The Texas Tech analysis “Crop Subsidies in Foreign Countries: Different Paths to Common Goals” is an update of a study first completed in February 2007. Increasing production of ethanol, increasing agricultural subsidies and the current worldwide recession caused the authors to reassess the situation for 21 major developed and developing countries. The study notes in the introduction that, “Virtually all countries, through their governments, interfere with the markets for agricultural products through a public policy framework. The amount and types of interference vary greatly among countries and the tools used to ‘manage’ them include trade protection, input and product subsidies, and a wide variety of price and income support programs.”
The analysis used Producer Subsidy Estimates (PSE) from the Organization for Economic Cooperation and Development (OECD), a group of 30 developed countries, which converts all government support for producers to a percent of total farm receipts. For 2007, South Korea, a developing country, had the highest PSE at 60 percent, followed by Japan at 45 percent and the EU at 26 percent. At the other end of the range were two developing countries, South Africa with a PSE of 3 percent and Brazil at 5 percent, followed by Australia at 6 percent, China 8 percent and the U.S. 10 percent. There is not a consistent divide between developed and developing countries on PSEs.
The average applied tariffs for agricultural products in the 21 countries show a different situation. The 15 developing countries were in a range that started with Egypt at 66 percent and ended with South Africa at 8 percent. Developed countries ranged from Japan and Russia at 8 percent to Australia at 1 percent; the U.S. is at 4 percent with the EU slightly less. Average bound tariffs, the maximum tariffs that could be applied under WTO commitments, were much higher than applied tariffs for developing countries, ranging from 150 percent for Nigeria to 15 percent for China, while much closer to applied tariffs for developed countries. The difference between bound and applied tariffs was a major issue in the Doha Round WTO talks.
Crop subsidies were divided into direct and indirect supports. The U.S. was not included in this part of the analysis. India and China appear to be the countries that are the most consistently involved in the most programs across almost all of the seven crops. Argentina, Australia, Japan, South Africa and South Korea were the least involved in subsidies for the seven crops overall, with a few exceptions like cotton in Argentina and rice in Japan and South Korea. The EU is heavily involved in direct supports, but generally not in the indirect supports.
If the G8 agriculture ministers are serious about food security and international trade flows of agricultural products, they will have to address the high import tariffs in developing countries. There is no away around that fact. Developing countries are using high bound tariffs and relatively high applied tariffs to manage trade flows to keep imports out to protect domestic producers, but reduce applied tariffs when domestic supplies are short. That shifts all of the supply and price adjustments to the rest of the world. Since other importers do not want to carry the entire load, they naturally pursue supply holding policies and production arrangements to avoid price increases. The result is higher costs for policies and less market flexibility.
China and India are the two countries in the 21 analyzed that have the most consistent intervention across the range of policies considered, including input subsidies that are not part of the WTO trade policy discussions. With over a third of the world’s populations they can have a huge impact on markets in both the short term and long term and should be included in trade policy issues, but have given no indication of interest in changing agricultural policies. Their positions have been to import or export agricultural products based on domestic political decisions without regard to international market impacts. The current round of elections in India is not likely to change those policies.
A general solution like a successful Doha Round or other agreement coordinated outside the WTO is not likely to happen. Some countries like South Africa and Brazil have followed enlightened self interests and pursued policies as developing countries that have generally worked well for developed countries. Other countries like South Korea has made little progress to date on subsidies or tariffs, but are engaged in bilateral discussions like the U.S.-Korea Free Trade Agreement which would create more market access.
Despite all the government interventions identified, open markets have played an important role in food security and will play a larger role as populations grow in areas of the world with little additional land and water to use for food production.
If the G8 Agriculture Ministers want to address these issues, they should first recognize that the economic benefits of trade must be achieved one country at a time and not with some broad pronouncement by the G8 leaders. They need to develop some general principles about what defines open markets, such as low import tariffs, and then work one country at a time to achieve that outcome.
Of course as the recent H1N1 flu outbreak has shown again, lower applied tariffs do not keep markets open if sanitary and phytosanitary policies become new barriers to trade. Now is not the time to throw-up our hands because keeping markets open is challenging, but to take fresh approaches to persistent trade policy issues.