Bringing Economic Sanity to Agricultural Trade

By Daniel Griswold
December 2, 1999

Agricultural trade is supposed to be one of the main items on the World Trade Organization’s agenda as it meets in Seattle this week, but the tough issue appears to be indigestible for the European Union, Japan and South Korea. A historic opportunity to bring economic sanity to international trade in agricultural goods could degenerate into a global food fight.

While average tariff levels on manufactured goods have fallen steadily in the postwar era, restrictions on agricultural imports have remained stubbornly high, especially in the more advanced economies. The average tariff on manufactured goods has today fallen to about 5 percent worldwide, while tariffs on agricultural goods top 40 percent. The figure masks an even deeper problem of tariff spikes as high as 300 percent and virtual bans and prohibitive tariff rates on certain goods.

Domestic price supports and export subsidies compound the problem, costing taxpayers huge amounts while creating market distortions that spur demand for import protection. The Organization for Economic Cooperation and Development estimates that the more economically advanced nations spent $362 billion in 1998 to support agriculture. (The EU spends nearly half its collective budget on the Common Agricultural Policy.)

The results of widespread intervention are production surpluses, artificially depressed and volatile world prices and unnecessarily high food costs for domestic consumers. Consumers of rice in Japan, bananas in Europe and sugar in the United States pay as much as two or three times the global price because of agricultural trade distortions. A study commissioned by the Australian government found that cutting global trade barriers and subsidies to agriculture by half would raise global welfare by $89 billion a year. Complete elimination of barriers and subsidies would raise global welfare by $150 billion.

Developed countries are the chief perpetrators—and hence the chief victims—of intervention in agriculture. Almost half the welfare gains of cutting agricultural intervention would accrue to Japan alone, with the European Union, the United States and Canada the other big winners. In fact, the welfare gain the developed countries would realize by cutting farm tariffs in half would be six times the welfare gain for all of Africa, Latin America and most of Asia combined. Liberalizing trade in agriculture should be considered, not a “concession” to less-developed countries, but a favor the developed countries can do themselves.

Americans would gain both as producers and as consumers. Thanks to high productivity and abundant land, agriculture is one of the most export-oriented sectors of the U.S. economy. In 1998 Americans exported $52 billion in farm goods, and one out of every three farm acres in America is now producing for export. Foreign trade barriers and subsidies, especially those of the EU, depress global prices, making U.S. farms less profitable and raising political pressure for an increase in taxpayer-financed income support.

The OECD estimates that America’s interventionist policies impose an implicit tax on food consumers of about 3 percent, costing U.S. consumers $18 billion a year. Those policies transfer wealth to a small group of food producers at the expense of food-consuming families, with the burden falling disproportionately on poorer families that spend larger proportions of their incomes on food.

Ultimately, WTO negotiators should seek a global agricultural market that is free of production subsidies and trade barriers. There is no reason why agriculture should be treated differently than manufacturing or services. As it does in other sectors, a free and open global market in agriculture would provide the widest variety of products at the lowest possible prices for global consumers. It would encourage nations to produce those food products and commodities in which they enjoy an advantage while importing what other nations produce efficiently. The result would be a huge boost to global welfare.

At minimum, negotiators should:

Drastically cut domestic production subsidies. In the United States, this will mean resisting attempts to dismantle the 1996 farm bill, either through a wholesale rewriting of the law or by piecemeal revisions in “emergency” farm relief bills.

Quickly phase out export subsidies including export credits the U.S. government extends to foreign buyers of U.S. farm goods.

Lower tariff barriers to no more than half their current levels and reduce tariff peaks even further.

Resist any compromise of the standards set in the current Sanitary and Phytosanitary Agreement. Any ban of agricultural products in the name of public health and safety should be based on sound science, not on pseudo-scientific perceptions that can be open to manipulation to protect domestic markets.

The EU and Japan have tried to justify intervention by stressing the “multifunctionality” of agriculture. They argue that agriculture deserves government support because its functions reach beyond merely producing food to include a number of “positive externalities” that benefit society as a whole, such as conservation and rural development.

Even if one accepts those externalities, they do not justify a protectionist policy. The positive externalities must be weighed against possible negative externalities such as pollution from pesticides and fertilizers. If governments want to encourage certain activities, they can intervene with direct subsides that would be far less costly to society as a whole than contorting the global food market.

No nation helps its citizens by maintaining a foolish policy that punishes food consumers year after year and saps tens of billions of dollars from the domestic economy. If negotiators in Seattle can move the world a step closer to economic sanity in agriculture, their meeting will have been a success.

Daniel Griswold is director of the Center for Trade Policy Studies at the Cato Institute.