Commentary

G-8 Summit Presents Opportunity to Cut Harmful Farm Subsidies

By Daniel Griswold
June 8, 2004

When leaders of the G-8 countries meet in Georgia this week, difficult questions about Iraq, terrorism, and global security will dominate the agenda. If the past is any guide, the leaders will probably not get around to talking much about a decision affecting both the economy and security: cutting rich country farm subsidies.

Along with their wealth, the G-8 member countries — United States, Canada, Britain, France, Germany, Italy, Japan, and Russia — have something else in common: heavy subsidies for farmers and high trade barriers against farm imports, especially from less developed countries.

Those subsidies are a study in public policy failure. They impose heavy costs on citizens both as taxpayers and as food consumers, and they breed resentment in less developed countries, complicating efforts to encourage economic development and political stability abroad.

The United States and the other G-8 members should happily surrender farm subsidies and trade barriers. We should do so not as a favor to other countries, although it would benefit some of the world’s poorest people, but first and foremost as a favor to ourselves. The International Monetary Fund estimates that abolishing rich country farm subsidies and trade barriers would raise annual global income by $100 billion. More than 90 percent of that gain would go to the liberalizing rich countries themselves.

The end of rich-country farm subsidies would not be the end of rich-country farming. Ending subsidies would reduce certain farming activities, especially those in which Americans are the least efficient. But it would stimulate other farm sectors by freeing up land and other resources and stoking more demand abroad for exports.

New Zealand provides a perfect laboratory test of life without farm subsidies. Beginning in the 1980s, New Zealand began to phase out its farm subsidies and trade barriers. Today, according the Organization for Economic Cooperation and Development, only 1 percent of farm income in New Zealand comes from government protection and subsidies, compared to 21 percent in the United States and 35 percent in Western Europe.

And how have New Zealand’s farmers fared under the rigors of the free market? They are prospering. In fact, since 1990, farm output in New Zealand as a share of GDP has actually increased, a development virtually unprecedented in an advanced economy.

A further incentive to liberalize was a ruling in April by a World Trade Organization panel, which upheld a complaint from Brazil that U.S. subsidies to cotton farmers exceeded levels allowed by our international agreements. The ruling, if upheld on appeal, could expose other U.S. subsidy programs to challenge.

The cotton program is especially harmful, not only to U.S. consumers and taxpayers, but also to our broader foreign policy interests because of the economic damage it causes to developing countries. In many poor countries, the majority of families earn their living by farming. Lower global prices cut directly into their incomes.

Consider the dirt-poor country of Mali in West Africa. Its farmers scratch out a living earning the equivalent of about $850 per capita each year. Half of Mali’s exports are cotton grown along the Niger River that flows through what is otherwise a desert country. Mali is also notable for being one of the few Muslim-majority nations in the world with a functioning democracy and full civil and political liberties.

And how has the U.S. government acted to encourage freedom and development in this Muslim country of 11 million struggling to create a more liberal society? By subsidizing the production of 25,000 U.S. cotton farmers with an average net worth of $800,000. Those subsidies depress the world price of cotton, driving thousands of already impoverished farmers off the land in Mali and other poor nations. According to the World Bank, U.S. cotton subsidies cost Mali and its desperately poor neighbors $250 million a year. This can only add to the frustration, despair, and anger that are rife in Muslim nations today. And we wonder why the United States has such a difficult time winning friends and influencing people in that part of the world.

A strong statement from the leaders at this week’s G-8 summit could give new momentum to stalled trade negotiations in the WTO. The Doha Development Round was launched on the promise that it will benefit poor countries as well as the more developed countries. No round can win the support of the 80 percent of WTO members who are less developed without including real market access for agriculture. By embracing the liberalization of farm markets, the rich countries would score a triple play by enhancing their own economic growth, spreading wealth to some of the world’s poorest nations, and reducing the stagnation and frustration abroad that fuels global instability.

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