7. The politics of farm subsidies and trade a. Do all governments

7. The politics of farm subsidies & trade
a.
b.
c.
d.
e.
f.
7. The politics of farm subsidies and trade
Do all governments give subsidies to farmers?
What explains the tendency of rich countries to
subsidize farmers?
Do farmers in rich countries need subsidies to
survive?
Why don’t taxpayers and food consumers join
to resist farm subsidies?
How do farm subsidies shape international
agricultural trade?
Why hasn’t the WTO been able to discipline
farm subsidies?
Politica economica delle risorse strategiche - Giacomo Branca, Universitá della Tuscia
7. The politics of farm subsidies & trade
a. Do all governments give subsidies to farmers?
Yes, rich countries
• Nearly all rich (OECD) countries support farmers’ incomes
(283 million $ in 2006):
– Trade policies (e.g. import tariffs or export subsidies) 
boost domestic farm prices (gvt. price guarantee)
– Public spending to purchase farm commodities (storage,
foreign food aid, Food Stamp program)
– Direct cash transfer, subsidized loans, tax breaks
• Level of support is average 29% of farmers’ income but it
varies among countries
– E.g. Switzerland  68%; EU  32%; US  16%; Australia
 5%; New Zealand  1%
– Not much related with weight of ag sector. E.g. Switzerland
 Ag. weights 1% GDP; New Zealand  6%
• Level of support varies among commodities (in general
exported goods receive more support)
• Food prices artificially high (indirect support to farmers) 
transfer of income from rich urban food consumers to farmers
(policies rural biased)
Politica economica delle risorse strategiche - Giacomo Branca, Universitá della Tuscia
7. The politics of farm subsidies & trade
a. Do all governments give subsidies to farmers?
No, poor countries
• Developing countries provide much less support to
agriculture despite being more ‘agricultural’ (sector
contributing more to GDP):
– Often farmers taxed to support urban people
• E.g. food prices artificially low (indirect support to
urban consumers)  transfer of income from
farmers to food consumers in urban areas (policies
urban biased)
• However….examples of input subsidies to farmers (e.g.
fertilizer program in Malawi and Zambia)
Politica economica delle risorse strategiche - Giacomo Branca, Universitá della Tuscia
7. The politics of farm subsidies & trade
b. What explains the tendency of rich countries to subsidize
farmers?
During industrial development
• All economic sectors (including agriculture) become wealthier
• However, wages & incomes in ag. sector remains lower than
off-farm (especially true for less competitive farmers)
• Larger and more competitive farms buy small farms to take
advantage of newly available machinery
• So traditional farmers seek gvt. support  lobby groups
Subsidies initiated in:
• Europe, during/after World War I, ‘20s
• US, during Great Depression, ‘30s (Roosevelt)
• Japan, industrialization, ‘50 and ‘60s
• Taiwan and S. Korea, ’70 and ‘80s
Politica economica delle risorse strategiche - Giacomo Branca, Universitá della Tuscia
7. The politics of farm subsidies & trade
c. Do farmers in rich countries need subsidies to survive?
Yes, when subsidies start
• Average incomes lower  e.g. US 1933, farmers’ income <
50% non farmers’ income
• Economic & social justification
No, after development
• Small farmers leave, farm consolidation  increased size,
large commercial farmers, income > non farmers (valuable
land, buildings & machinery)
But farm subsidies are kept
• ….thanks to the power of agriculture lobbies…..
• ….and target mainly small farmers (in fact are linked to
volume production)…..
– E.g. US, 45% subsidies  largest 7% farms
– E.g. EU, 80% subsidies  wealthier 20% farms
Politica economica delle risorse strategiche - Giacomo Branca, Universitá della Tuscia
7. The politics of farm subsidies & trade
d. Why don’t taxpayers and food consumers join to resist
farm subsidies?
Farm subsidies are costly both to taxpayers and food
consumers. E.g. 1980’s  Billion $/yr
Country
Taxpayer
Food consumer
US
30
6
EU
16
33
Japan
6
28
But taxpayers and consumers are not as organized as
agriculture lobby pressure
• Smaller groups easier to organize  greater individual
share of benefits & easier to discipline free-riding
• Also smaller commodity groups (sugar) do better than larger
farmer groups in securing subsidy benefits
Rich consumers: food expenditure only a small share of income
(US from 41 to 10%), also thanks to increased ag. productivity
Taxpayers: public spending increases, reduced % ag. subsidies
Politica economica delle risorse strategiche - Giacomo Branca, Universitá della Tuscia
7. The politics of farm subsidies & trade
e. How do farm subsidies shape international agricultural
trade?
Farm subsidies in rich countries distort production and trade
• Too much food produced in regions not well suited to
farming (e.g. alpine areas, desert land in US southwest)…
• Too little food produced in the (tropical) developing countries
where potential is high….
• Take away share from other rich countries more suited for
certain types of productions (e.g. Australia)
• Examples:
– Sugar:  high (domestic) sugar prices & import
restrictions in US & EU
 production from sugar beet in US & EU
instead of cane sugar in Caribbean, Brazil and
tropical Africa
 40% sugar produced in the wrong place
Politica economica delle risorse strategiche - Giacomo Branca, Universitá della Tuscia
7. The politics of farm subsidies & trade
e. How do farm subsidies shape international agricultural
trade?
Damages done by farm policies of rich countries to poor
countries can be quantified
• E.g. Brazil’s complaint on US cotton subsidies in 2002
– without US subsidies:
• production 29% lower and exports 41% lower
• International cotton price 13% higher (with benefits
for African producers as well  cash crop &
increased farm income by 2-6%....
Politica economica delle risorse strategiche - Giacomo Branca, Universitá della Tuscia
7. The politics of farm subsidies & trade
f. Why hasn’t the WTO been able to discipline farm
subsidies?
One of the purposes of WTO is to reduce trade distortions (all
sectors)
• But in agriculture limited results of the rounds of
negotiations.
– For example average import tariff applied to ag imports
was 17% (three times more the average tariff on
manufactured goods!)
– US ag products find: average 30% import tariff in EU and
59% in Japan
•
In fact barriers to ag trade are difficult to bring down.
– Without import barriers domestic farm support
(subsidies) would cost more (increased international
competition would require more domestic support….)
– Easy to support farmer income through import tariffs
(they do not cost and may earn govt revenues; they push
some costs to foreign producers)
Politica economica delle risorse strategiche - Giacomo Branca, Universitá della Tuscia
7. The politics of farm subsidies & trade
f. Why hasn’t the WTO been able to discipline farm
subsidies?
Not all subsidies distort trade
• Subsidies that stimulate production and export do – these
are so called ‘coupled’ measures (e.g. indirect support
through market price, minimum guarantee price)
• ‘Decoupled’ subsidies do not (e.g. direct cash payments to
farmers)
Subsidies that do not distort trade
• Green box  they are allowed
Subsidies that do distort trade
• Red box  they are banned
• Amber box  allowed only up to a certain $ value. But no
agreement in the Doha Round here….
‘Decoupled’ subsidies (EU): blue box
Politica economica delle risorse strategiche - Giacomo Branca, Universitá della Tuscia
7. The politics of farm subsidies & trade
Example of trade distorting policy  export restrictions
& import subsidies effects on international food prices
•
“…export restrictions play a direct role in aggravating food
crises…” (Pascal Lamy, Director General of WTO, 2011)
•
40%, 19% and 10% of 2007-08 spike in rice, wheat and
maize prices respectively due to trade policies (Anderson
and Nelgen, 2012)
•
If enough countries adopt trade policies, end result is
increased world food price instability
•
Unless countries cooperate over not using trade policies,
each has unilateral incentive to intervene, but collectively
no better off
Politica economica delle risorse strategiche - Giacomo Branca, Universitá della Tuscia
An example: World Rice Market
Rice
Price
Supply with
Export Controls
Supply
W3
W2
Demand with
Import Subsidies
P3= W1=P1
P2
Demand
Q2
Q1=Q3
Rice
Quantity
An example: Welfare Effects of Export Taxes
Rice
Price
Supply with
Export Taxes
Supply
t
W2
W1=P1
a
b
d
c
P2
Demand
Q2
Q1=Q3
Rice
Quantity
7. The politics of farm subsidies & trade
Welfare Effects of Export Taxes
•
If several countries use export tax, shifts up world supply
curve, world price increasing to W2, domestic price in
exporting countries falling to P2
•
Global effects of export tax:
- importers loss of consumer surplus = –(a+b)
- exporters loss of producer surplus
- exporting government tax revenue
- deadweight loss
= –(c+d)
= +(a+c)
= -(b+d)
7. The politics of farm subsidies & trade
Resources:
Paarlberg R., Food Politics, chapter 9
Politica economica delle risorse strategiche - Giacomo Branca, Universitá della Tuscia