W.T.O. Sanctions U.S.

Another indictment of the U.S. Farm Bill:

American goods will face about $295 million in annual sanctions as a result of the United States’ failure to eliminate illegal subsidies to domestic cotton growers, the World Trade Organization ruled on Monday.

The size of the penalty was disappointing for Brazil, which had sought $2.5 billion worth of economic retaliation against American goods and drug patents.

The W.T.O. ruled that the sanctions should vary depending on American payments each year. Arbitrators used 2006 as a base year for the ruling, and said United States payments would have to increase significantly for Brazil to be allowed to punish American drug patents.

It cannot be said often enough: the Farm Bill makes the poor poorer to benefit a very small slice of the U.S. population, and should be done away with as quickly as possible. This is a common theme here. The U.S. has been somewhat sensitive to W.T.O. rulings in the past, and hopefully it will be again:

It is the fifth major decision since the Brazilian government brought the case in 2002, claiming that the United States was able to retain its place as the world’s second-largest cotton producer by paying out some $3 billion to American farmers each year. China is the largest exporter of cotton, while Brazil is fifth. ...

In response to the legal defeats, Congress has scrapped some export credits and in 2006 repealed the “Step 2” cotton-marketing program that made payments to exporters and domestic mill users as compensation for buying higher-priced American cotton.

But last year it approved a farm bill worth nearly $300 billion that left a number of other contentious cotton programs intact.

Then again, $300mn is only 0.1% of $300bn, so my hopes for the repeal of the Farm Bill aren't very high.

Who Gets E.U. Farm Subsidies (redux)?

In a previous post, I noted that many E.U. agriculture subsidies went to huge corporate conglomerates rather than the noble family farmer that has captured the imagination of Europeans. But that was only the tip of the iceberg. Others receiving E.U. agriculture subsidies include a Spanish construction company, German gummy bear manufacturers, cruise ship caterers, the Roman Catholic Church, and Her Majesty the Queen of England. The NY Times:

This year for the first time, all of the 27 nations in the European Union were forced to disclose how they distribute the money from farm subsidies, with Germany the only nation failing to comply in full. A computer analysis by The New York Times and the International Herald Tribune of recipients in major countries has provided the first detailed look at who receives the money.

The data underscore the extent to which the subsidy program has evolved beyond its original goals of increasing food production and supporting traditional farmers as they dealt with market fluctuations. It also illustrates how the European Union has moved to emphasize rural development instead of price support and production incentives, and in the process has decentralized the system, giving countries more discretion over the dispersal of subsidies.

Agricultural subsidies have been a frequent topic at IPE@UNC, and we are always quick to point out that the U.S. is guilty of similar distorting subsidies. But the E.U. is the worst offender. They spend roughly four times as much as the U.S. does, and the beneficiaries are even more ludicrous: there are no gravel manufacturers or electrical companies receiving U.S. agricultural aid.

Why does this matter? Besides the fact that it is absurd for E.U. taxpayers to be subsidizing vacation estates for the Queen of England (that isn't even used for farming), these subsidies have a severely negative impact on LDC development. As the Times article says, "European officials and some economists believe that much of the cash from those subsidies ultimately trickles down to local farmers, since without them companies might buy cheaper food elsewhere." The "elsewhere" in that sentence refers to some of the poorest areas in the world, e.g. Africa and (non-E.U.) E. Europe. U.S. price supports undercut agriculture in S. America and Africa. Japanese subsidies have an adverse effect on growers in S.E. Asia. In other words, the burden of the subsidies is not only being borne by the wealthy taxpayers in the developed world; they are quite literally removing one of the few possible sources of income for many of the poorest people in the world.

When we talk about LDC development, we often talk about the effectiveness of aid programs, or the necessity of institution-building, or the economic consequences of war. But one of the biggest steps we could take to encourage economic development in the poorest parts of the world is to simply allow access to our markets. This would benefit consumers in the MDCs by lowering both taxes and the prices of goods. Of course, some major corporations and titled landowners might pitch a fit, but I think it's reasonable to say that we don't owe them anything.

There would be some small-time farmers that would be adversely affected, and I'm sure that Willie Nelson would write a teary song for them, but if we want to provide welfare for the least-fortunate among us, surely a Moroccan cotton farmer or Brazilian sugar grower is more deserving of our sympathy than an Italian multinational corporation or an Iowan corn grower that has been receiving handouts for decades.

Who Gets E.U. Farm Subsidies?

French chicken farmers, Irish pudding makers, and Italian banks. Not at all the small-time farmer that proponents of farm subsidies often champion.

The U.S. is no better, by the way.

Who Says IPE Is Boring?

Brawls broke out in the South Korean legislature over a proposed U.S./S. Korea trade pact:

Scuffles broke out as dozens of opposition members and their aides attempted to push their way into the office. TV footage showed people from both sides shoving, pushing and shouting in a crowded hall at the National Assembly building amid a barrage of flashing cameras.

Opponents later used a sledgehammer and other construction tools to tear open the room's wooden doors, only to find barricades of furniture set up inside as a second line of defense.

Opponents counter that it will cause pain to key sectors in both nations — agriculture in South Korea and automobiles in the United States.

Note that this "free trade" deal is causing a lot of controversy primarily because tariffs aren't the only trade-distorting regulations in the two countries. The opposition party in S. Korea is (justifiably) worried that U.S. subsidies to American farmers will make S. Korean farmers unable to compete if their protections are discarded. They may be right: U.S. agricultural policy is a tragicomedy of perverse incentives, corporate welfare, and inefficiencies. American and European agricultural policies are also killing the agricultural sectors of developing countries, and this has lead to the near-abandonment of the Doha round of WTO negotiations.

America is poised to lose much of its automobile industry anyway; the only question seems to be whether we let it happen now or in a few years when the pill may be easier to swallow. So, without having studied it in depth, this deal looks great for Americans; less good for S. Koreans. Still, I tend to believe than in normal circumstances any reduction in trade barriers will bring a net gain to society, so I'd like to see this pact pass. But it's another reminder that not all "free trade" is truly free.

My hope? Deals like this will eventually force the U.S. and E.U. to abandon their own agricultural subsidies and open their markets to exports from the developing world. This would be helpful on so many levels: it could provide good jobs and strong industries to the countries that need them the most (esp. in Africa and S. America), it could eliminate a great source of waste and inefficiency in American and Europe, it could further the passage of Doha, and give the West more credibility when it talks about markets and liberty to the rest of the world.

Will that happen? I doubt it. But that's what I'd like to see.

UPDATE: Dr. Oatley posted a short video in October that highlights some of relevant points about the politics of farm subsidies. It is here

Ending the Food Crisis

Paul Collier says it's possible, but only if we get over our aversion to large-scale corporate farming, end domestic farm subsidies in the first world, and accept genetically modified food. This, he says, will allow us to capture scale returns, alleviate the supply-side shortages, and give farmers in the developing world competitive access to Western markets. These three policy actions can directly address the central cause of food shortages:

The root cause of high food prices is the spectacular economic growth of Asia. Asia accounts for half the world's population, and because its people are still poor, they devote much of their budgets to food. As Asian incomes rise, the world demand for food increases. And not only are Asians eating more, but they are also eating better: carbohydrates are being replaced by protein. And because it takes six kilograms of grain to produce one kilogram of beef, the switch to a protein-heavy diet further drives up demand for grain.

The two key parameters in shaping demand are income elasticity and price elasticity. The income elasticity of demand for food is generally around 0.5, meaning that if income rises by, say, 20 percent, the demand for food rises by 10 percent. (The price elasticity of demand for food is only around 0.1: that is, people simply have to eat, and they do not eat much less in response to higher prices.) Thus, if the supply of food were fixed, in order to choke off an increase in demand of 10 percent after a 20 percent rise in income, the price of food would need to double. In other words, modest increases in global income will drive prices up alarmingly unless matched by increases in supply.

In recent years, the increase in demand resulting from gradually increasing incomes in Asia has instead been matched with several supply shocks, such as the prolonged drought in Australia. These shocks will only become more common with the climatic volatility that accompanies climate change. Accordingly, against a backdrop of relentlessly rising demand, supply will fluctuate more sharply as well.

These supply shocks can be ameliorated by an overhaul of the regulatory regime and encouragement of technological improvement that, Collier says, will match increased demand with increased supply, thus keeping prices down. The entire article is interesting, and strongly challenges many first- and third-world ideologies and romanticisms. It is also a good object lesson in the the Law of Unintended Consequences.

He's Ripping You Off...

I'm not always a big fan of Kristoff, but I have to respect his honesty this time around. The punchline:

"There is a familiar trajectory when a political party takes power. At first, it brims with ideals. Then it makes compromises to stay in power. Finally, it becomes devoted simply to staying in office. Can Ms. Pelosi really have compressed this downward spiral into just six months?

President Bush had sought to place a ceiling on payments to any farmer of $200,000 per year, but the Democratic leaders have set it at $1 million ($2 million for a couple). [Editorial comment: because a couple just can't get by on $1 million these days] Any time the Democrats find themselves fighting on behalf of fat cats, against a Republican White House that says enough is enough, it’s time for the donkey to kick itself in the head."

Further evidence that party really matters only to the uninformed.

The Farm Bill

NPR's Morning Edition had a couple good pieces on the Farm Bill today. One focuses on how farmers support the bill in spite of current high prices. The other story focuses on what the Senate might do--principled opposition or a "massive money grab." My bet is on the second option. Both links are to audio files.