Transcript Network Studies - Strathmore University

WTO, Agricultural
Subsidies and
Development
Strathmore University Presentation
Dr. Reid E. Whitlock
Nairobi, Kenya
January 2006
WTO Meetings In Hong Kong
18 December 2005
#1 “WTO secured an end date - 2013 -- for all
export subsidies in agriculture
*** The declaration makes clear that the agreed date is
conditional. Loopholes have to be plugged to avoid hidden
export subsidies in credit, food aid and the sales of
exporting state enterprises
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Agreements

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#2 There is an agreement on cotton.
For cotton the end date for subsidies by
developed countries is accelerated to the end of
2006. In addition, cotton exports from leastdeveloped countries will be allowed into
developed countries without duty or quotas
from 2006.
Cotton (cont’d)

" Ministers have also agreed to aim to cut tradedistorting domestic subsidies on cotton by more than
would normally apply under the new agreement, and to
do so more quickly." The main countries involved
in this outcome were: United States and the four
countries pushing for an agreement on cotton
(Benin, Burkina Faso, Chad and Mali).
Item 3
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The member nations negotiated " a very solid"
duty-free, quota-free access for the 32 leastdeveloped country members. (When??)
Item 4: Food Aid
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we reconfirm our commitment to maintain an
adequate level and to take into account the interests of
food aid recipient countries. To this end, a “safe box”
for bona fide food aid will be provided to ensure that
there is no unintended impediment to dealing with
emergency situations. Beyond that, we will ensure
elimination of commercial displacement. To this end,
we will agree effective disciplines on in-kind food aid,
monetization and re-exports so that there can be no
loop-hole for continuing export subsidization.
Item 5: Role of LDCs
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# 5 We reaffirm our commitment to effectively
and meaningfully integrate LDCs into the
multilateral trading system and shall continue to
implement the WTO Work Programme for
LDCs adopted in February 2002.
Item 6: Help To LDCs

We recognize the dependence of several
developing and least-developed countries on the
export of commodities and the problems they
face because of the adverse impact of the longterm decline and sharp fluctuation in the prices
of these commodities
WTO Summary

Subsidies
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Food aid

Access for LDCs
Definitions


A monetary grant given by government to lower
the price faced by producers or consumers of a
good
A payment that a government makes to a
producer to supplement the market price of a
product or commodity the producer is selling.
(continued)
Definitions (cont’d)

A payment, designed to increase producer income by
raising the level of prices above market rates (BUYERS
are given vouchers by the government to give to sellers
when a sale is made. They can announce the higher
price but only have to pay their original, lower price)

Export subsidies are payments given by the
government to farmers so that they will sell their
product abroad
What Do Subsidies Mean For
Countries Like the U.S.?

By guaranteeing U.S. farmers a minimum
payment for commodities such as corn, rice and
soybeans, the government encourages
overproduction. That drives down the market
price, forcing even higher subsidies and creating
more surpluses that can be exported.
Myth of the Farmer

A part of the problem is that Americans still
believe the myth of the family farmer as
somehow ‘superior’ to other classes of workers.
That gives farm lobbyists a potent hook with
which to demand public assistance.
The Myth is Costly
…and not only for the 97 percent of Americans
who don't live on farms. Boosting farm
subsidies in the U.S.will be enormously
damaging to the U.S. position in global trade
talks, where negotiators have been trying to get
other countries to reduce their own agricultural
subsidies.
What Do Subsidies Mean For LDCs?

As a condition for helping many LDCs service
their large foreign debt, international lending
agencies demand that the countries keep their
tariffs low. The governments are then unable to
bar American sugar, grain, and other food
products from their countries, so their own
farmers get stuck
The Problem In A Nutshell

An American farmer has high labor costs, high
machinery costs, high land acquisition costs, high
regulatory compliance costs (environment, pesticides,
labeling, storage, etc..). Because the American market is
well-served by farmers, there is not much market for an
individual farmer's maize. The farmer looks to foreign
markets that are fragmented and/or easy to penetrate to
sell his/her products into. Because the American
farmer's costs are so high (s)he can only sell at all by
having the government supplement what (s)he earns on
each foreign sale
An Example

If the price in the Kenya market was $2 per kilo
of maize, the American farmer would lose
money accepting this price, when his/her costs
are $ 3 per kilo. Instead of withdrawing from
the market and producing something else,
cutting costs or leaving farming altogether,
American farmers appeal to the public -- the
American people -- and the U.S. government
and claim that they can only continue to exist
with help.
The Example Continues…

The government gives this help in the form of
subsidies. These subsidies bring the U.S.
production cost per kilo down from $ 3 to $ 1 -enough to ensure that Kenyan consumers will
buy their maize from American -- and not
Kenyan -- farmers.
The Paradox

domestic supports can encourage
overproduction because if the government is
paying producers of a certain crop, others will
want to start producing it too or will produce
more of it than normal. This can make global
prices
Historical Background

Modern subsidies began In WW1 when the U.S. needed
higher production for the war and offered subsidies as
inducements to farm. After WW1 prices dropped with
overproduction so the government propped up prices
with subsidies to avoid farm failures. During the Great
Depression (1930). Dustbowl. Designed to increase, or
at least stabilize, farm income. WW2 stimulus needed
again. Post-war, prices fell with overproduction.
Subsidies propped up prices.
The Political Economic Realities
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
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There is a popular belief in the farmer as a “folk
figure” in American culture – like the cowboy
Leaders can’t favor producers at the expense of
consumers or vice versa
As a major food aid donor, subsidy-generated
surpluses have a natural outlet
More Realities


- Agricultural subsidies are insignificant in the
American budget.
State 20 mmm (of which, USAID 3.9mmm in
2005; joint State-Ag programs for another 4.8
mmm, global HIV/AIDS for 1.45 mmm and 2.5
mmm for the Millenium Challenge Corp), Ag 90
mmm, defence 540 mmm, health & human svc
660, interest on debt 440 mmm, social security
510 mmm -- total : over 4 trillion
More Realities
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- focusing on the aid part of the US budget, the
US ranks 22 out of 22 DCs in aid as a % of
GNP. Most is spent on middle income countries
and democratic success stories or disasters.
Realities (cont’d)
- the costs to LDC's of lost sales seem big to
them.
- there are costs in innovation not undertaken by
DC's that continue to subsidize and LDCs that
continue to stagnate and complain rather than
changing focus.
Details About Subsidies

Remember, farm subsidies are a TINY
percentage of the U.S. government budget -- 5
to 20 billion/year (direct plus indirect -subsidized loans, loan guarantees, insurance) out
of 4 trillion
Details (cont’d)
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58 percent of farmers including most vegetable, beef
cattle, and chicken producers are able to operate in the
market economy without receiving taxpayer subsidies.
But producers of just five crops - wheat, corn,
soybeans, rice, and cotton - have secured a direct
pipeline to more than 90 percent of U.S. farm handouts. Stated another way, while just 7 percent of all U.S.
farms have sales of $250,000 or more, this 7 percent
receive almost half of all government payments.
More Details
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Many of the largest, most profitable farms and
agribusinesses that have received the lion's share
of subsidies have used these funds to buy out
smaller farms.
It’s Not Just the U.S. !!!
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
Japan.
Europe – a high-cost producer – generates an
export surplus of approximately 5 million
tonnes of sugar. Currently, the EU is spending
€3.30 in subsidies to export sugar worth €1. In
addition to the 1.3bn in export subsidies
recorded annually in its budgets, the EU
provides hidden support amounting to around
€833m on nominally unsubsidised sugar exports.
Food Aid & Development
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
United States is now in the embarrassing
situation of undermining its own foreign-aid
program.
80% of U.S. aid actually goes to American
companies implementing projects in LDCs. Italy
and US tie over 70% of their aid.
Access For Countries Like Kenya
What Can Kenya Do?
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Buy into the U.S. (invest behind the subsidy wall)
Develop products the U.S. cannot produce (too
labor intensive, requires too much heat, sunshine
or rainfall) -- examples are: tea, coffee, gum
arabic
Protest to WTO
Kenya Could Introduce CounterSubsidies

This could work if agriculture mattered so much to
Kenya that it was prepared to match and beat any
subsidy provided by American (or other) goverments to
its farmers. The reality is that Kenya -- maybe the
government and maybe the citizens -- doesn't care
about this issue as much as America does, It does not
have the political will to shift public funds from other
sectors to agriculture.
Clarification

Note I did not say Kenya lacks the money to win a
subsidy war. I believe that there are two categories of
developing countries that are relevant for this
discussion: those that have the money to wage such a
war but choose not to spend it for such a war, and
those whose agricultural sector is so small, so
backwards, so undeveloped, so uncompetitive, that even
if every advantage and protection was given to it, it
would not be able to adequately and professionally
serve the market.
One More Option:

What if Kenyans Stopped Farming Admitting Defeat in This Trade War?
Option Analysis
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This might be a good thing if the energy and
determination of Kenyan farmers and the government
structures that support them such as agricultural
research stations and technical schools and extension
workers and government anti-locust spraying programs
and water infrastructure projects were redirected
towards something about which the U.S. did not care
about in which the U.S. could not defeat Kenya. Even
if such a product existed, the transition would be slow
and painful. Many farmers don't know how to do
anything but farm, and are too old, too set in their
ways, or too committed to farming to do anything else.
A Few Thoughts

Societies have a right to decide what they collectively
really care about. The U.S. should not be faulted because
it cares about keeping farming alive in America. That is
its right. Its choice. Kenya should be equally clear and
decisive about the things important to Kenya. Kenya
could erect tariff barriers to keep American farm
products out. This would require that it leave the WTO
or face sanctions and reprisals. It would mean not
taking IMF and World bank money. Kenya has to
decide if it is worth it.
Unacceptable

That the U.S. joins a forum -- the WTO -committed to removing subsidies, when it has
no intention of playing along with the game. It
would be much more honest -- and would make
the battle lines clearer to understand -- if the
U.S. withdrew from WTO as it did from the
global warming, greenhouse gases and emissions
organizations.
Unacceptable, part 2

that developing countries have not done more to
improve the competitiveness of their agricultural
sectors though they are quick to criticize the
developed countries for their problems. In my
experience, the countries that really care about
something, do something about the problem
rather than just complain. Chile, Vietnam,
Thailand, China come to mind.
Unacceptable, part 3

that many developing countries are still blaming
colonialism for their inability to improve their situation.
There is not --never was and never will be -- any such
thing as a level playing field. A country has to deal with
problems and opportunities it inherits, and has to make
the best of them. No one is listening and no one will
ever be swayed in the ways you hope, by your
complaints. Not the U.N., not the WTO, not England,
which colonized you, and certainly not the U.S., which
cares next-to-nothing about Kenya and feels no
obligation to give it any special consideration.
The World Is Changing

For better or worse, the world as we know it is
merging, partnering, growing, in ways that make
it extremely difficult for small economies to
flourish. Small economies will be permanently
relegated to pauper status -- forgotten footnotes
to history, economics and politics that
occasionally make the headlines when there is
another coup or drought or massacre or ethnic
cleansing or descent from democracy.
Thank You

Q&A: Single questions only please -- short and
to-the-point.