Commentary

U.S. Farm Policy: An Equal Opportunity Disaster

By Daniel Griswold
May 2, 2003

America’s federal farm policy is an equal-opportunity disaster. Its victims include tens of millions of American families who must pay higher taxes and higher grocery bills, hundreds of millions of farmers in poor countries around the world, and ultimately American farmers themselves.

Farm subsidies in the United States and other rich countries prolong the mismatch between global supply and demand. By design, U.S. farm policy promotes production even if market prices are falling. In a normal market, supply would contract when prices fall, but our farm policy keeps farmland in production even when the market is sending the opposite signal. The resulting overproduction depresses global prices, hurting farmers abroad, especially those in the world’s least developed countries.

In most poor countries, the majority of families earn their living by farming. Lower prices cut directly into their incomes. Let me offer two examples. The first involves rice.

A study published recently by the National Bureau of Economic Research found that the rising price of rice in Vietnam between 1993 and 1998 dramatically reduced the number of children in the labor force and doubled the percentage of girls attending school. So, by depressing global prices, U.S. subsidies for domestic rice production lead directly to more children working and fewer attending school in Vietnam and other poor countries.

Another example involves cotton, our commodity poster child for today’s event. The country of Mali in West Africa is dirt poor. 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. In fact, according to the human rights group Freedom House, Mali is the only Muslim-majority nation in the world that it rates as “Free.” The rest are either “Partly Free” or “Not Free.”

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.

It would be bad enough if U.S. farm policy were a case of rich countries at the expense of the world’s poor. But we are the chief victims of our own policies. According a study by the International Monetary Fund, the repeal of all rich-country trade barriers and subsidies to agriculture would boost global welfare by $100 billion a year. More than 90 percent of that gain, or $92 billion, would go to the rich countries themselves. We can do ourselves a favor AND do good for the world’s poorest people by unilaterally junking our awful farm policies.

The farm bill and the higher subsidies it contains will not even be good for U.S. farmers in the long run. The U.S. farm sector has a huge stake in reducing foreign trade barriers to agriculture. While global tariffs on manufacturing goods have fallen steadily in the post-war era, to about 4 percent, tariff- and tariff-equivalent barriers to farm products remain stubbornly high at more than 40 percent. America is the world’s number one exporter of food. Last year, American farmers exported $50 billion worth of goods-far more than any other country in the world. One out of every three crop acres planted in the United States is exported, and those exports produce 25 percent of U.S. farm income. With only four percent of the world’s stomachs located in the United States, U.S. farmers must export to prosper. Yet U.S. farm policy has vastly complicated the task of opening markets abroad.

Supporters of higher subsidies contained in last year’s farm bill claim they increase the leverage of U.S. trade negotiators by giving them more chips with which to bargain in the WTO and other trade negotiations. But the farm bill forfeited our most valuable chip of all-American leadership. Our calls for more market competition in agriculture ring hollow now that we have taken such a giant step in the opposite direction.

The Doha 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. Disputes over farm trade almost wrecked the Uruguay round. Yet the U.S. farm bill strikes at the heart of U.S. credibility to lead any serious negotiations toward freer trade in agriculture. The U.S. farm lobby has sold the keys to long-term prosperity for a pot of subsidized porridge.

American farmers do not need subsidies and tariffs to be competitive in the global marketplace. Our country is blessed with much of the best farmland in the world.

Our farmers enjoy the best technology and finance and transportation systems in the world. Subsidies only keep less efficient producers in business, draining resources from more productive farms. In the long run, subsidies create a less efficient and competitive farm sector. If American farmers need proof that there is life after subsidies, take a look at New Zealand. In the last 15 years, the New Zealand government has unilaterally opened its farm markets and almost eliminated subsidies. 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. Between 1990 and 2000, agricultural output in New Zealand actually grew as a share of its overall economy, while farm output continues to shrink as a share of total output in the United States and Western Europe.

By any measure, U.S. farm policy is a net loser. It hurts U.S. taxpayers and consumers, it hurts hundreds of millions of farmers in the world’s poorest countries, it hurts our foreign policy as we wage a war against global terrorism, and in the end it hurts U.S. farmers by foreclosing opportunities to earn more income through honest trade.

Daniel Griswold directs the Center for Trade Policy Studies at the Cato Institute in Washington, D.C. This column is excerpted from his new book, Mad about Trade: Why Main Street America Should Embrace Globalization (Cato Institute, 2009).