How To Get Back To Multilateral Trade Liberalization: Cut Agriculture Subsidies!

Recent discussions of trade negotiations have focused on the Trans Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP), often referred to as “mega-regional” trade talks.  But most economists and other trade experts agree that trade liberalization would be more beneficial if done on a multilateral basis, at the World Trade Organization (WTO).  There are talks going on at the WTO, referred to as the Doha Round, but they started in 2001 and are widely seen as not likely to achieve much.

What would it take to get WTO liberalization going again?  There are lots of theories on this, but my view is that it’s really pretty simple:  The major trading countries need to propose significant liberalization.  That hasn’t happened yet, and that’s why there has been so little progress.

There are probably several examples of what might constitute significant trade liberalization, but the most obvious one is agriculture subsidies.  There is a long-standing criticism from, well, everyone, that the U.S. and EU and others subsidize their agriculture sector too much, in ways that distort trade.  Obviously, it would take a serious commitment by the U.S./EU to take on domestic special interests and propose big subsidy cuts here, but the domestic and international benefits of doing so are clear.

So what are the chances of this happening?  Based on the rhetoric on these issues, it seems unlikely.  Here is U.S. Trade Representative Michael Froman writing in the Financial Times:

When Doha was launched in 2001, the focus was on US and EU agricultural subsidies, which have since been cut. Now, some emerging markets are the biggest providers of agricultural subsidies but would be exempt under Doha from cuts. If you are a poor farmer facing a global market distortion, it does not matter where the subsidies causing it came from. Artificial distinctions between developed and emerging economies make no economic sense.

There’s a bit of truth in this, but all in all the picture drawn here is misleading.  Yes, developing countries have increased their agriculture subsidies.  That part is true.  But the assertion about U.S./EU cuts is a questionable one, as OECD data show a more complex picture.  Agriculture subsidies vary widely in terms of methods used to provide them, but relying on the general category of “producer support estimates,” here is the breakdown of U.S./EU agriculture subsidies from 1995-2014:

 US/EU Farm Subsidies

 Source: OECD.Stat

You could look at that data and say there was a “cut” between 2001 and 2014, at least for the U.S..  But a more accurate description would be to say that these subsidies were very large over the whole period (and peaked in 1999-2001 for the U.S.).

With these facts in mind, the solution is kind of simple and obvious:  Some government – could be the U.S. or EU, but also Brazil or China – needs to propose that all governments cut their agriculture subsidies significantly, say, 50% to start, and going down further from there.  We are all doing it; we should all stop.  Someone needs to take the lead and argue this, but so far, no one has stepped up.  Instead, governments hide behind the actions of others to avoid doing any liberalizing of their own.

The upshot of all this is that the chances of large-scale multilateral liberalization are very low right now.  Until the major governments are willing to propose liberalization, there is no deal to be had.  Instead, it appears as though we will continue the current focus on regional trade deals, which offer tariffs cuts and some other liberalization on a preferential basis to a few trading partners only, combined with special interest rules on IP, labor and the environment.  When it comes to more comprehensive trade liberalization, there has been no one willing to take the lead.