Whistling to the Same Tune? The Contest Over Future WTO Agricultural Subsidies
Matias E. Margulis, McMaster University
Agricultural trade liberalization is without question the most contentious international trade issue. It is an issue that deeply concerns and affects a diversity of groups, ranging from Quebec dairy farmers to West African cotton growers, multinational agri-food corporations to small-scale cooperative coffee growers in Central America. Reforming the international agricultural trade system continues to be at the very top of the globalization agenda. At the World Trade Organization (WTO), agriculture has been the key focus of the current round of trade negotiations and as any negotiator will tell you, without a deal on agriculture, there will be no deal on anything else.
Something very remarkable has happened over the last couple years, something without precedent. What I am referring to is that most WTO members, the World Bank, International Monetary Fund (IMF), United Nations (UN) system, and non-governmental organizations (NGOs), all have adopted an identical position on a crucial and controversial farm trade issue; they have expressed their support for putting an end to rich countries' agricultural subsidies. They argue that this step is the best way to aid struggling developing country farmers, reduce global poverty and inequality, and make the international trading system fair.
This consensus is quite remarkable. Throughout the highly fragile and often turbulent current round of WTO negotiations, this diverse group of actors, many of which are antagonists in most other settings, appear to have coalesced along a single principled position. Within the WTO itself, the attack on subsidies has rallied the majority of the organization's one hundred and fifty-one members — most of which are developing countries, led by Brazil, China, and India — against the $US 300 billion worth of annual farm subsidies that countries such as the United States, European Union (EU) and Japan provide to their farm industries.
The political significance and long-term impacts of this development for the multilateral trading system should not be underestimated. In fact, this unified chorus of criticism has grown louder and louder at the negotiating table since the Doha Development Agenda kicked off in 2001. Perhaps its apex was in evidence when diverging positions between Northern and Southern countries on farm subsidies helped bring the WTO trade negotiations to a spectacular crash in Hong Kong in 2006, the date by which a draft agreement on agricultural trade was scheduled to be completed. WTO negotiators are still desperately picking up the pieces and the future of the agriculture negotiations, and the WTO more generally, remains uncertain.
For those who follow international trade negotiations, it is quite striking that the collapse of the WTO's Hong Kong ministerial was for much different reasons than those that led to the failure of the 1999 ministerial meeting in Seattle. The events of 1999 themselves were a defining moment in the history of the multilateral trading system. If we recall, a broad coalition of NGOs, labour, environmental and human right groups, as well as private citizens, converged on the streets of Seattle to protest the launch of a new round of WTO negotiations. They represented a diverse set of concerns. Some called for fairer trade rules; others wanted environmental concerns to be linked to trade. Some unions expressed fear of their members' jobs being outsourced to low-wage developing countries. Most of these groups took part in peaceful protests and engaged in lively political street theatre while others took more confrontational approaches, such as making it difficult for WTO delegates to get to their meetings by blocking roads and entrances to meeting places and hotels. There were also skirmishes between protesters and riot police. These events fed a media frenzy that came to dub the protests the "Battle in Seattle." Media attention brought the WTO negotiations to a heightened level of public awareness and scrutiny as never before. Supporters of economic globalization saw Seattle as a failure to spread economic prosperity and blamed this on the pejoratively labelled "anti-globalization movement." Inside the meeting rooms, developed and developing countries disagreed on what issues should be at the core of the trade negotiations. Developed countries wanted to expand the mandate of the WTO in areas such as investment, services, and intellectual property but there was also wide disagreement between them over agricultural subsidies. Developed countries were hesitant to expand the WTO mandate any further with many feeling that the concessions they had won in the last round had yet to be implemented. Combined, the tension that permeated inside the meeting rooms as a result of disagreement between states and that produced outside as the protests intensified, delayed but did not stop a new round of trade negotiations. WTO negotiations, however, would never again happen out of sight and out of mind of public scrutiny.
While the failure of the 1999 Seattle ministerial was a result of diverse concerns emanating from within and outside the WTO over its future scope and advancing neo-liberal globalization, the failure in Hong Kong six years later was largely attributable to the prominence of one highly sensitive issue: agricultural subsidies. So why is it that agriculture is so contentious and divisive? That is a complicated story.
A short and simple answer is to say that agriculture matters significantly to developing countries' economies, much more so than to those of developed countries. It is important to consider that seventy-five percent of the developing world's inhabitants live in rural areas and work in agriculture. Many poor countries depend heavily on export earnings from products such as coffee, cocoa, and cotton. By contrast, farming is of fairly minor economic importance in developed countries and employs less than one percent of the labour force in Europe and North America.
Agriculture is highly protected in developed countries. This means that Northern farmers are much more insulated from price volatility and changes in consumer demand. In addition, many Northern farmers benefit from government-run insurance programs in the case of extreme weather or natural disasters, tariffs to keep out foreign goods, and subsidies to enhance international competitiveness. If you are a farmer in a developing country, you are likely to feel the repercussions of market volatility far more than your Northern counterpart. Developing country farmers do not have access to the same forms of assistance their Northern counterparts do. And in very poor countries, farming is already a very unstable and tenuous existence. Farming is not just a job for those in the poorest regions of the planet, it is often the only source of survival. But the problem of subsidies is not just one of inequality of the resources available to farmers in the North and South (i.e., the North has them and the South does not). The problem lies in the effects of Northern subsidies, which are not just local but have global ramifications. Economic globalization has led to an expansion of international food trade, meaning that Northern and Southern farmers increasingly compete with one another in the global market place. Economists have long-argued that subsidies encourage Northern farmers to overproduce. According to laws of classical economics, when supply goes up and demand remains constant, this causes prices to drop. That means farmers receive less and less for what they produce. In the case of poor farmers, declining prices mean lower incomes which can drive them out of business and ever deeper into poverty.
There is also another more complicated and more convoluted dimension to this situation arising out of international politics, international trade rules, and fifty years of development policy. One of the main reasons agricultural trade is so contentious is that international trade rules have long favoured rich countries. In fact, multilateral agricultural trade rules did not come into existence until relatively recently. It was only during the recent Uruguay round of multilateral trade negotiations (1986-1994) that agriculture was put on the multilateral negotiating table. By contrast, trade rules on industrial goods have been negotiated successively since the implementation of the General Agreement on Tariffs and Trade (GATT) in 1948. Whereas subsidies to industrial goods had been gradually reduced over time and later prohibited as international trade expanded in the post-World War II era, no limits existed on how much countries could subsidize their farm sectors. In fact, agriculture was considered exempt from GATT rules in part due to the refusal of the United States to cede authority over its farm policy.
Historically, agricultural subsidies had helped to mechanize farming in order to build massive productive and export capacity in developed countries. Such subsidies were particularly important in the post-war reconstruction of Europe. However, once agricultural sectors in developed countries had stabilized by the 1960s, subsidies became an increasing source of political friction between countries. As global trade in farm goods increased, the absence of any meaningful constraints on subsidization meant that rich countries would end up in a vicious cycle of outspending each other on subsidies in order to keep their farm goods "competitive" and maintain their shares of export markets. This competition came to a head in the early 1980s when a farm trade war erupted between the United States and European Union. At that time both provided their farm sectors with egregious amounts of subsidies. This conflict became the final straw for many developed and developing countries which saw the subsidy conflict as dangerously destabilizing international agricultural markets and prices, in addition to directly and negatively impacting their farm sectors. They called for more disciplinary policies on the use of farm subsidies and this was a central issue during the Uruguay Round of GATT negotiations which led to the creation of the WTO.
The end result was the Agreement on Agriculture. This agreement sought to progressively reduce, but not eliminate, the level of rich country farm subsidies. Proponents of the WTO claim the agreement was a good start and would make the international market for farm goods less distorted and allow developing countries to take advantage of their so-called comparative advantage in agricultural production. The minimizing of trade distortions which the agreement was argued to provide was supposed to have led to higher farm gate prices, and thus higher income for all producers. No one could deny, however, that these rules mostly benefited developed countries because they institutionalized and legalized their ability to provide farm subsidies, instead of prohibiting subsidies altogether as in the case of industrial goods. Developing countries, the majority of which did not significantly provide subsidies prior to the agreement (nor could afford to for that matter), felt they failed to get the parity in trade rules for which they were looking. To make matters worse, the agreement ended up with a subsidy reduction formula calculated by the United States and European Union to minimize the overall impact.
Over the ensuing years, developing countries' frustration with the existing WTO farm subsidy rules was increasingly vocalized within the WTO. With the launch of the Doha Development round of multilateral trade negotiations, most developing countries (and a handful of developed countries) adopted the position that a new agriculture agreement would have to see developed countries end their subsidy programs as a minimum requirement.
This concern over Northern farm subsidies took on special significance after Brazil launched a trade challenge in 2002 against the United State's cotton subsidy program arguing that the program did not conform to WTO subsidy rules. The United States is by far the world's biggest cotton exporter and its cotton industry is significantly subsidized. It was not uncommon in some years for more than half of the price received by American cotton producers to be made up of subsidies. Because of its status as the world's major exporter of cotton, these subsidies had major impacts on international cotton prices. When they had the effect of lowering world cotton prices, they harmed the economies of poor African cotton producing states which are highly dependent on cotton exports for a significant share of national income and employment. The United States lost the case and was ordered by the WTO to reform and reduce its cotton subsidy program. This decision marked a major legal and political victory, as well as a moral one for those who saw Northern subsidies as major impediments to economic development in the South.
In the years leading up to the Hong Kong meeting of trade ministers, the call for ending rich farm subsidies took on greater and greater symbolic significance. It became a major rallying point for developing country WTO members, NGOs, and WTO critics alike. Ending farm subsidies was seen as more than just another trade concession to be made by the developed world. Rather, it was cast as a necessary step to right the injustices of the international trading system. In particular, the NGO community criticized the paucity of efforts by developed countries to reduce agricultural protection as a rejection of their commitments to developing countries to help reduce poverty and hunger in the developing world, especially in Africa.
International financial institutions such as the World Bank and IMF also support the end of Northern farm subsidies. They view efforts to further liberalize agricultural trade (which includes eliminating subsidies and tariffs, and privatization) as inherently desirable because this, they argue, will lead to greater incomes in the developing world and reduce poverty. Moreover, the World Bank and IMF hope that liberalizing agriculture will help foster growth in African states, the very same region where these institutions' own neo-liberal policy programs failed to usher in the growth and economic stability. The UN supports efforts to reduce Northern subsidies. Like the World Bank and IMF, the UN views agricultural trade liberalization as a path towards economic development in developing countries. Moreover, the UN promotes agricultural trade liberalization as a tool to meet the Millennium Development Goals of reducing poverty and hunger by half by 2015.
Exactly how we are to interpret the meaning of the agreement of developing countries, NGOs, and international organizations on the subsidy issue is far from clear. Is it an indication that we are moving toward a more just trading system where the voices of the poor will be heard? Does it suggest new possible alliances between civil society, governments, and international organizations? Maybe these are plausible interpretations. But there are also very good reasons to be cautious and scrutinize this broad agreement in terms of what it suggests in the longer term for agricultural trade and development in the South.
One particular concern is the way these groups are framing the problem and the solution to the Northern farm subsidy issue. The way the debate has been articulated by these groups has been to characterize rich countries' farm subsidies as the primary obstacle in the way of facilitating economic growth and poverty reduction in the South. In essence, they argue that Northern subsidies unequivocally reap havoc on developing country farmers. While Northern subsidies are harmful to developing countries, the problem of poverty in the South is much more complex and there is considerably more than just farm subsidies to consider.
In this debate, it is important to be sceptical and to try to separate the rhetoric of trade politics and the potential impacts of different policy options. While there is certainly a global and popular appeal, and political points to be won in the North and South by those groups critical of farm subsidies, there is also much reason to be concerned with the broader implications of this position.
It is clear that the elimination of subsidies will likely be painful for certain farming groups in developed countries and this will certainly cause domestic political strife. However, it is much less clear if the elimination of subsidies will necessarily help improve the livelihood of developing country farmers. The first and most obvious reason is that most subsidies, with the exception of cotton and sugar, are directed to agricultural commodities that the poorest developing countries do not grow. The poorest developing countries are still dependent on cocoa, coffee, and tropical fruits and vegetables. These commodities receive minor amounts or no subsidies in the North (the major exception being the European Union which subsidizes its fruits and vegetables).
One has to be cautious about putting too much faith in the argument that ending subsidies will have major positive impacts on developing countries. Many economists suggest that reducing subsidies may lead to increases in commodity prices. While this might benefit some developing country producers, it is sure to make life more difficult for many developing countries in Africa and Asia which are net-food importers by increasing their food bills. Outlays for food already represent a high proportion of income in developing countries, especially for the poorest. Even small increases in food prices disproportionately disadvantage the people in the worlds' poorest states. Development economists Nancy Birdsall, Dani Rodrik, and Arvind Subramanian (2005, 5) argue that ending Northern subsidies will mostly benefit Northern taxpayers and consumers while the economic benefits to developing countries are likely to be negligible.
When we examine the position taken by states, international organizations, and NGOs on farm subsidies more closely, it becomes highly problematic because what they are in effect doing is naturalizing and reaffirming neo-liberal approaches to trade and development. The main intellectual thinking underpinning their position is that by ending rich countries' farm subsidies, markets will correct themselves and efficiency gains will be accrued by all.
Therefore, the WTO farm subsidy debate is suspect because it appears flawed, naïve, and overly simplistic. Most observers concede that economic liberalization is subject to social and political forces. Trade policy is not immune from such forces. In fact, the politics of trade are always highly visible in the process. Markets and trade flows do not operate as textbook economics suggest they do. This should make us aware that eliminating farm subsidies alone will not fix the injustices, unfairness, and the structural inequalities inherent in global farm trade. While states, international organizations, and NGOs place such high expectation on the subsidy problem, they are also demonstrating a lack of imagination and do not offer constructive alternatives to addressing the serious structural problems and power imbalances at play in the global trading system or some of the domestic problems facing agricultural economies in developing countries. Leaving the solution to the market has been a key problem with neo-liberal thinking for over two decades now.
The current group supporting the elimination of subsidies misses a key point. Many of the problems that affect the prospects for improving developing country agriculture are going to need much more constructive approaches. As I stated earlier, developing countries remain dependent on a small group of export-oriented commodities, a continuing legacy of imperialism in many cases. A key issue that has yet to be raised and addressed is the large degree of market concentration in agriculture. Unfortunately, these sorts of market "distortions" arising from the oligopolistic structures of agri-business are not on the WTO negotiating table because the behaviour of private actors are beyond the scope of international trade rules. However, states play a major role in creating conditions for monopoly and oligopoly control of commodity chains. Many decades ago, the UN system was entrusted to look at these issues and to examine commodity specific solutions. While this mandate still exists, there seems very little interest in or political support for reviving this sort of role for the Food and Agriculture Organization (FAO) or UN Conference on Trade and Development (UNCTAD).
Looking back at the WTO ministerial collapse in Hong Kong, the friction over agricultural subsidies suggests to us that the major disagreements at play are not really about alternative visions to the existing agriculture trade system. It appears that the subsidy debate reflects an intensification of the neo-liberal policy paradigm instead of constituting a challenge to it. The agenda and support around eliminating subsidies suits middle-income developing countries like Brazil and Argentina who have powerful domestic farm oligopolies, international organizations such as the WTO, IMF, and World Bank who unquestionably believe in the benefits of trade liberalization for the South, and even NGOs that see subsidies as manifestations of inequality and injustice in the global trading system. While the position taken on subsidies by these diverse actors meets a variety of strategic objectives, in the end it supports the status quo of neo-liberal economic globalization by promoting free-market ideals. Despite the time, energy, and political will expended in order to achieve the objective of reducing Northern subsidies, it seems unlikely to result in radical improvements to the livelihoods of hundreds of millions poor farmers in the developing world.
Works Cited
Birdsall, Nancy, Rodrik, Dani, and Subramanian, Arvind. 2005. If rich governments really cared about development. Geneva:
International Centre for Trade and Sustainable Development.
Available:
http://www.ictsd.org/dlogue/2005-07-01/Docs/RODRIK-BRIDSALL_SUBRAMANIAN_what-rich-can-do_April2005.pdf .
(Accessed: 21 March 2008)