Commentary

Who Pays for Farm Subsidies?

This article appeared in the Washington Times on November 25, 2005
Peter Mandelson, the European Union trade commissioner, said Nov. 11 that the Doha round of negotiations on trade liberalization (Dec. 13-18) in Hong Kong is likely to fail. “The problem,” he said, “is that whatever we offer is not enough for the highly competitive, very aggressive agricultural producers and exporters like Brazil, Australia, New Zealand and the United States.”

Mr. Mandelson should resist the protectionist calls from within the EU and embrace the ambitious proposals on agricultural trade liberalization as outlined by his American counterpart. The EU (as well as America) stand to gain a great deal from cutting and, eventually, eliminating their agricultural support programs.

The general public in rich countries bears much of the cost of agricultural protectionism. First, the public subsidizes the farming community through higher taxes. Second, the public pays food prices that are higher than they would be under a liberalized trade regime. In 2004, for example, agricultural support in the countries of the Organization for Economic Cooperation and Development (OECD) came to about $280 billion. The EU’s agricultural support amounted to about $133 billion, Japan’s to $49 billion, America’s to $47 billion, South Korea’s to $20 billion and Canada’s and Switzerland’s to $6 billion each. Moreover, in 2003, the British think-tank Policy Exchange found that EU consumers “pay 42 percent more for agricultural products than they would if the system were dismantled. Americans pay 10 percent extra, Japanese more than twice as much. For less well-off families, for whom food takes up a large proportion of household income, freer trade would mean a noticeably higher standard of living.”

The level of agricultural protectionism in Europe is higher than that in the United States. That is part of the reason why, as researchers at the Friedrich Naumann Foundation found, the prices of bread in France and Germany are 45 percent higher than in the United States, and the prices of meat in France and Germany are 56 percent and 87 percent higher than in the United States.

True, agricultural subsidies contribute to keeping the already tiny number of farmers in the rich countries employed, but, as French economist Patrick Messerlin estimated, the average cost incurred by the European taxpayer for every job “saved” through protectionism was approximately $200,000 per year during the 1990s. Shockingly, over the same period, each sugar industry job “saved” through protectionism cost the U.S. taxpayer $800,000.

Farm subsidies are, of course, a form of corporate welfare. As the OECD documents, the wealthiest 20 percent of farmers in Europe receive 80 percent of the subsidies. In the United Kingdom, those wealthy farmers include Britain’s richest man, the Duke of Westminster, as well as other rich noblemen, including the Dukes of Marlborough and Bedford, and the Earl of Leicester. Prince Albert of Monaco also received common agricultural policy (CAP) money, as did four Danish cabinet ministers and several members of the Danish Parliament. The Dutch agriculture minister, Cees Veerman, was also on the CAP payroll.

Likewise, in the United States, it is the wealthiest farmers who receive the most in agricultural grants. In 1999, for example, 45 percent of agricultural subsidies went to the largest 7 percent of farms in the United States. According to the Environmental Working Group’s Farm Subsidy Database, a Washington-based non-profit organization, one of the more prominent recipients of U.S. agricultural subsidies is Senate Minority Whip Dick J. Durbin.

In a recent in-depth study titled Agricultural Trade Reform and the Doha Development Agenda, Kym Anderson and Will Martin of the World Bank estimated the welfare gains resulting from full liberalization of global merchandise trade. According to the authors, by 2015, annual welfare gain in the EU and EFTA countries would be $65 billion greater than it would have been had no trade liberalization taken place. The United States would benefit by $16 billion, Brazil by $10 billion, and Australia and New Zealand by $6 billion. Other large protectionists would gain as well. Japan would net $55 billion, South Korea and Taiwan $45 billion, and Hong Kong and Singapore $11 billion.

Aside from monetary gains, trade liberalization may contribute to making the relations between rich countries, especially the EU and the United States, more harmonious. Moreover, agricultural trade liberalization will remove the charge of hypocrisy that the leaders of the developing world so often raise against representatives from rich countries. As the latter urge the former to embrace the free market, it is only to be expected that the rich countries live by the words they preach.

Marian L. Tupy is assistant director of the Project on Global Economic Liberty specializing in the study of Europe and sub-Saharan Africa at the Cato Institute.