The Beginning of the End for Farm Subsidies?

U.S. farmers had better prepare for major changes in their nearly new farm subsidies.

The agricultural chairman of the World Trade Organization (WTO) recently made the first international attempt in a decade to rewrite the world’s farm subsidy rules—and it would  radically cut farm subsidies for both U.S. and European farmers. However, the new rules drafted by Stuart Harbinson of Hong Kong would also sharply increase U.S. farmers’ opportunities for exports to Asian cities full of people with rising incomes and a desire for better diets.

According to Feedstuffs magazine, Harbinson’s new rules would phase out most farm export subsidies, as the European Union (EU) had feared, over six years, with all export subsidies banned after ten years. This would substantially raise world farm prices that have long been depressed by EU dumping.

Harbinson would also sharply cut tariffs on farm commodities. Meanwhile, all 145 WTO member countries would have to permit farm imports to equal at least 10 percent of their domestic food consumption within five years. (The current import requirement is 5 percent, and neither China nor India has been obligated.)

Developing countries would be allowed to designate a few “strategic” commodities where employment, food security, or rural development argued for a slower rate of liberalization.

The Harbinson proposals would offer expanded export opportunities to most U.S. commodities, with major export gains likely for U.S. grains, oilseeds, livestock products, and horticultural crops. The WTO proposals would force cuts in U.S. subsidies for dairy products, partially offsetting dairy’s export gains. The United States would also be required to permit sugar imports, forcing radical change on America’s sugar program.  However, the United States could not get added export potential for its other farmers if it held onto the dairy and sugar programs.

Most of Europe’s farm subsidy schemes are in the WTO’s “blue box” (because they involve production limits and import protection). Harbinson would cut such subsidies by 50 percent over five years. “Amber box” (trade distorting) subsidies would be cut even more sharply, by 60 percent. This will set off an urgent debate among U.S. commodity groups over which American subsidies are “amber.”

However, even the de minimis provision, which EU Agriculture Commissioner Franz Fischler said recently was the largest loophole used to cover U.S. farm subsidies, would be cut by more than half over five years.

For fifty years the agriculture industry avoided the trade liberalization that swept across nonfarm industries, stimulating both incomes and economic growth in those trade-friendly sectors. While non-farm tariffs have been cut from an average of 40 percent to 4 percent, the average farm tariff is still above 60 percent. Trade barriers have held the world’s grain trade to a tiny 6 percent of world consumption, and pork to less than 3 percent.

The unfortunate result is that high-quality diets are much more expensive for children in countries such as India and China (not to mention France) than in America.

President Bush, though he signed the current farm law, makes no secret of his desire to shift American farm income from government subsidies to export earnings. It is not impossible that U.S. farm export earnings could double their recent $50-60 billion per year under free trade, especially because the price-depressing weight of EU commodity dumping would be eliminated.

The White House has also offered to eliminate tariffs on all textiles and clothing imports from Latin American countries as part of the Free Trade Area of the Americas’ negotiations. A few years ago, such textile liberalization would have been politically unthinkable. 

It is far too soon to know how close the WTO’s new farm trade rules will be to Chairman Harbinson’s first draft. However, both the United States and the EU signed the negotiating mandate for the WTO’s Doha Round aimed at ending farm-export subsidies and phasing out most farm subsidies within a decade.

Chairman Harbinson’s draft indicates that the WTO is taking that mandate seriously.