Fuzzy Trade Math
Trade talks at Cancun broke down principally because the G-20 group of mainly larger developing countries rejected U.S. and EU offers on reducing their agricultural protection. Two years later, as the Hong Kong Ministerial approaches, agriculture remains the make-or-break issue in the Doha negotiations. But the impasse can be broken.
Abstract:
Trade talks at Cancun broke down principally because the G-20 group of mainly larger developing countries rejected U.S. and EU offers on reducing their agricultural protection. Two years later, as the Hong Kong Ministerial approaches, agriculture remains the make-or-break issue in the Doha negotiations. But the impasse can be broken once we clear up the misinformation on (a) the magnitude of EU and U.S. subsidies and (b) the level of protection through trade barriers in developed and developing countries in agriculture.
The New York Times has editorialized that the "developed world funnels nearly $1 billion a day in subsidies," which "encourages overproduction" and drives down prices. The World Bank's president, Paul Wolfowitz, similarly referred to developed countries expending "$280 billion on support to agricultural producers" in an op-ed in the Financial Times. Oxfam routinely accuses rich countries of giving more than $300 billion annually in subsidies to agribusiness. Astonishingly, these estimates bear virtually no relationship to the subsidies actually at the heart of the Doha negotiations. Instead, they have their origins in the altogether different measure called the Producer Support Estimate (PSE), published by the OECD. The PSE includes all measures that raise the producer price above the world price, including border measures such as tariffs and quotas. All economists would find the identification of such a measure with subsidies unacceptable.
To measure the true magnitude of subsidies that drive down world prices, we need consider only those subsidies contingent on exports or output. This done, the extent of subsidies turns out to be considerably smaller than $1 billion per day. Thus, rich country export subsidies that have been so much in news have considerably declined in importance in recent years: They currently amount to less than $5 billion, at times as little as $3 billion, annually. Subsidies contingent on output are larger; but they, too, are much smaller than commonly believed: Under the commitments made in the Uruguay Round Agreement on Agriculture, WTO members have achieved substantial reductions in these subsidies. The EU has made a special effort to decouple its domestic subsidies from output as a part of the reform of its Common Agricultural Policy.
Based on the latest data available from the WTO, domestic output subsidies amounted to $44 billion in 2000 in the EU, $21 billion in 2001 in the U.S. and less than $15 billion in 1998 in Japan, Switzerland, Norway and Canada combined. Recognizing that there have been no major cases of backsliding and the EU has made further progress in decoupling its subsidies from output, we can conclude that rich country domestic subsidies that encourage production and lower world prices are substantially below $100 billion.