subsidies. The removal of subsidies would not wipe out all American agricultural producers; rather, marginal producers whose operations were only profitable due to the receipt of subsidies would exit the market. [This reduction in domestic producers would be somewhat offset by the entry of new producers from other countries to the degree that there was a global price increase.] The allocation of agricultural production globally would better reflect comparative advantage (subject to the constraint of other nations protecting and subsidizing their own agricultural markets). The US would still produce a lot of food.
Third, specialization through international trade does not permanently erode the supply capacity of output sectors that are at a comparative disadvantage vis-a-vis foreign competitors. Just as reductions in the foreign supply of oil raise the global price and induce new investments in drilling for oil in the United States, global price increases spurred by reduced agricultural production abroad would result in increased domestic production of agricultural goods in the US.
[There might be dynamic concerns. For examples, if factories or IT parks were erected on every piece of arable land in the United States, it would take time to transform those assets into production inputs for agricultural firms. If someone wants to develop this structural friction into a scenario for a temporary food shortage, I may or may not refute that story.]
Fourth, oil "dependence" has served us fairly well. While we could have adopted "oil security" by only using American oil, we'd have had to pay much higher prices at the pump. We've reaped gains from trade by allowing US entities to purchase oil from foreigners. When people complain about events or factors that increase the price of oil by reducing the certainty of being able to obtain imports, they are complaining about the loss of gains from trade, not harm that makes us worse off than if we had never traded. [Recall Brad DeLong's more general formulation of this argument in regards to international trade.]
Any harm due to our "dependence upon foreign oil" has been due to the efforts of US policymakers to "secure" access to foreign oil through a military presence in the Persian Gulf or other policies. The country can't be hurt by being willing to import foreign goods (unless the income is used by foreigners to engage in damaging non-economic activities like terrorism).
Fifth, markets compensate for uncertainty. When there are fears that an oil-exporting regime may collapse or cease exporting, the perceived probability of that risk is incorporated into the present price of oil, raising it (because the potential of reduced supply increases the expected future price of oil, which is equal to the current price of oil).
Food futures won't operate quite as smoothly, to the degree that food commodities have storage costs. But if the expected price of food for next year's harvest is higher due to the potential that some foreign producers won't be able to reach the market (due to political uncertainty, etc), then more investments in food production will usually be made. If the damaging event doesn't happen, then there's an oversupply and some of those investments lose money. If it does occur, then the price is higher and those investments pay off. If it's true that there are significant risks attached to "dependence on foreign food," then we shouldn't expect domestic production to disappear.
The bottom line: In the absence of agricultural subsidies, United States farmers would continue to produce massive amount of food, and the US would likely remain a net exporter of agricultural commodities. But even in a world where the US produced very little food domestically, the situation would more closely resemble our dependence on foreign textiles than our dependence on foreign oil. And I'm not worried about China leaving me naked.
Posted by Dingel at 06:28 PM | Comments (3)
October 10, 2005
Breakthrough on Subsidies?
In an effort to revive stalled World Trade Organization (WTO) talks, US Trade Representative Rob Portman said the US would cut farm subsidies by 60%. EU Trade Commissioner Peter Mandelson responded by saying that the EU "will match, and indeed go substantially beyond" that reduction... Europe's response came after the US said its offer was valid only if the EU and Japan also made large cuts in trade-distorting support for agriculture. [BBC]
Will Japan move to match?
(On an almost unrelated note, the BBC story features an old photo of anti-WTO protestors in turle costumes. Recall, as Jagdish Bhagwati has noted, that those activists didn't understand the shrimp/turtle decision and that the WTO actually ruled in favor of the environmental protection.)
Posted by Dingel at 10:23 AM | Comments (0)
August 30, 2005
Rules of origin as a constraint upon development
Paul Brenton and Takako Ikezuki note ways in which rules of origin can hamper economic development in a working paper from April 2004:
Strict rules of origin are viewed by some as a mechanism for encouraging the development of integrated production structures within developing countries to maximize the impact on employment and to ensure that it is not just low value-added activities that are undertaken in the developing countries. However, there is no evidence that strict rules of origin over the past 30 years have done anything to stimulate the development of integrated production structures in developing countries. In fact such arguments have become redundant in the light of technological changes and global trade liberalization that have led to the fragmentation of production processes and the development of global networks of sourcing.Strict rules of origin act to constrain the ability of firms to integrate into these global and regional production networks and in effect act to dampen the location of any value-added activities. In the modern world economy, flexibility in the sourcing of inputs is a key element in international competitiveness. In the clothing industry, for example, modern analyses show that the key to moving up the value chain is to shift from simple assembly toward design and ultimately production of own label products. Limitations on the sourcing of materials will be a constraint rather than a stimulus to higher value-added activities.
Thus, it is more than likely that the imposition of restrictive rules of origin rather than stimulating economic development raises costs of production by constraining access to cheap inputs and undermines the ability of firms to compete in overseas markets. It is also no coincidence that restrictive rules of origin act to protect U.S. clothing producers and stimulate demand for U.S. made fabrics. It is perhaps ironic that whilst technical assistance and advice to many of the countries in the region is stressing the importance of access to low cost imported inputs and the need to remove logistical and bureaucratic barriers for competitiveness and growth of exports, the rules of origin that will be imposed under AGOA on clothing products in 2004 will act in exactly the opposite way. They will constrain access to low-cost imported inputs and will raise bureaucratic barriers to exports.
Posted by Dingel at 04:53 PM | Comments (0)
August 03, 2005
CAFTA + DMCA
I previously complained that CAFTA was driven by non-trade interests like regional security. Now Declan McCullagh notes that CAFTA will harmonize copyright standards by having our six CAFTA partners adopt the bulk of the Digital Millenium Copyright Act. I wish "trade liberalization" would return to liberalizing trade.
[Hat tip: H&R]
Posted by Dingel at 03:15 PM | Comments (0)
August 02, 2005
What if activists really understood agricultural subsidies?
In a post on anti-subsidy activism by celebrities on behalf of Oxfam, Kerry Howley of Reason wonders: "What if Hollywood activists all started making sense?"
She then notes that Minnie Driver's agricultural product of choice to have dumped on her head was cotton "because she needed to remain relatively clean after her photograph, since she was in the middle of a press tour for a London play."
Here's an alternative universe where Minnie Driver does make sense:
Ms. Driver chose cotton because she wanted to protest the agricultural subsidy most damaging to LDCs. Citing a recent conversation with Arvind Panagariya, Driver explained that the campaign against most agricultural subsidies was actually being driven by the middle-income Cairns Group of developing countries, as LDCs already enjoy preferential access to EU markets. Noting that the EU's internal price for cotton wasn't elevated above world prices, the actress explained how the abolition of cotton subsidies would not result in a terms-of-trade deterioration for LDCs, whereas the cessation of sugar subsidies would damage the terms of trade for poor exporting nations such as India and the African, Caribbean and Pacific (ACP) countries.
If that didn't make sense, read this PDF.
Posted by Dingel at 10:09 PM | Comments (0)
August 01, 2005
WTO Membership Benefits
I thought that the world of textiles had entered "2005 and beyond: the Quota-Free Era," so I was confused when I read this article:
Fees applied to quotas on garment and textile exports to the United States have been abolished by the Vietnamese Ministry of Finance in a recent decision.Deputy Finance Minister Truong Chi Trung said the decision, dated July 25, was good news for about 800 US-bound garment and textile exporters in Vietnam.
The decision was made in the context that Vietnamese garment and textile exporters are facing fierce competition from their Chinese rivals, with the threat of decreasing exports.
Trung went on to say that the abolishment of quota fees will not cause a big impact on the country's tax revenues as fees collected from garment and textile exports are estimated at a mere VND50-55 billion a year....
To boost exports to the US, Vietnam plans to negotiate with the US to increase quotas for Vietnamese garment and textile exporters and simplify procedures on granting export permits, Trung said. [Yahoo]
I was aware of the calls for the imposition of "emergency" quotas upon Chinese textile exports, but how is the US getting away with plain old protectionism?
Here's the trick: Vietnam isn't a member of the WTO. Neither are Russia, the Ukraine, nor Belarus. The US maintains textile quotas against each of them.
Posted by Dingel at 11:44 AM | Comments (0)
Japanese seek to punish Byrd Amendment
Japan said it will impose higher tariffs on 15 U.S. products starting Sept. 1 in retaliation for a U.S. law that distributes the proceeds from anti-dumping levies to affected industries.The increased tariffs are worth 5.7 billion yen ($51 million), the Ministry of Finance said in a statement today, without identifying the products involved.
Japan wants the U.S. to repeal the so-called Byrd Amendment, which became law in 2000, where proceeds from anti-dumping levies against Japanese steel products are distributed to the U.S. steel industry. [Bloomberg]
The perverse structure of the Byrd Amendment encourages rent-seeking, as Dan Ikenson noted in a September 2004 column:
The legislation was surreptitiously inserted into the agriculture appropriations bill in 2000 by Sen. Robert Byrd after it failed to win support from the congressional committees that have expertise and oversight on trade issues...By compensating petitioners and supporters of petitions, the Byrd Amendment provides an additional financial incentive to file antidumping and countervailing duty cases. Furthermore, by excluding from compensation those companies that do not support the petitions, the law encourages them to change their positions simply to maintain eligibility for compensation.
Yet despite opposition to the law from President Clinton and advocacy for repeal from President Bush, Congress shows no sign of relenting. [Cato]
Posted by Dingel at 08:45 AM | Comments (0)
July 29, 2005
Cultural Biases as Trade Barriers
The WTO can't host negotiations on these barriers to trade:
How much do cultural biases affect economic exchange? We try to answer this question by using the relative trust European citizens have for citizens of other countries. First, we document that this trust is affected not only by objective characteristics of the country being trusted, but also by cultural aspects such as religion, a history of conflicts, and genetic similarities. We then find that lower relative levels of trust toward citizens of a country lead to less trade with that country, less portfolio investment, and less direct investment in that country, even after controlling for the objective characteristics of that country. This effect is stronger for good that are more trust intensive and doubles or triples when trust is instrumented with its cultural determinants. We conclude that perceptions rooted in culture are important (and generally omitted) determinants of economic exchange.
That's the abstract of a December 2004 working paper by Luigi Zingales, Paola Sapienza, and Luigi Guiso.
[Hat tip: H&R]
Posted by Dingel at 11:03 AM | Comments (0)
July 28, 2005
Horse-trading on CAFTA might boost agricultural subsidies
I'm not sure if this paragraph from the WaPo story on CAFTA refers to agricultural subsidies or another agricultural program:
The last-minute negotiations for Republican votes resembled the wheeling and dealing on a car lot. Republicans who were opposed or undecided were courted during hurried meetings in Capitol hallways, on the House floor and at the White House. GOP leaders told their rank and file that if they wanted anything, now was the time to ask, lawmakers said, and members took advantage of the opportunity by requesting such things as fundraising appearances by Cheney and the restoration of money the White House has tried to cut from agriculture programs.
Posted by Dingel at 08:36 AM | Comments (0)