The High Price of Farm Policies

September 26, 2005 • Commentary
This article appeared in the Journal of Commerce on September 26, 2005.

In a speech before the United Nations earlier this month, President Bush pledged that the U.S. would eliminate its agricultural subsidies and trade barriers “as other countries do the same.” The president deserves applause for his free‐​trade vision, but not for his “I‐​insist‐​you‐​go‐​first” approach to achieving it.

U.S. farm subsidies and trade barriers are not bargaining chips to be hoarded, but a ball and chain around America’s neck. According to a recent report from the Organization of Economic Cooperation and Development, the U.S. government transferred $46 billion to America’s agricultural producers in 2004 through a combination of direct taxpayer subsidies and higher domestic prices through tariff‐​rate quotas aimed at keeping out lowerpriced imports.

Regardless of what other countries do, Americans pay a high cost for our ongoing farm policies. According to a new study from the Cato Institute, reducing U.S. farm subsidies and trade barriers would benefit Americans in six important ways.

One, reform would deliver lower food prices to tens of millions of American households, especially low‐​income families that spend a higher share of their income on food. Americans pay artificially high prices for sugar, milk, butter, cheese, peanuts, beef and orange juice. Last year, according to the OECD, U.S. farm programs transferred $16.2 billion from U.S. food consumers to producers. That amounts to a regressive annual “food tax” on the typical American household of $147.

Two, reform would lower costs for U.S. industries, such as confectioners and other food processors, that use agricultural commodities in their final products. For example, the U.S. sugar program maintains a domestic price that is twice the world price, imposing a huge cost on U.S. producers of candy and other confectionary products, chocolate and cocoa products, chewing gum, bread and other bakery products, cookies and crackers, and frozen bakery products. In the past decade thousands of jobs have been lost in the confectionary industry, with losses especially heavy in the Chicago area.

Manufacturing and service industries also would benefit from farm reform because existing U.S. policies remain the biggest obstacle to a comprehensive Doha Round agreement in the World Trade Organization. Develop‐​ing countries such as India and Brazil will not be ready to sign a serious deal on opening global markets to competitive U.S. exports until the U.S., European Union and other rich countries are ready to make meaningful cuts in their farm subsidies and trade barriers.

Three, reducing farm subsidies would save U.S. taxpayers tens of billions of dollars during the next decade. The first three fiscal years following the enactment of the 2002 farm bill have seen an estimated $55.5 billion spent on farm subsidies already. While Republican leaders in Congress say there is no fat left in the budget to trim, farm subsidies provide an obvious target for savings. And many of those subsidy payments currently go to large farms and agribusinesses, not to smaller “family farms.”

Four, agricultural reform would enhance the environment by reducing the amount of topsoil lost and damaging fertilizers and pesticides used by American farmers. It would liberate farmland to be used for reforestation, recreation and other more environmentally friendly uses. A study by the Environmental Protection Agency found that 72 percent of U.S. rivers and 56 percent of lakes it surveyed suffer from agriculture‐​related pollution.

Five, agricultural reform would benefit farmers themselves by promoting production of crops that are in demand by consumers. Farm reform would stimulate innovation and productivity gains on the farm, and promote more economic diversity and dynamism in rural communities. The end of subsidies and protection would not be the end of farming. Many farmers in New Zealand and Australia are thriving even though their governments largely ended farm giveaways in the 1980s.

Six, lower farm trade barriers would raise incomes among farmers in poor countries, reduce global poverty and create a more hospitable climate abroad for U.S. foreign policy. While the U.S. government promises more aid for Africa, U.S. cotton subsidies have driven down global prices, imposing an annual cost of between $250 million and $400 million on cotton farmers in West and Central Africa. This sort of hypocrisy breeds resentment against U.S. policies in general.

America’s agricultural polices are relics of a bygone era, a drag on our 21st century economy, and a blemish on America’s image in the world. Congress and the president should seize the opportunity presented by the Doha Round negotiations in the WTO and the next reauthorization of the farm bill to fundamentally reform U.S. agriculture policy.

About the Author
Daniel Griswold
Former Director, Herbert A. Stiefel Center for Trade Policy Studies