The way to get the right outcome in the ongoing WTO negotiations is to focus on the right questions. Some U.S. politicians, editorial writers and agricultural interests are focusing too much on the farm policies of the EU and not enough on economic growth in developing countries. That is the real key to growth in U.S. agricultural exports. Arguing with the EU is fun and easy to do because we have had so much practice, but it will put very little additional money in U.S. farmers and ranchers pockets in the years ahead.
Reforms in EU farm policies certainly need to be part of any successful WTO Doha Round agreement. The EU provides about 90 percent of the agricultural export subsidies used in the world. They have already made commitments to phase out those subsidies as part of an agreement.
The EU also must reduce its complicated system of tariffs and variable levies that shield domestic markets from changes in world supply and demand. Prices received by EU producers were on average about 32 percent higher than world market prices in 2002-04. In May of this year, the EU agreed to a formula for calculating ad valorem equivalent tariffs that will result in relatively large cuts in tariffs on many agricultural products. If there is an agreement to significantly cut tariffs in all countries, EU agricultural markets may be more accessible than at any time in the past 30 years.
The EU is also implementing a “Single Farm Payment” system that makes payments based on historical payments, not on current production. This follows the concept of “decoupling” that has been talked about for 20 years as a way to reduce trade distortions. While an argument can be made that all subsidies have an impact on production, consumption and trade, the new EU direct payments are much preferred to policies of the past. Even with these changes, the OECD (Organization for Economic Cooperation and Development) producer support estimate (PSE) of EU farm policy is still expected to be over $100 billion per year. U.S. farm policy had a 2002-04 average annual PSE of $40 billion per year.
Despite positive developments in EU farm policy and potential changes in a new WTO agreement, they are not likely to result in major increases in markets for U.S. farm products. By most estimates the EU population will shrink in the years ahead. Incomes are relatively high and there will be little growth in the demand for food. Lower market barriers would cause changes in demand for some food products, but not change total consumption.
Even if the U.S. were successful in getting the EU to reduce all barriers to food imports and eliminate all payments to producers, overall demand for U.S. farm products would likely increase only modestly. While the least efficient of EU producers would quickly drop out of agricultural production, the more efficient producers would remain and produce the bulk of domestic needs. With the elimination of export subsidies, products that were exported would then be available for domestic consumption. The U.S. would also face strong competition from other exporters like Canada, Brazil and Argentina.
The real potential growth markets for U.S. farm products are the developing countries of the world. A recent World Bank analysis shows that over 90 percent of the economic benefits of freer trade in agriculture would be the result of reducing import barriers. Agricultural and food products would account for about two-thirds of the total economic gains from freer trade.
The potential in developing countries is truly staggering. Total world population is about 6.4 billion, with expectations of a population of 7.1 billion by 2015 according to World Bank estimates. About three billion people currently live on $2 per day or less. Most of the expected growth in population by 2015 will occur in the group that is living on $2 per day or less. For a family of four, $2 per day per person is $3,000 per year. About three-fourths of that income is usually spent on food.
Research shows that the greatest increase in the demand for food occurs as per capita income increases from $2 per day to $10 per day, about $15,000 per year for a family of four. Spending for food continues to increase as incomes rise above $10 per day, but most of the money is spent for a wider variety of foods, higher quality food and more packaging of food.
One other important population shift is expected to occur by about 2020. At that point for the first time in recorded history, more people will live in urban areas than on farms and in rural areas. They will be living in urban, market economies rather than in rural, subsistence economies.
As noted earlier, the key to economic growth in the world is greater market access, reductions in both tariff and non-tariff barriers. Reductions in barriers to trade will determine how many of the current three billion people who live on $2 per day or less will have an income shift to the high growth for food demand of $3-10 per day and how many of the 700 million growth in population by 2015 will join the high food demand group.
As the Doha Round WTO negotiations begin in earnest in September in preparation for the Hong Kong ministerial meeting in early December, the U.S. Trade Representative negotiators, the Bush Administration, U.S. Representatives and Senators and agricultural groups have to make a clear choice. They can complain about the EU trade and farm program policies and rehash the policy disputes from the past 30 years or they can turn their attention to the real potential growth markets for the future. The real progress to be made for U.S. farmers and ranchers is in supporting WTO policies that will lower market barriers for both agricultural and non-agricultural products in developing countries that will pull more people into the $3-10 per day per capita income category.
Ross Korves was raised on a southern Illinois hog farm and educated at Southern Illinois University. He served as senior economist for the American Farm Bureau Federation and is currently the trade policy analyst for Truth About Trade & Technology, a nonprofit advocacy group led by American farmers that supports free trade and agricultural biotechnology.