TCS Daily


Let Them Eat Subsidies

By Daniel Drezner - July 17, 2003 12:00 AM

In September, the world's trade ministers will meet in Cancun to check on the health of the so-called "development round" started in Doha two months after the September 11th attacks. The general consensus was for this round of World Trade Organization talks to provide a helping hand for the developing world, in particular by addressing the most important barriers to exports from these countries -- agricultural tariffs and subsidies in the OECD countries.

Why should Americans care about this? There's the whole "helping out one's fellow man" argument. As numerous studies have shown, one of the best ways to spur growth in developing countries is through increased trade. There is a general consensus that trade is twice as valuable as aid handouts to the poorest of the poor countries. Furthermore, freer trade can augment the fight against AIDS. Uganda's president, Yoweri Museveni, argued last month that:

"[The] real solution to the defeat of the pandemic lies in economic development and trade. In Africa, we have a terrain in which HIV, malaria, TB and other infections thrive to a degree nowadays unthinkable in Europe and the U.S. The common thread is poverty. For poverty creates an environment, physical as well as social, highly favorable to disease.

So, even as we mobilize our people to change their behavior to protect themselves against HIV, we have to promote broad-based economic growth that will lead to improvement in living conditions and levels of education. The surest path to that kind of growth is trade and investment."

There are self-interested reasons for Americans to want the latest trade round to succeed. In the war against terrorism, weak states are the enemy. Weak states thrive in stagnant economies. A failure to move forward in the WTO makes it that much more difficult for governments to stop the spread of terrorist networks. Further trade liberalization would also provide a boost to a lumbering global economy.

More generally, the developed world needs to rewrite an emerging narrative from the developing world that goes something like this: "We recognize that free markets are the key to economic development. We have liberalized our trade policies, even when it was politically painful. However, despite the flowery rhetoric, you in the West have not liberalized the sectors that can help us the most. The anti-globalization crowd says the WTO is just a rich man's club designed to keep down the poor. Maybe they are right."

So how are things going? The latest official WTO assessment is pessimistic; the WTO's Director-General warns of a "dogfight in the world trading system" next year. Who can we thank for this state of affairs?

The United States certainly has its share of odious farm subsidies. OxFam estimates that the U.S. government spends more in subsidies on its cotton farmers than the entire GDP of Burkina Faso. However, a quick glance at this graph shows that if the U.S. commits a venal sin with its agricultural subsidies, then the European Union, Japan, South Korea, and Scandinavia are committing mortal sins with theirs.

The EU, with the largest single economy in the developed world, is the real culprit for the stalling trade talks. Last month, its agricultural ministers tried to agree on reforming its Common Agricultural Policy (CAP), which is to world trade as Showgirls is to good taste. The worst aspect of the CAP is that it links subsidies to production -- the more food that is grown, the greater the subsidy from the EU. This not only hurts LDC agricultural sectors in cracking the European market, it creates the perverse incentive for European farmers to try and dump their surpluses on the global market, depressing prices for everyone else.

Even the EU recognized the absurdity of its policies, which is why Franz Fischler, the EU agricultural commissioner, pledged to decouple subsidies from production. On June 3rd, entering into negotiations with EU member countries, Fischler said, ""To be absolutely clear: a reform without decoupling is no reform."

Three weeks later, the EU reached an agreement that watered down Fischler's already watered-down reforms. The agreement permitted EU members to delay decoupling for an additional two years. For some agricultural goods, such as beef and cereals, decoupling is only partial. For other sectors -- olive oil and sugar -- there is no change in the status quo. In response to French pressure, price supports for farmers remain unchanged.

Eurocrats were thrilled with the agreement, with European Trade Commissioner Pascal Lamy vowing to go "on the offensive" in Cancun. To be fair, the EU accomplished what many had thought was impossible -- convincing India and Pakistan to rally around a common cause. Of course, what united these South Asian rivals was their anger at the EU's latest effrontery to world trade in agriculture.

The rest of the world remains unimpressed by the bilge that passes for European agricultural reform. African trade ministers have called for greater cuts in Eurosubsidies. Brazil's ambassador to the EU labeled the reform "unsatisfactory." India, Pakistan, and fifteen other developing countries described agriculture as the "make-or-break" issue for Cancun. The United States has pressured the EU to show more flexibility on the subject.

Will the EU oblige? Don't hold your breath. For the EU to go further in its reforms, it will need to convince the largest recipients of CAP funds -- France, Spain, and Ireland -- to accept further reforms. These countries were the ones that watered down Fischler's original reform proposals, and they are unlikely to be shamed into recanting their position. French stubbornness on this issue has a long history -- the Uruguay round of trade talks was nearly sabotaged at the last minute by French obstreperousness on agricultural trade.

One possible European response could be to compensate a lack of trade reform with an increase in foreign aid to the affected countries. Such a gambit would double the economic inefficiency of the CAP subsidies, but eliminate many political headaches for European leaders.

What's interesting is that bribes may not work. Even in Africa, the region most in need of foreign aid, governments are singing a different tune. One African commentator recently noted:

"African leaders have seen the miracle which trade can perform and discovered the futility of foreign aid. They can learn useful lessons from the take-off into sustained economic growth, first in Western Europe and North America, then in Japan and East Asia. It is a futile attempt to dangle more aid to this crop of African leaders. They instead want the continent products to compete favourably in the world market. In this unfair trade regime, Africa is on the debit side."

After decades of adherence to the notion that the state should manage economic growth, developing countries finally agree on the prominence of market forces. They have held to this view in the face of numerous financial crises over the past decade. It would be both ironic and cataclysmic if these countries rejected the power of the free market because the continent that produced Adam Smith and Frederic Bastiat rejected it first.

Daniel W. Drezner is Assistant Professor of Political Science at the University of Chicago. He keeps a daily weblog at
http://drezner.blogspot.com
.
Categories:
|

TCS Daily Archives