President Bush stirred up the Group of Eight Summit this week by proposing that the EU drop all agricultural subsidies simultaneously with the U.S. as early as 2010. The pretext for doing this is to benefit African countries by expanding access to developed countries’ markets. This comes as WTO negotiators begin intense discussions on agricultural issues that could lead to a tentative agreement by early August.
That President Bush would make such a statement to reporters at the G-8 meeting shows the political importance of agricultural trade in the wider political agenda.
U.S. complaints about EU farm program spending are nothing new; that has been going on for over 30 years. A U.S. offer to drop its subsidies if the EU would is also nothing new. President Bush would likely not be able to get the U.S. Congress to drop all subsidies even if the EU did agree. The statement was partially directed toward internal EU politics and WTO politics that now involve 148 countries, most of which are developing countries.
The EU continues to struggle with long-term budget issues. The Common Agricultural Policy (CAP) takes 45 percent of the budget. Germany and France are big winners in the EU budget and England is a big net contributor. Bush’s comments were welcomed by British Prime Minister Tony Blair’s government. Blair was also pushing debt relief for Africa’s poorest countries.
President Bush’s comments also reflect the reality that a WTO agreement will not be reached without support from developing countries. The WTO works by consensus, and African and other developing countries can block any proposed changes unless they believe they gain from a new agreement.
The biggest challenge for those interested in a new WTO agreement is to keep the politics of trade reforms separate from the economics of trade reforms. President Bush talked about eliminating all agricultural subsidies, but that is not at the heart of the current WTO debate. The WTO negotiators are most interested in “trade distorting domestic subsidies.” These are subsidies that directly influence production, price and trade to the detriment of producers in other member countries. The movement over the last ten years has been toward “decoupled payments.” Direct payments in the 2002 farm bill and the Single Farm Payments in the recent EU reforms are mostly decoupled and have a much smaller impact on trade than programs that establish minimum market prices for commodities and/or make payments to producers when market prices fall below guaranteed price levels.
EU Farm Commissioner Mariann Fischer Boel responded to President Bush by stating that the EU was already prepared to eliminate export subsidies if the U.S. phases out export credit programs and food aid. That is old news. The EU uses about 90 percent of the world’s export subsidies and has previously committed to eliminating them. The U.S. has already changed the export credit programs effective July 1 of this year based on the WTO cotton case ruling. U.S. food aid programs have been talked about at international forums for several years and a deal will be worked out. The Bush Administration has also suggested that Congress eliminate the cotton Step 2 subsidy program to meet the requirements of the cotton decision.
Helping African and other developing countries by increasing market access to developed country markets is only partly related to reducing subsidies to farmers in developed countries. Developing countries have talked about sugar and cotton as the two crops that most need reforms on market access. The U.S. does not make direct payments to sugar producers, and the EU sugar reform proposal made two weeks ago would increase payments under the Single Farm Payment as part of a plan to eliminate sugar export subsidies and lower import barriers. If the U.S. proposed reducing barriers to entry for imported sugar, some type of transitional payments for U.S. producers would likely be part of the program. As the U.S. considers other changes in the cotton farm program, one option would be to increase decoupled payments to cotton producers while reducing payments that are made based on production and market prices.
Many of the disputes between the U.S. and EU on farm subsidies have dealt with wheat, corn, milk and meat. These are commodities that generally are not produced in exportable quantities by most developing countries. Some higher income developing countries like Brazil and Argentina do export these commodities and would be hard pressed to argue that their export quantities have been hurt by U.S. and EU farm programs. Arguments can be made for changes in these programs, but helping producers in most less developed countries is not one of them.
Some developing countries may be competitive in certain fruits and vegetables, as attested to by the recent announcement by Sunkist that they will be importing oranges from South Africa. The U.S. does not subsidize the production of fruits and vegetables. The EU has subsidized some products, but has already made commitments under the Everything But Arms initiative to increase access to its markets for the world’s 50 poorest countries.
The task for WTO negotiators and policymakers in developed and developing countries is to use the visibility that President Bush and other leaders have given to these issues to create a force for change in the WTO negotiations. These issues are much more complex than just saying that fewer subsidies for EU and U.S. farmers mean more market opportunities for low income farmers in Africa.