TCS Daily


Valueless Bargaining Chips

By Martin Krause - October 3, 2006 12:00 AM

The Group of 20 (G-20) includes those countries that supposedly do not subsidize agriculture, but they subsidize everything else. They came together in order to push for a reduction in agricultural tariffs and subsidies from Japan, Europe and the US, mentioned in order of protectionism in this area.

The truth is, they do subsidize and protect at least some kinds of agricultural production, as Brazil does, for example, with its production of ethanol out from sugarcane, or Argentina with "regional" agricultural products such as tobacco.

As is well known, the Doha Round of negotiations has entered a kind of limbo. There are certainly many reasons for this, of which the resistance of Europe and Japan are only some. But another source of the Doha collapse came from the G-20 countries, themselves.

The G-20 thought they had a bargaining chip in resisting the opening of their markets to the industrial products of developed countries. Turns out that was nonsense. Of course, they are right to demand the abolition of tariffs in agricultural products -- something that will certainly benefit consumers in developed countries who are supporting a minor and small number of producers through higher prices. Nevertheless, they hoped to avoid opening up their markets to industrial products -- which amounted to shooting themselves in the collective foot. It meant blocking the introduction of the latest technologies and granting privileges to well established and inefficient local "industrialists" whose only competitive advantage is access to government for favors.

On top of this, the US is announcing it will eliminate the benefits of the Generalized System of Preferences (GSP) for 8 of the 20 countries of the group, in a clear retaliation for the role they played during the negotiations. The argument is that this program should be helping the poorest countries. But the political punishment is clear.

The GSP are tariff preferences the developed countries grant to the underdeveloped ones, reducing or eliminating the import duties other developed countries have to pay. These were introduced in the 60s and 70s as a way to help improve the access to these large markets.

Such have never been a panacea, of course. The preference is usually small, since developed countries already have very low tariffs for manufactured products, and the GSP does not include agricultural preferences, which could make a real difference to the poor countries. But the system helped several industries -- not in the poorest but in "emerging" countries such as India, Brazil or Argentina.

What are these countries going to do? Retaliate in some way?

Actually the GSP are preferences the giving countries grant unilaterally, and in this way, they can remove them at will. They embody a very interesting principle to help poor countries: trade, not aid. It is also true that rich countries should open up their agricultural markets, but in this sense the G-20 and the US are more allies than enemies. They should push together for the end of protectionism in Japan and Europe.

Once this is achieved and we get real free trade for all products in all countries, the G-20 should go for US subsidies; in this case, with the help of a deteriorating fiscal situation. They should think: let's compete and make your subsidies a larger burden.

Martin Krause is the Professor of Economics and Dean of ESEADE Business School in Buenos Aires, Argentina.

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6 Comments

Tariffs/Subsidies only Harm
People have to realize that the market distortions caused by these things only harm themselves.

If the US was smart enough to unilaterally remove agricultural subsidies, we would:

* directly reduce the budget
* rid ourselves compliance jobs in the DoA
* stop funding inefficient farming methods
* lower the cost of food, clothing, and labor
* further develop our global trading influence

and the downsides would be:

...

So why are we wasting time negotiating this away?

Great
the US govt is going to punish US consumers, because certain countries won't stop punishing their consumers.

How does the old saying go - eye for an eye leads to everyone being blind?

Why can't they understand
that inflicting economic punishment means everyone loses to some degree and never generates any net benefit? Moreover, it's counterproductive. Such actions only lead to a hardening of attitudes on trade, making the problem of reaching the eventual agreement that much more difficult.

Universal blindness? Absolutely correct.

difuse pain, concentrated benefit
Those who are hurt, are only hurt a little. A few dollars here, a few dollars there. They don't have much incentive to take to the streets and vote out the people who are causing them pain.

Those who are benefitting, are few in number, but they are getting richer by the milliions, if not billions, so they have the money and the incentive to buy as many politicians as it takes to protect their ill gotten gain.

Brazilian ethanol and subsidies
A very good commentary.

However, Martin Krause states that "The truth is, they [the G-20 nations] do subsidize and protect at least some kinds of agricultural production, as Brazil does, for example, with its production of ethanol out from sugarcane ... ."

His information on that one example is out of date. The statement would be correct if he said "as Brazil DID". Brazil eliminated direct production and investment subsidies for ethanol (and to a large extent for sugar) back in the late 1990s. More recently, it reduced its tariff on imported ethanol in February of this year to 0%.

Brazil's main support to domestic sales (not exports) of ethanol now is through much higher excise and related taxes on gasoline than on ethanol.

Free Trade is Green
Add to kwillinski's list of benefits of free trade the protection of the enviroment.

Here is an example. Tariffs on foreign sugar have made it profitable to grow sugar in the Everglades in Florida. One of the world's great natural wonders has been trashed to benefit a few politically connected growers. Billions are being spent to try to restore the Everglades, but it is far from certain how successful the effort will be.

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