The Costs of Agricultural Trade Barriers

Introduction

Free trade has become more and more the reality around the world in today’s era of globalization. It has been the driving force behind unparalleled economic growth in many countries. However, in many arenas free trade is very unpopular. Economist and politician Phil Gramm explains why: “Free trade benefits almost everybody, but they don’t know who they are. Free trade hurts a few, and they all know who they are.”[1] Nowhere is this truer than in the agricultural sector, traditionally the most protected of all sectors of the economy.

While the United States has frequently painted itself as the champion of free trade, it has not been willing to apply its rhetoric to its agricultural programs. Other developed countries have followed the US example. When the General Agreement on Tariffs was signed in 1947, both the European Community (the predecessor of the European Union) and the United States demanded that agriculture be entirely excluded from the agreement.[2] The North American Free Trade Agreement (NAFTA) has eliminated all significant tariff and quota barriers between Canada, the United States and Mexico in all areas except agriculture.[3] The richest developed countries use “a dizzying array of policies to support farm income, such as import tariffs, tariff-rate quotas (in which imports up to a certain level are subject to a given tariff rate and imports above the quota limit are subject to a different, usually higher, tariff rate); subsidies on inputs, outputs, and exports, and direct payments to farmers.”[4]

Such programs have real and substantial costs, and not only for the people of countries that use these subsidies. A former World Bank chief economist estimated the cost of subsidies alone among members of the Organization for Economic Co-operation and Development (an organization made up mostly of high income developed nations) to be more than three hundred billion dollars annually. He further noted that such trade practices “impose a high burden on farmers and rural households in developing countries.”[5]

Means of Agricultural Protectionism

In most developed countries, import tariffs are the most common tool to protect inefficient domestic producers from foreign competition.[6] A few examples show just how much tariffs can distort prices. Canadian dairy tariffs increase the cost of imported dairy products by 200 to 300 percent; US sugar tariffs double the cost of sugar; US peanut tariffs sit at 130 percent; Canadian poultry tariffs are around 240 percent; and US tobacco tariffs are estimated at 350 percent.[7] South Korea applies tariffs to potatoes at 304 percent and to barley at 324 percent.[8] These tariffs are the greatest obstacle to free trade in agriculture. An empirical study in 2006 concluded that if all agricultural support polices were removed worldwide, “93 percent of the gains in real income for the world would be due to tariff elimination, 5 percent due to elimination of production subsidies, and 2 percent attributable to export subsidies.”[9]

Agricultural subsidies are used far more by developed countries than developing countries. 84 percent of total agricultural subsidies worldwide are used by the United States, Canada, the European Union and Japan to protect their own domestic markets. These expensive subsidies have been justified as a way to help small family farmers stay in business, but the reality is that larger company farms reap disproportionate benefit from such programs. “For example, in the United States in 2004, farms that accounted for more than $250,000 in sales, which represented only about 9 percent of all farms, received 58 percent of total government payments. In the European Union in 2003, farms that accounted for over 100,000 euros in sales, which represented only 0.3 percent of all farms, received about 12 percent of government payments.”[10]

Other non-tariff barriers exist and can have a significant effect on international trade in agricultural products. Free trade agreements use mechanisms called rules of origin to keep countries that are not party to the agreement from taking advantage of differences in tariffs between countries in the free trade area by proving where the goods originally came from. Restrictive rules of origin increase costs to the exporter because it complicates inspections, increases administrative costs, and makes cross-border trade less predictable. As a result, many exporters decide it is better for them to pay extra duties than to take advantage of the benefits of the free trade agreement and have to deal with proving origin of their goods. Rules of origin can be entirely avoided if states involved in free trade agreements are willing to submit to a common external tariff,[11] though many nations are reluctant to do so.

How Protectionism Hurts the Developed World

Agricultural trade barriers hurt the developed world both because of their direct costs and the way they distort the agricultural market. These trade barriers are a consistent roadblock in trade liberalization talks[12] and thus prevent the economic growth that could be had with greater liberalization in other sectors of the economy. Developing countries are increasingly skeptical of greater trade integration, because “the gap between rhetoric and reality is enormous.”[13] The same countries that call for global free trade also use consistently high protectionist supports that have drawn objections throughout the developing world.[14]

The Common Agricultural Policy (CAP) of the European Union is a very inefficient way to increase farm incomes; about half the total cost of the program goes to pay for rents and purchases of agricultural land whose prices are inflated by the distortions of the CAP. Politicians quick to pander to well organized agricultural interests ought to realize that “if farm subsidies and trade barriers were to be reduced and eventually eliminated, the biggest beneficiaries would be the developed countries themselves and especially their poorest citizens, for they spend more of their income on food than the rich do and so would gain most from lower food prices.”[15] Despite differences in methodology and data sets, all studies of the effects of removing agricultural trade barriers back the assertion that developed countries would benefit most from liberalization, with the greatest gains in the countries with the most distortive agricultural policies such as the European Union, the United States, Japan and South Korea.[16] The richest countries in the world are hurting the prospects for their own economic growth by squandering their resources on inefficient agricultural policies.

How Protectionism Hurts the Developing World

When developed countries pump huge subsidies into their agricultural sector, the result is a worldwide depression of market prices as developed countries dump their surplus goods onto the global market priced below their actual cost to produce. This drives local farmers in developing countries out of business by destroying their ability to compete both in their local and global markets; this shrinks rural economies worldwide.[17]

Removing barriers on agricultural trade would result in a worldwide rise in agricultural commodity prices. Developing countries often have a comparative advantage in agriculture. As a result, developing countries as a whole would greatly benefit from increased agricultural trade liberalization. This does not mean that all countries would benefit; some developing countries are net importers of food products and cannot easily increase their domestic agricultural capacity. These nations have benefited from the dumping of agricultural products from developed countries; higher food prices would hit these countries hard.[18]

Among those countries that would benefit from removing barriers on agricultural trade, the benefits would not be equally divided, because trade barriers are not equally divided among agricultural commodities. Those nations that export products that are less distorted by tariffs and subsidies would gain less than those nations that export products that are much more distorted.[19]

The specific case of cotton illustrates the varied effects of liberalization. Cotton is heavily subsidized in the United States, to the tune of $3.4 billion dollars in 2001 alone.[20] This depresses the world price of cotton significantly, hurting some of the poorest countries in the world. In places like Chad, Mali, Benin, and Burkina Faso, with average per-capita incomes of fewer than four hundred dollars a year, cotton accounts for up to half of their total exports. This is why these countries have sought unsuccessfully to use the World Trade Organization to force the US to stop subsidizing cotton.[21] According to both the International Monetary Fund and the World Bank, removing these subsidies would increase incomes of West and Central African countries by at least $250 million dollars per year.[22]

While the net welfare of the world would go up with cotton market liberalization from gains in efficiency and significant gains in sub-Saharan Africa, some countries, such as India, Bangladesh and some parts of Latin America would be worse off because they depend on imported cotton for their textile industries and benefit from the current depressed price.[23] Some Mediterranean countries would suffer for the same reason.[24]

Some skeptics of increasing agricultural trade liberalization, particularly in the European Union, point to the existing system of preferences that enables some of the least developed countries to export to the European and US markets at tariff rates lower than most favored nation status. They argue that reducing tariffs in general will erode the benefit that such preferences provide to some of the poorest countries in the world and therefore oppose liberalization to help these countries’ economic development. Empirical studies have shown, however, preference erosion is not a significant concern. To receive these preferences, exporters must keep detailed records and comply with rules of origin and other technical requirements. The costs of compliance add up to approximately four percent of the value of the exports involved. The average margin of these preferences is less than four percent, so the overall net effect of preference erosion would be minimal,[25] though some developing countries could lose some markets to richer countries like Australia or New Zealand, or even to other developing countries that are doing well economically, such as Brazil.[26]

Efforts to Reduce the Negative Impacts of Agricultural Trade Liberalization

There have been some efforts to reduce the negative impacts of agricultural trade liberalization, with somewhat mixed results. The Agreement on Agriculture, signed in 1994, included a provision that was supposed to provide funding to aid developing countries if food import bills went up too quickly. The provision was there to assuage concerns from net-food importing developing countries. In 1995 and 1996, food prices worldwide increased significantly, raising food import bills in developing countries by a full forty percent. The IMF decided that this wasn’t caused by the trade agreement, and the developed countries refused to fund the promised aid as a result.[27]

In 2004, the IMF announced the Trade Integration Mechanism, designed to assist countries that encounter balance-of-payments problems as a result of multilateral trade liberalization by making resources more predictably available. Since its creation, Bangladesh, the Dominican Republic, and Madagascar have sought and been granted aid by this program.[28]

The Prospects for Change

The North American Free Trade Agreement has been a means of reducing trade barriers in many sectors, but reducing agricultural trade barriers between its members is not likely to happen anytime soon. Tensions on immigration issues are very high in the United States, and this issue overshadows any further economic integration in the region.[29] All three NAFTA members have their own array of free trade agreements that they have signed with trade partners worldwide. All these agreements would need to be harmonized to effectively reduce barriers for the bloc as a whole.[30] All three NAFTA members are uncomfortable with the idea of transferring regulatory authority to any supranational institution and regard their ability to make their own agricultural policy as a critical part of their national sovereignty, and “protectionist sentiments run deep in each NAFTA country.”[31]

Bilateral trade agreements do not seem any more likely to make progress. There are three pending bilateral trade agreements between the US and Panama, Columbia and South Korea that have the potential to reduce some agricultural trade barriers. All three were negotiated and signed by the Bush administration, and President Obama can decide if and when to send the agreements to Congress for approval. Trade promotion authority rules allow these agreements to follow expedited legislative procedures that forbid amendments, limit debate and force a straight up or down vote.[32]

In his 2010 State of the Union address, President Obama said that America “has to seek new markets aggressively, just as our competitors are…[or] we will lose the chance to create jobs… [that] is why we will strengthen our trade relations in Asia and with key partners like South Korea and Panama and Columbia.”[33] However, President Obama has been reluctant to move forward on any of these proposals. With regards to Panama, the Obama administration has set two conditions: cutting the minimum number of members required to form a trade union in Panama by half to twenty workers, and to sign a tax information exchange treaty to make it harder to launder money in Panama.[34] With regards to South Korea, the Obama administration has concerns about the provisions governing US access to the South Korean automobile market, and has made no concrete plan to resolve these concerns or submit the agreement to Congress.[35] The Columbian trade agreement has stalled due to human rights concerns among Democratic congressmen about violence against trade unions there and is not likely to be considered for a vote anytime soon.[36] The common thread through all of these agreements is that the Obama administration appears committed to strengthening the political position of labor unions both at home and abroad.

On a more global level, agricultural trade has been one of the most contentious issues. It has paralyzed the Doha Development Round of negotiations through the World Trade Organization and made liberalizing trade more difficult in other areas as a result. Developed nations have not been willing to give up their protectionist agricultural policies, and developing countries have made reducing agricultural trade barriers and subsidies in developed countries a vital condition of any agreement.[37]

Therefore, it appears at present that meaningful progress on reducing agricultural trade barriers is very unlikely, thanks to a matrix of entrenched agricultural interests, protectionist sentiments and the attaching of additional conditions by the Obama administration to bilateral trade agreements after they have been signed by a previous president. It has proven very difficult to find the political will to permanently reduce agricultural protectionist supports anywhere in the developed world.[38] All of this is unfortunate, because it ensures the continued squandering of resources on inefficient farming policies throughout the world.

References

Bouët, Antoine, et al. "Multilateral Agricultural Trade Liberalisation: The Contrasting Fortunes of Developing Countries in the Doha Round." World Economy 28, no. 9 (September 2005): 1329-1354. Business Source Elite, EBSCOhost(accessed February 4, 2012).

Fergusson, Ian F. "World Trade Organization Negotiations: The Doha Development Agenda." Congressional Research Service: Report (December 12, 2011): 1-24. International Security & Counter Terrorism Reference Center, EBSCOhost(accessed February 5, 2012).

Jurenas, Remy. "Agriculture in Pending U.S. Free Trade Agreements with Colombia, Panama, and South Korea: R40622." Congressional Research Service: Report (February 4, 2010): 1-18. International Security & Counter Terrorism Reference Center, EBSCOhost (accessed February 5, 2012).

Meilke, Karl, James Rude, and Steven Zahniser. "Is ‘NAFTA Plus’ an Option in the North American Agrifood Sector?." World Economy 31, no. 7 (July 2008): 925-946. Business Source Elite, EBSCOhost (accessed February 4, 2012).

Murphy, Sophia. "Free Trade in Agriculture," Monthly Review: An Independent Socialist Magazine 61, no. 3 (July 2009): 78-91, Academic Search Premier, EBSCOhost (accessed February 4, 2012).

Nordlinger, Jay. “Conservatives vs Capitalism,” National Review Online, January 9, 2012, http://www.nationalreview.com/corner/287606/conservatives-vs-capitalism-jay-nordlinger (accessed February 4, 2012).

Tokarick, Stephen. "Dispelling Some Misconceptions about Agricultural Trade Liberalization." Journal Of Economic Perspectives 22, no. 1 (Winter 2008): 199-216. Business Source Elite, EBSCOhost (accessed February 4, 2012).

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[1] Jay Nordlinger, “Conservatives vs Capitalism,” National Review Online, January 9, 2012, http://www.nationalreview.com/corner/287606/conservatives-vs-capitalism-jay-nordlinger (accessed February 4, 2012).

[2] Sophia Murphy, "Free Trade in Agriculture," Monthly Review: An Independent Socialist Magazine 61, no. 3 (July 2009): 79. Academic Search Premier, EBSCOhost (accessed February 4, 2012).

[3] Karl Meilke, James Rude, and Steven Zahniser. "Is ‘NAFTA Plus’ an Option in the North American Agrifood Sector?." World Economy 31, no. 7 (July 2008): 927. Business Source Elite, EBSCOhost (accessed February 4, 2012).

[4] Stephen Tokarick, "Dispelling Some Misconceptions about Agricultural Trade Liberalization," Journal Of Economic Perspectives 22, no. 1 (Winter2008 2008): 199. Business Source Elite, EBSCOhost (accessed February 4, 2012).

[5] Tokarick, “Dispelling Some Misconceptions,” 199.

[6] Tokarick, “Dispelling Some Misconceptions,” 202.

[7] Karl Meilke, James Rude, and Steven Zahniser. "Is ‘NAFTA Plus’ an Option in the North American Agrifood Sector?." World Economy 31, no. 7 (July 2008): 932. Business Source Elite, EBSCOhost (accessed February 4, 2012).

[8] Remy Jurenas, "Agriculture in Pending U.S. Free Trade Agreements with Colombia, Panama, and South Korea: R40622." Congressional Research Service: Report (February 4, 2010): 13. International Security & Counter Terrorism Reference Center, EBSCOhost (accessed February 5, 2012).

[9] Tokarick, “Dispelling Some Misconceptions,” 210.

[10] Tokarick, “Dispelling Some Misconceptions,” 203-204.

[11] Meilke, “Is ‘NAFTA Plus’ an Option,” 930

[12] Tokarick, “Dispelling Some Misconceptions,” 215.

[13] Murphy, “Free Trade in Agriculture,” 81.

[14] Murphy, “Free Trade in Agriculture, 86.

[15] “Give Freedom a Chance,” The Economist (June 26, 2003). http://www.economist.com/node/1857671 (accessed February 4, 2012).

[16] Tokarick, “Dispelling Some Misconceptions,” 208.

[17] Murphy, “Free Trade in Agriculture,” 85.

[18] Antoine Bouët, et al. "Multilateral Agricultural Trade Liberalisation: The Contrasting Fortunes of Developing Countries in the Doha Round." World Economy 28, no. 9 (September 2005): 1331. Business Source Elite, EBSCOhost(accessed February 4, 2012).

[19] Bouët, “Multilateral Agricultural Trade Liberalisation,” 1331.

[20] “Give Freedom a Chance,” The Economist.

[21] Tokarick, “Dispelling Some Misconceptions,” 212.

[22] “Give Freedom a Chance,” The Economist.

[23] Tokarick, “Dispelling Some Misconceptions,” 212.

[24] Bouët, “Multilateral Agricultural Trade Liberalisation,” 1352.

[25] Tokarick, “Dispelling Some Misconceptions,” 213-214.

[26] Bouët, “Multilateral Agricultural Trade Liberalization,” 1332

[27] Murphy, “Free Trade in Agriculture,” 81.

[28] Tokarick, “Dispelling Some Misconceptions,” 214-215.

[29] Meilke, “Is ‘NAFTA Plus’ an Option,” 929-930.

[30] Meilke, “Is ‘NAFTA Plus’ an Option,” 934.

[31] Melike, “Is ‘NAFTA Plus’ an Option,” 943.

[32] Jurenas, “Agriculture in Pending U.S. Free Trade Agreements,” 5.

[33] Jurenas, “Agriculture in Pending U.S. Free Trade Agreements,“ 4.

[34] Jurenas, “Agriculture in Pending U.S. Free Trade Agreements,” 10.

[35] Jurenas, “Agriculture in Pending U.S. Free Trade Agreements,” 11, 16.

[36] Jurenas, “Agriculture in Pending U.S. Free Trade Agreements,” 20.

[37] Ian F. Fergusson, "World Trade Organization Negotiations: The Doha Development Agenda." Congressional Research Service: Report (December 12, 2011): 1-24. International Security & Counter Terrorism Reference Center, EBSCOhost(accessed February 5, 2012).

[38] Meilke, “Is ‘NAFTA Plus’ an Option,” 939.